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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1994
Commission File Number 0-19065
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SANDY SPRING BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1532952
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) or No.)
17801 Georgia Avenue, Olney, Maryland 20832
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 774-6400.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
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(Title of Class)
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 such filing
requirements for the past 90 days. YES /x/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /x/
The registrant's Common Stock is not regularly and actively traded in any
established market. The aggregate market value of the Common Stock held by non-
affiliates of the registrant, computed by reference to the price ($49.00 per
share) at which the stock was sold on March 6, 1995, was approximately
$100,014,831. For purposes of this calculation, the term "affiliate" refers to
all directors and executive officers of the registrant.
As of the close of business on March 6, 1995, 2,149,163 shares of the
registrant's Common Stock were outstanding.
Documents Incorporated By Reference
Parts I and II: Portions of the Annual Report to Shareholders for the year
ended December 31, 1994 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 19, 1995 (the "Proxy Statement").
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PART I
ITEM 1. BUSINESS
GENERAL
Sandy Spring Bancorp, Inc. ("Bancorp") is a one-bank holding company for
Sandy Spring National Bank of Maryland (the "Bank"). Bancorp is registered as a
bank holding company pursuant to the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). As such, Bancorp is subject to the
supervision of and regulation by the Board of Governors of the Federal Reserve
System (the "FRB"). Bancorp commenced operations in 1988. The Bank traces its
origin to 1868 and is the oldest banking business based in Montgomery County,
Maryland. The Bank is independent, community oriented, and conducts a full-
service commercial banking business through 14 community offices located in
Montgomery and Howard counties in Maryland. The Bank is subject to the
supervision of and regulation by the Office of the Comptroller of the Currency
(the "OCC"). The Bank's savings and deposit accounts are insured by the Bank
Insurance Fund administered by the Federal Deposit Insurance Corporation (the
"FDIC") to the maximum permitted by law.
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits comes from savings institutions, other
commercial banks and credit unions located in the Bank's primary market area of
Montgomery and Howard Counties in Maryland. Additional significant competition
for savings deposits comes from mutual funds and corporate and government debt
securities. As an alternative to traditional deposit accounts, annuities are
offered through Sandy Spring Insurance Corporation, a wholly owned subsidiary of
the Bank. The primary factors in competing for loans are interest rates and
loan origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate and other loans
normally comes from thrift institutions, other commercial banks, mortgage
bankers, mortgage brokers and insurance companies. Management believes the Bank
is able to compete effectively in its primary market area.
Bancorp's and the Bank's principal executive office is at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is (301) 774-6400.
REGULATION, SUPERVISION AND GOVERNMENTAL POLICY
The following is a brief summary of certain statutes, rules and regulations
affecting Bancorp and the Bank. A number of other statutes and regulations have
an impact on their operations. The following summary of applicable statutes and
regulations does not purport to be complete and is qualified in its entirety by
reference to such statutes and regulations.
BANK HOLDING COMPANY REGULATION. Bancorp is registered as a bank holding
company under the Holding Company Act and, as such, is subject to supervision
and regulation by the FRB. As a bank holding company, Bancorp is required to
furnish to the FRB annual and quarterly reports of its operations at the end of
each period and to furnish such additional information as the FRB may require
pursuant to the Holding Company Act. Bancorp is also subject to regular
examination by the FRB.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the FRB before (i) acquiring direct or indirect ownership or control
of any voting shares of any bank or bank holding company if, after such
acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
The Holding Company Act currently prohibits the FRB from approving an
application by a bank holding company to acquire voting shares of a bank located
outside the state in which the operations of the holding
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company's bank subsidiaries are principally conducted, unless such an
acquisition is specifically authorized by state law. Maryland law provides,
subject to certain terms and conditions, that an out-of-state bank holding
company located in one of 14 states or the District of Columbia may acquire a
bank located in Maryland. The Riegle-Neal Act, however, generally permits the
FRB, effective September 29, 1995, to approve interstate bank acquisitions by
bank holding companies without regard to any prohibitions of state law. See
"Competition."
Under the Holding Company Act, any company must obtain approval of the FRB
prior to acquiring control of Bancorp or the Bank. For purposes of the Holding
Company Act, "control" is defined as ownership of more than 25% of any class of
voting securities of Bancorp or the Bank, the ability to control the election of
a majority of the directors, or the exercise of a controlling influence over
management or policies of Bancorp or the Bank.
The Change in Bank Control Act and the regulations of the FRB thereunder
require any person or persons acting in concert (except for companies required
to make application under the Holding Company Act), to file a written notice
with the FRB before such person or persons may acquire control of Bancorp or the
Bank. The Change in Bank Control Act defines "control" as the power, directly
or indirectly, to vote 25% or more of any voting securities or to direct the
management or policies of a bank holding company or an insured bank.
The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The activities of Bancorp are subject to these legal and
regulatory limitations under the Holding Company Act and the FRB's regulations
thereunder. Notwithstanding the FRB's prior approval of specific nonbanking
activities, the FRB has the power to order a holding company or its subsidiaries
to terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness or stability of any bank subsidiary of that holding
company.
The FRB has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "Regulatory Capital Requirements."
The FRB has the power to prohibit dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The FRB has issued a
policy statement on the payment of cash dividends by bank holding companies,
which expresses the FRB's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
As a bank holding company, Bancorp is required to give the FRB notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of Bancorp's consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the proposal
would violate any law, regulation, FRB order, directive, or any condition
imposed by, or written agreement with, the FRB.
BANK REGULATION. As a national bank, the Bank is subject to the primary
supervision of the OCC under the National Bank Act. The prior approval of the
OCC is required for a national bank to establish or relocate an additional
branch office or to engage in any merger, consolidation or significant purchase
or sale of assets.
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The OCC regularly examines the operations of the Bank, including but not
limited to capital adequacy, reserves, loans, investments and management
practices. These examinations are for the protection of the Bank's depositors
and not its shareholders. In addition, the Bank is required to furnish
quarterly and annual reports to the OCC. The OCC's enforcement authority
includes the power to remove officers and directors and the authority to issue
cease-and-desist orders to prevent a bank from engaging in unsafe or unsound
practices or violating laws or regulations governing its business.
The OCC has adopted regulations regarding the capital adequacy of national
banks, which require national banks to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets. See "Regulatory
Capital Requirements."
Pursuant to the National Bank Act, no national bank may pay dividends from
its paid-in capital. All dividends must be paid out of current or retained net
profits, after deducting reserves for losses and bad debts. The National Bank
Act further restricts the payment of dividends out of net profits by prohibiting
a national bank from declaring a dividend on its shares of common stock until
the surplus fund equals the amount of capital stock or, if the surplus fund does
not equal the amount of capital stock, until one-tenth of a bank's net profits
for the preceding half year in the case of quarterly or semi-annual dividends,
or the preceding two half-year periods in the case of annual dividends, are
transferred to the surplus fund.
The approval of the OCC is required prior to the payment of a dividend if
the total of all dividends declared by a national bank in any calendar year
would exceed the total of its net profits for that year combined with its net
profits for the two preceding years, less any required transfers to surplus or a
fund for the retirement of any preferred stock. In addition, the Bank is
prohibited by federal statute from paying dividends or making any other capital
distribution that would cause the Bank to fail to meet its regulatory capital
requirements. Further, the OCC also has authority to prohibit the payment of
dividends by a national bank when it determines such payment to be an unsafe and
unsound banking practice.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the FDIC to the legal maximum of $100,000 for each insured depositor.
Some of the aspects of the lending and deposit business of the Bank that are
subject to regulation by the FRB and the FDIC include reserve requirements and
disclosure requirements in connection with personal and mortgage loans and
savings deposit accounts. In addition, the Bank is subject to numerous federal
and state laws and regulations which set forth specific restrictions and
procedural requirements with respect to the establishment of branches,
investments, interest rates on loans, credit practices, the disclosure of credit
terms and discrimination in credit transactions.
The Bank is subject to restrictions imposed by federal law on extensions of
credit to, and certain other transactions with, Bancorp and other affiliates,
and on investments in the stock or other securities thereof. Such restrictions
prevent Bancorp and such other affiliates from borrowing from the Bank unless
the loans are secured by specified collateral, and require such transactions to
have terms comparable to terms of arms-length transactions with third persons.
Further, such secured loans and other transactions and investments by the Bank
are generally limited in amount as to Bancorp and as to any other affiliate to
10% of the Bank's capital and surplus and as to Bancorp and all other affiliates
to an aggregate of 20% of the Bank's capital and surplus. These regulations and
restrictions may limit Bancorp's ability to obtain funds from the Bank for its
cash needs, including funds for acquisitions and for payment of dividends,
interest and operating expenses.
Under an OCC regulation that became effective March 19, 1993, national
banks must adopt and maintain written policies that establish appropriate limits
and standards for extensions of credit that are secured by liens or interests in
real estate or are made for the purpose of financing permanent improvements to
real estate. These policies must establish loan portfolio diversification
standards, prudent underwriting standards, including loan-to-value limits, that
are clear and measurable, loan administration procedures and documentation,
approval and reporting requirements. A bank's real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending
Policies (the "Interagency Guidelines") that have been adopted by the federal
bank regulators. The
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Interagency Guidelines, among other things, call upon depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the loan-to-value limits specified in the Guidelines for the various
types of real estate loans. The Interagency Guidelines state, however, that it
may be appropriate in individual cases to originate or purchase loans with loan-
to-value ratios in excess of the supervisory loan-to-value limits.
The FDIC has established a risk-based deposit insurance premium assessment
system for insured depository institutions. Under the system, the assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC, which is determined by
the institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well-capitalized, adequately
capitalized or undercapitalized -- based on the data reported to regulators for
the date closest to the last day of the seventh month preceding the semi-annual
assessment period. Well-capitalized institutions are institutions satisfying
the following capital ratio standards: (i) total risk-based capital ratio of
10.0% or greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and
(iii) Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized
institutions are institutions that do not meet the standards for well-
capitalized institutions but that satisfy the following capital ratio standards:
(i) total risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based
capital ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or
greater. Undercapitalized institutions consist of institutions that do not
qualify as either well-capitalized or adequately capitalized institutions.
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses that, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rates range from 0.23% of deposits for well capitalized institutions
in Subgroup A to 0.31% of deposits for undercapitalized institutions in Subgroup
C. The Bank is a well capitalized institution, and has been notified that its
annual deposit insurance assessment rate for the first six months of 1995 is
0.23%.
Supervision, regulation and examination of the Bank and Bancorp by the bank
regulatory agencies are intended primarily for the protection of depositors
rather than for holders of Bank or Bancorp stock.
REGULATORY CAPITAL REQUIREMENTS. The FRB and the OCC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and national banks, respectively. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the FRB and the OCC require bank holding companies and
national banks, respectively, to maintain a minimum leverage ratio of "Tier 1
capital" (as defined in the risk-based capital guidelines discussed in the
following paragraphs) to total assets of 3.0%. Although setting a minimum 3.0%
leverage ratio, the capital regulations state that only the strongest bank
holding companies and banks, with composite examination ratings of 1 under the
rating system used by the federal bank regulators, would be permitted to operate
at or near such minimum level of capital. All other bank holding companies and
banks are expected to maintain a leverage ratio of at least 1% to 2% above the
minimum ratio, depending on the assessment of an individual organization's
capital adequacy by its primary regulator. Any bank or bank holding company
experiencing or anticipating significant growth would be expected to maintain
capital well above the minimum levels. In addition, the FRB has indicated that
whenever appropriate, and in particular when a bank holding company is
undertaking expansion, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, it will consider, on a case-by-case basis, the level
of an organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
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The risk-based capital rules of the FRB and the OCC require bank holding
companies and state member banks to maintain minimum regulatory capital levels
based upon a weighting of their assets and off-balance sheet obligations
according to risk. The risk-based capital rules have two basic components: a
core capital (Tier 1) requirement and a supplementary capital (Tier 2)
requirement. Core capital consists primarily of common stockholders' equity,
certain perpetual preferred stock (which must be noncumulative with respect to
banks), and minority interests in the equity accounts of consolidated
subsidiaries; less all intangible assets, except for certain purchased mortgage
servicing rights and purchased credit card relationships. Supplementary capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years from issuance; hybrid capital instruments, including perpetual debt and
mandatory convertible securities; and subordinated debt and intermediate-term
preferred stock.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-
weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital will be limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital will be limited. In addition, the risk-based capital regulations limit
the allowance for loan losses includable as capital to 1.25% of total risk-
weighted assets.
The federal bank regulatory agencies, including the OCC, have proposed to
revise their risk-based capital requirements to ensure that such requirements
provide for explicit consideration by commercial banks of interest rate risk.
Under the proposed rule, a bank's interest rate risk exposure would be
quantified using either the measurement system set forth in the proposal or the
bank's internal model for measuring such exposure, if such model is determined
to be adequate by the bank's examiner. If the dollar amount of a bank's
interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets, the bank would be required under the
proposed rule to hold additional capital equal to the dollar amount of the
excess. Management of the Bank does not believe that adoption of the proposed
rule would have a material adverse effect on the required levels of capital.
The proposed interest rate risk component rule would not apply to bank holding
companies on a consolidated basis.
The OCC has issued final regulations which classify national banks by
capital levels and which provide for the OCC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%. An adequately capitalized bank is one that does not qualify as well-
capitalized but meets or exceeds the following capital requirements: a total
risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a
leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite
examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically undercapitalized
depending on the extent to which the bank's capital levels are below these
standards. A national bank that falls within any of the three undercapitalized
categories established by the prompt corrective action regulation will be
subject to severe regulatory sanctions. As of December 31, 1994, the Bank was
well-capitalized as defined by the OCC's regulations.
For information regarding Bancorp's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis -- Capital and Capital Ratios" in the Annual Report.
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COMPETITION
In order to compete effectively, the Bank relies substantially on local
commercial activity; personal contacts by its directors, officers, other
employees and shareholders; personalized services; and its reputation in the
communities it serves.
The Bank presently competes within its market area with numerous bank
subsidiaries of larger bank holding companies, including the subsidiaries of
regional bank holding companies with principal operations in states other than
Maryland. It also competes with numerous independent banks, thrift
institutions, credit unions, and various other nonbank financial companies.
The banking business in Maryland generally, and the Bank's primary service
areas specifically, are highly competitive with respect to both loans and
deposits. As noted above, the Bank competes with many larger banking
organizations that have offices over a wide geographic area. These larger
institutions have certain inherent advantages, such as the ability to finance
wide ranging advertising campaigns and promotions and to allocate their
investment assets to regions offering the highest yield and demand. They also
offer services such as international banking, which are not offered directly by
the Bank (but could be offered indirectly through correspondent institutions);
and by virtue of their larger total capitalization (legal lending limits to an
individual consumer or corporation are limited to a percentage of the Bank's
total capital accounts), such banks have substantially higher lending limits
than does the Bank. Other entities, both governmental and in private industry,
raise capital through the issuance and sale of debt and equity securities and
thereby indirectly compete with the Bank in the acquisition of deposits.
In addition to competing with other commercial banks and thrift
institutions, commercial banks such as the Bank compete with nonbank financial
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for available funds with money market
instruments, which are not subject to interest rate ceilings. Such money market
funds have provided substantial competition to banks for deposits, and it is
anticipated they may continue to do so in the future.
The State of Maryland has enacted reciprocal interstate banking statutes
that authorize banks and thrift institutions, and their holding companies, in
Maryland to be acquired by regional banks and thrift institutions, or their
holding companies, in designated states, and permits Maryland banks and thrift
institutions, and their holding companies, to acquire banks and thrift
institutions in designated states, if such jurisdictions have enacted reciprocal
statutes. A majority of the jurisdictions designated in the interstate banking
statutes have enacted legislation authorizing interstate transactions in one
form or another. The effect of this legislation may be to increase competition
within the State of Maryland among banking and thrift institutions located in
Maryland and from the major regional bank holding companies that acquire
institutions in Maryland, most of which are larger than the Bank.
The Holding Company Act was recently amended by the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), which
significantly eased applicable restrictions on interstate banking. The Riegle
Neal Act permits the FRB, effective September 29, 1995, to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB
from approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Riegle-Neal
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or bank
holding company to the extent such
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limitation does not discriminate against out-of-state banks or bank holding
companies. The effect of the Riegle-Neal Act may be to increase competition
within the State of Maryland among banking and thrift institutions located in
Maryland and from banking companies located anywhere in the country.
The Riegle-Neal Act also authorizes the federal banking agencies, effective
June 1, 1997, to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks opts out of the Riegle-Neal Act by adopting a law
after the date of enactment of such Act and prior to June 1, 1997 that applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. The Maryland legislature is expected to consider
interstate branching legislation during its 1995 session.
EMPLOYEES
As of March 6, 1995, Bancorp and the Bank employed 314 persons, including
executive officers, loan and other banking and trust officers, branch personnel,
and others. None of Bancorp's or the Bank's employees is presently represented
by a union or covered under a collective bargaining agreement. Management of
Bancorp and the Bank consider their employee relations to be excellent.
EXECUTIVE OFFICERS
The following table sets forth information regarding the executive officers
of Bancorp and the Bank who are not directors.
Name Age (1) Principal Position(s)
- ---- ------- ---------------------
Thomas O. Keech 61 Vice President and Treasurer of
Bancorp and Executive Vice
President and Chief Financial
Officer of the Bank
Stanley L. Merson 38 Senior Vice President of the Bank
James H. Langmead 45 Senior Vice President of the Bank
James R. Farmer 43 Senior Vice President of the Bank
Frank H. Small 48 Senior Vice President of the Bank
____________
(1) At March 25, 1995
The principal occupation(s) and business experience of each executive
officer who is not a director for the last five years are set forth below.
THOMAS O. KEECH is Vice President and the Treasurer of Bancorp and
Executive Vice President and Chief Financial Officer of the Bank. He has been
employed by the Bank since 1980. Mr. Keech is a Certified Public Accountant.
STANLEY L. MERSON has been a Senior Vice President of the Bank since 1991
and was Vice President of the Commercial Loan Department prior to becoming
Senior Vice President. Mr. Merson has been employed by the Bank since 1982.
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JAMES H. LANGMEAD became a Senior Vice President of the Bank on January 1,
1994. Prior to that, Mr. Langmead was Vice President and Controller of the Bank
(March, 1992 through 1993) and Executive Vice President of the Bank of Baltimore
(1987-1991).
JAMES R. FARMER became a Senior Vice President of the Bank on January 1,
1994. Prior to that, Mr. Farmer was Vice President of the Bank. Mr. Farmer has
been employed by the Bank since 1979.
FRANK H. SMALL became a Senior Vice President of the Bank on January 1,
1994. Mr. Small was Vice President of the Bank (1990-1993) and prior to that,
was Vice President in charge of branch operations at Equitable Bank, N.A.
TABULAR FINANCIAL INFORMATION
RATE VOLUME TABLE. The following table sets forth information regarding
the effect of volume and rate changes on net interest income (dollars in
thousands and tax-equivalent basis).
<TABLE>
<CAPTION>
1994 v. 1993 1993 v. 1992
-----------------------------------------------------------------------
Due to Change Due to Change
Increase in Average:(1)(2) Increase in Average: (1)(2)
or ----------------- or ------------------
(Decrease) Volume Rate (Decrease) Volume Rate
---------- ------ ---- ---------- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Interest Income From
Earnings Assets:
Loans $3,711 $4,425 $(714) $(3,390) $ (752) $(2,638)
Taxable securities 1,544 2,406 (862) 5 1,625 (1,620)
Nontaxable securities (313) (36) (277) 369 859 (490)
Other investments (613) (836) 223 329 417 (88)
------ -------
TOTAL INTEREST INCOME 4,329 5,231 (902) (2,687) 3,200 (5,887)
Interest Expense on Funding
Of Earnings Assets:
Interest-bearing demand deposits 14 184 (170) (258) 195 (453)
Regular savings deposits 1,038 1,057 (19) (145) 314 (459)
Money market savings deposits (240) (115) (125) (442) 561 (1,003)
Time deposits 62 85 (23) (2,943) (1,107) (1,836)
Short-term and other borrowings 617 435 182 316 332 (16)
------
TOTAL INTEREST EXPENSE 1,491 1,715 (224) (3,472) 759 (4,231)
------ ------ ------ ------- ------- -------
NET INTEREST INCOME $2,838 $3,516 $(678) $ 785 $ 2,441 $(1,656)
------ ------ ------ ------- ------- -------
------ ------ ------ ------- ------- -------
- ------------------------
<FN>
(1) Variances are computed on a line-by-line basis and are non-additive.
(2) Combined rate/volume variances, a third element of the calculation, are
allocated to the volume and rate variances based on their relative size.
</TABLE>
LOAN MATURITY TABLE. The following table sets forth information regarding
the loan maturities and interest rate sensitivity for the real estate-
construction, commercial and tax exempt categories (dollars in thousands).
<TABLE>
<CAPTION>
Years to Maturity
----------------------------------------------------
1 or Less Over 1 - 5 Over 5 Total
----------------------------------------------------
<S> <C> <C> <C> <C>
Real Estate Construction $17,109 $ 5,500 $ 360 $22,969
Commercial 25,777 17,381 402 43,560
Tax Exempt 134 196 206 536
------- ------- ------- -------
TOTAL $43,020 $23,077 $ 968 $67,065
------- ------- ------- -------
------- ------- ------- -------
Rate Terms:
Fixed $22,823 $11,001 $ 438 $34,262
Variable or adjustable 20,197 12,076 530 32,803
------- ------- ------- -------
TOTAL $43,020 $23,077 $ 968 $67,065
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
9
<PAGE>
CREDIT LOSS ALLOWANCE TABLE. The following table presents the allocation
of the allowance for credit losses for the past five years, along with the
percentage of total loans in each category (dollars in thousands).
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------- ------------- -------------- ------------- --------------
Loan Loan Loan Loan Loan
Amount Mix Amount Mix Amount Mix Amount Mix Amount Mix
------ --- ------ --- ------ --- ------ --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amount applicable to:
Real estate--mortgage. . . . . . . . . . $1,581 76% $2,046 77% $1,756 82% $1,861 80% $1,077 76%
Real estate--construction. . . . . . . . 41 6 34 4 78 4 72 5 89 7
Consumer . . . . . . . . . . . . . . . 136 7 324 6 353 6 285 7 327 8
Commercial . . . . . . . . . . . . . . . 832 11 1,998 13 61 7 472 7 868 8
Tax exempt . . . . . . . . . . . . . . -- -- -- -- -- 1 -- 1 -- 1
Unallocated. . . . . . . . . . . . . . . 3,518 1,775 1,568 -- 207
------ ------ ------ ------ ------
Total allowance for credit
losses. . . . . . . . . . . . . . . $6,108 $6,177 $3,816 $2,690 $2,568
------ ------ ------ ------ ------
------ ------ ------ ------ ------
</TABLE>
The tabular financial information set forth on pages 12 through 23 of the
Annual Report is incorporated herein by reference.
ITEM 2. DESCRIPTION OF PROPERTY
The inside back cover page of the Annual Report (listing executive and
community offices) is hereby incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
Note 18 on page 37 of the Annual Report ("Litigation") is hereby
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1994, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The section entitled "Recent Stock Prices and Dividends" on page 11 of the
Annual Report is hereby incorporated by reference.
For information regarding regulatory restrictions on the Bank's and,
therefore, Bancorp's payment of dividends, see Note 11 -- "Stockholders' Equity"
on page 33 of the Annual Report, which is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Historical Trends in Financial Data 1990 - 1994" on
page 13 of the Annual Report is hereby incorporated by reference.
10
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 12 through 23 of the Annual Report are hereby incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 24 through 42 of the Annual Report are hereby incorporated by
reference. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of Bancorp and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is included
under the captions entitled "Election of Directors -- Information as to Nominees
and Continuing Directors" and "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" on pages 3 through 5 and pages 16 and 17 of the Proxy
Statement and is hereby incorporated by reference.
Information concerning the executive officers of Bancorp is included under
the caption entitled "Item 1. Business -- Executive Officers" of this report
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of Bancorp's directors and executive
officers is included under the caption "Executive Compensation" on pages 6
through 13 of the Proxy Statement and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Bancorp's common stock by
certain beneficial owners and management of Bancorp is included under the
caption "Stock Ownership of Management" on page 2 of the Proxy Statement and is
hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is included under the caption "Transactions and Relationships with
Management" on page 16 of the Proxy Statement and is hereby incorporated by
reference.
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of Bancorp included in the
Annual Report to Stockholders for the year ended December 31, 1994, are
incorporated herein by reference in Item 8 of this Report. The remaining
information appearing in the Annual Report to Shareholders is not deemed to
be filed as part of this Report, except as expressly provided herein.
The following financial statements are filed as a part of this report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1993 and 1994
Consolidated Statements of Income for the years ended December 31,
1992, 1993 and 1994
Consolidated Statements of Cash Flows for the years ended December 31,
1992, 1993 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1992, 1993 and 1994
Notes to the Consolidated Financial Statements
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated
financial statements or related notes.
The following exhibits are filed as a part of this report:
Exhibit No. Description Incorporated by Reference to:
- -----------
3(a) Articles of Incorporation of Sandy Exhibit 3.1 of Form 8-K
Spring Bancorp, Inc. dated May 13, 1992, SEC
File No. 0-19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 of Form 8-K
dated May 13, 1992, SEC
File No. 0-19065.
10(a) Sandy Spring Bancorp, Inc. Retirement Exhibit 10(a) of Form
Income Plan, as amended 10-K for the year ended
December 31, 1989, SEC
File No. 0-19065, and
Exhibit 10(l) hereto
10(b) Sandy Spring Bancorp, Inc., Cash Exhibit 10(b) of Form
and Deferred Profit Sharing Plan and 10-K for the year ended
Trust, as amended December 31, 1989, SEC
File No. 0-19065, and
Exhibit 10(m) hereto
12
<PAGE>
Exhibit No. Description Incorporated by Reference to:
- ----------- ----------- -----------------------------
10(c) Sandy Spring Bancorp, Inc. 1982 Exhibit 10(c) of Form
Incentive Stock Option Plan 10-Q for the quarter
ended June 30, 1990, SEC
File No. 0-19065
10(d) Lease dated December 11, 1986 Exhibit 10(d) of Form
for Leisure World Plaza Branch 10-K for the year ended
of Sandy Spring National Bank December 31, 1988, SEC
of Maryland File No. 0-19065
10(e) Employment Agreement with Exhibit 10(e) of Form
Hunter R. Hollar 10-K for the year ended
December 31, 1990, SEC
File No. 0-19065
10(f) Form of 1992 Amendment to Exhibit 10(f) of Form
Employment Agreement with 10-K for the year ended
Hunter R. Hollar December 31, 1991, SEC
File No. 0-19065
10(g) Forms of Supplemental Executive Retirement Exhibit 10(g) of Form
Agreements with Willard H. Derrick, 10-K for the year ended
Hunter R. Hollar, Thomas O. Keech and December 31, 1991, SEC
A. Hardy Pickett, with 1992 Amendments File No. 0-19065
10(h) Forms of Executive Severance Agreements Exhibit 10(h) of Form
with Willard H. Derrick, Thomas O. Keech 10-K for the year ended
and A. Hardy Pickett, with 1992 Amendments December 31, 1991, SEC
File No. 0-19065
10(i) Sandy Spring Bancorp, Inc. 1992 Stock Exhibit 10(i) of Form
Option Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
10(j) Sandy Spring National Bank of Maryland Exhibit 10(g) of Form
Executive Health Insurance Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
10(k) Sandy Spring National Bank of Maryland Exhibit 10(k) of Form
Executive Health Expense Reimbursement Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
10(l) First Amendment to Sandy Spring Bancorp, Exhibit 10(l) of Form
Inc. Retirement Income Plan Form 10-K for the year
ended December 31, 1993,
SEC File No. 0-19065
10(m) First Amendment to Sandy Spring Bancorp Exhibit 10(m) of Form
Cash and Deferred Profit Sharing Plan 10-K for the year ended
and Trust as Amended and Restated and December 31, 1993, SEC
Second Amendment to the Adoption Agreement File No. 0-19065
to Sandy Spring Bancorp Cash and Deferred
Profit Sharing Plan and Trust
13 Sections of 1994 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
13
<PAGE>
(b) No Current Reports on Form 8-K were filed during the three month period
ended December 31, 1994.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated as of March 23, 1995.
Principal Executive Officer and Principal Financial and Accounting
Director: Officer:
/s/ Hunter R. Hollar /s/ Thomas O. Keech
- ------------------------------ -----------------------------------
Hunter R. Hollar Thomas O. Keech
President and Chief Executive Officer Vice President and Treasurer
A majority of the directors of Bancorp executed a power of attorney appointing
Marjorie S. Cook as their attorney-in-fact, empowering her to sign this report
on their behalf. This power of attorney has been filed with the Securities and
Exchange Commission under Part IV, Exhibit 24 of this Form 10-K for the year
ended December 31, 1994. This report has been signed below by such attorney-in-
fact as of March 23, 1995.
By: /s/ Marjorie S. Cook
----------------------------------------
Marjorie S. Cook
Attorney-in-Fact for Majority of the
Directors of Bancorp
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description Incorporated by Reference to:
- -----------
3(a) Articles of Incorporation of Sandy Exhibit 3.1 of Form 8-K
Spring Bancorp, Inc. dated May 13, 1992, SEC
File No. 0-19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 of Form 8-K
dated May 13, 1992, SEC
File No. 0-19065.
10(a) Sandy Spring Bancorp, Inc. Retirement Exhibit 10(a) of Form
Income Plan, as amended 10-K for the year ended
December 31, 1989, SEC
File No. 0-19065, and
Exhibit 10(l) hereto
10(b) Sandy Spring Bancorp, Inc., Cash Exhibit 10(b) of Form
and Deferred Profit Sharing Plan and 10-K for the year ended
Trust, as amended December 31, 1989, SEC
File No. 0-19065, and
Exhibit 10(m) hereto
10(c) Sandy Spring Bancorp, Inc. 1982 Exhibit 10(c) of Form
Incentive Stock Option Plan 10-Q for the quarter
ended June 30, 1990, SEC
File No. 0-19065
10(d) Lease dated December 11, 1986 Exhibit 10(d) of Form
for Leisure World Plaza Branch 10-K for the year ended
of Sandy Spring National Bank December 31, 1988, SEC
of Maryland File No. 0-19065
10(e) Employment Agreement with Exhibit 10(e) of Form
Hunter R. Hollar 10-K for the year ended
December 31, 1990, SEC
File No. 0-19065
10(f) Form of 1992 Amendment to Exhibit 10(f) of Form
Employment Agreement with 10-K for the year ended
Hunter R. Hollar December 31, 1991, SEC
File No. 0-19065
10(g) Forms of Supplemental Executive Retirement Exhibit 10(g) of Form
Agreements with Willard H. Derrick, 10-K for the year ended
Hunter R. Hollar, Thomas O. Keech and December 31, 1991, SEC
A. Hardy Pickett, with 1992 Amendments File No. 0-19065
10(h) Forms of Executive Severance Agreements Exhibit 10(h) of Form
with Willard H. Derrick, Thomas O. Keech 10-K for the year ended
and A. Hardy Pickett, with 1992 Amendments December 31, 1991, SEC
File No. 0-19065
10(i) Sandy Spring Bancorp, Inc. 1992 Stock Exhibit 10(i) of Form
Option Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
10(j) Sandy Spring National Bank of Maryland Exhibit 10(g) of Form
Executive Health Insurance Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
<PAGE>
10(k) Sandy Spring National Bank of Maryland Exhibit 10(k) of Form
Executive Health Expense Reimbursement Plan 10-K for the year ended
December 31, 1991, SEC
File No. 0-19065
10(l) First Amendment to Sandy Spring Bancorp, Exhibit 10(l) of Form
Inc. Retirement Income Plan Form 10-K for the year
ended December 31, 1993,
SEC File No. 0-19065
10(m) First Amendment to Sandy Spring Bancorp Exhibit 10(m) of Form
Cash and Deferred Profit Sharing Plan 10-K for the year ended
and Trust as Amended and Restated and December 31, 1993, SEC
Second Amendment to the Adoption Agreement File No. 0-19065
to Sandy Spring Bancorp Cash and Deferred
Profit Sharing Plan and Trust
13 Sections of 1994 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
<PAGE>
EXHIBIT 13
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
(from the inside back cover of the Annual Report)
OFFICE LOCATIONS
EXECUTIVE OFFICES GAITHERSBURG
17801 Georgia Avenue 814 West Diamond Avenue
Olney, Maryland 20832 Gaithersburg, Maryland 20878
(301) 774-6400 (301) 963-3600
AIRPARK LAYHILL
7653 Lindbergh Drive 14241 Layhill Road
Gaithersburg, Maryland 20879 Silver Spring, Maryland 20906
(301) 774-8408 (301) 774-8406
ASHTON LEISUREWORLD PLAZA
1 Ashton Road 3801 International Drive
Ashton, Maryland 20861 Silver Spring, Maryland 20906
(301) 774-8405 (301) 774-8407
ASPENWOOD LISBON
(Aspenwood Residents and Employees Only) 710-N Lisbon Centre Drive
14400 Homecrest Road Woodbine, Maryland 21797
Silver Spring, Maryland 20906 (410) 442-1878
(301) 774-8406
BURTONSVILLE OLNEY
3535 Spencerville Road 17801 Georgia Avenue
Burtonsville, Maryland 20866 Olney, Maryland 20832
(301) 774-8404 (301) 774-8402
CLARKSVILLE ROCKVILLE
12276 Clarksville Pike 611 Rockville Pike
Clarksville, Maryland 21029 Rockville, Maryland 20852
(410) 531-2650 (301) 217-0555
COLESVILLE SANDY SPRING
13300 New Hampshire Avenue 908 Olney-Sandy Spring Road
Silver Spring, Maryland 20904 Sandy Spring, Maryland 20860
(301) 774-8403 (301) 774-8401
DAMASCUS MONTGOMERY VILLAGE (LATE 1995)
26250 Ridge Road 9921 Stedwick Road
Damascus, Maryland 20872 Gaithersburg, MD 20879
(301) 253-0133 (301) 774-6400
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
(FROM PAGE 37 OF THE ANNUAL REPORT)
NOTE 18 -- LITIGATION
At December 31, 1994, the Company was involved in litigation arising from
normal banking, financial, and other activities of the Bank. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
(from page 11 of the Annual Report)
RECENT STOCK PRICES AND DIVIDENDS
(Dollars in thousands, except per share data)
Shareholders received quarterly cash dividends totaling $2,273 in 1994, and
$2,014 in 1993. Regular dividends have been declared for ninety-four
consecutive years. The Company has increased its dividends per share each year
for the past fourteen years. Since 1989, dividends per share have risen at an
annual compound growth rate of 9.8%, with an increase of 9.2% in 1994.
Total dividends, expressed as a percent of net income, were 28.3% in 1994
and 25.1% in 1993. The amount of dividends is established by the Board of
Directors in consideration of operating results, financial condition, capital
adequacy, regulatory requirements, shareholder returns and other factors.
Shares issued under the dividend reinvestment plan totaled 16,613 in 1994
and 14,982 in 1993.
There is no established public trading market for the Company's common
stock, which is traded lightly in a local market. The number of shareholders of
record continues to grow, reaching approximately 1,900 as of February 10, 1995
from approximately 1,800 a year earlier. Management estimates that about three
fourths of the Company's shareholders reside in its market area.
The following table sets forth the range of high and low sales prices for
the common stock as well as dividends declared in each quarter of the two most
recent years. Sales prices shown represent actual transactions known to the
Company to have occurred in each quarterly period shown, with the exception of
the high sales prices shown for the third and fourth quarters of 1994, and the
low sales price shown for the second quarter of 1994, each of which is based
upon reports of transactions published by third parties.
(from page 33 of the Annual Report)
(Dollars in thousands, except per share data)
<PAGE>
NOTE 11 -- STOCKHOLDERS' EQUITY
Bancorp's Articles of Incorporation authorize 6,000,000 shares of capital
stock, par value $1.00 per share, to be initially classified as common stock.
However, as set out in the Articles of Incorporation, remaining unissued stock
may in the future be designated as either common or preferred stock.
On July 24, 1992, Sandy Spring Bancorp issued and sold 237,426 shares of
common stock for $34.00 per share in a combined shareholder rights and community
offering. Net proceeds from the stock offering were $7,950, and are being used
for general corporate purposes, including contributions to the Bank of $2,000.
On December 16, 1992, the Board of Directors approved the Sandy Spring
Bancorp Dividend Reinvestment Plan (the "Plan") effective for the first dividend
of 1993. The Plan provides shareholders with the opportunity to increase their
equity ownership in Bancorp by electing to have cash dividends automatically
reinvested in additional shares of common stock without payment of any brokerage
commission or service charge. The Board has reserved 100,000 shares for
issuance under the Plan.
Bank and holding company regulations, as well as Maryland law, impose
certain restrictions on dividend payments by the Bank, as well as restricting
extensions of credit and transfers of assets between the Bank and the holding
company. These restrictions have had no impact on Bank dividend payments in
prior years and none is anticipated in future periods. There were no loans
outstanding between the Bank and Bancorp at December 31, 1994 and 1993.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
(from page 13 of the Annual Report)
HISTORICAL TRENDS IN FINANCIAL DATA 1990-1994
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S>
RESULTS OF OPERATIONS (for the year): <C> <C> <C> <C> <C>
Interest Income $46,264 $41,674 $ 44,520 $ 47,448 $ 44,986
Interest Expense 19,179 17,695 21,188 28,471 28,520
Net Interest Income 27,085 23,979 23,332 18,977 16,466
Provision for Credit Losses 160 950 1,750 835 560
Net Interest Income after Provision for Credit Losses 26,925 23,029 21,582 18,142 15,906
Non-Interest Income 4,129 4,808 4,573 2,724 2,334
Non-Interest Expenses 19,895 16,942 15,269 13,477 11,542
Income before Taxes and Cumulative
Effect of Accounting Change 11,159 10,895 10,886 7,389 6,698
Income Tax Expense 3,139 2,888 2,981 1,994 1,949
Income before Cumulative Effect of Accounting Change 8,020 8,007 7,905 5,395 4,749
Cumulative Effect of Accounting Change -- -- 744 -- --
Net Income 8,020 8,007 8,649 5,395 4,749
PER SHARE DATA
Net Income $3.78 $3.89 $4.53/$4.14* $ 3.01 $ 2.66
Dividends Declared 1.07 0.98 0.85 0.75 0.72
Book Value 31.29** 31.46** 26.75 21.98 19.71
FINANCIAL CONDITION (at year end):
Assets $764,135 $722,465 $626,084 $573,812 $517,899
Deposits 645,619 622,056 557,958 517,110 466,539
Loans 401,524 324,372 274,189 313,315 336,072
Securities 304,004 309,013 284,999 191,221 108,517
Stockholders' Equity 66,956 66,391 54,668 39,501 35,233
MEASUREMENTS (for the year):
Return on Average Assets 1.11% 1.24% 1.44%/1.32%* 1.00% 1.01%
Return of Average Equity 12.12 13.74 19.31/17.65* 14.75 14.35
Average Equity to Average Assets 9.19 9.06 7.45 6.79 7.03
Dividends Declared to Net Income 28.34 25.14 18.97/20.76* 24.94 27.03
<FN>
*Excludes the cumulative benefit recorded in 1992 from the change in accounting
for income taxes.
**Includes the effects under Statement of Financial Accounting Standards No. 115
of marking to market the available-for-sale portion of the investment portfolio.
</TABLE>
<PAGE>
Item I. Business -- Tabular Financial Information
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(from pages 12-23 of the Annual Report)
Management's Discussion and Analysis (Dollars in thousands)
NET INTEREST INCOME
The Company's net interest income rose $3,106 or 13.0% during 1994 to
$27,085 for the year. The percentage increase was 2.8% in 1993 resulting in net
interest income of $23,979, up from $23,332 the prior year. On a tax-equivalent
basis, the respective net interest income figures for 1994, 1993 and 1992
amounted to $28,970 (representing a 10.9% annual rise), $26,132 (3.1% annual
rise) and $25,347.
One extremely important factor in the profitability of a bank is
management's ability to maximize net interest income. The Company's performance
in this regard is analyzed in the "Consolidated Average Balance, Yields and
Rates" table accompanying this discussion.
Greater volume of business was the predominant factor generating the higher
level of net interest income in 1994, compared to 1993. Interest rate changes
had an adverse, though relatively moderate, effect on net interest income.
INTEREST INCOME
The Company's tax-equivalent interest income increased 9.9% or $4,329 in
1994, as a result of a $73,725 or 12.2%, increase in average earning assets
offset in part by a decline of 14 basis points in average yield earned. Average
loans (yielding 8.15%) increased 18.9% or $54,090 while average securities
(yielding 6.08%) posted a 14.9% or $42,486 rise. The growth in loans and
securities was funded in part by a decrease of 65.4% or $22,851 in time deposits
with other banks and federal funds sold, the lowest yielding categories of
earning assets.
In 1993, tax-equivalent interest income declined, by 5.8% or $2,687, as an
increase of 7.2% in average earning assets was more than offset by a 100 basis
point reduction in average yield earned.
INTEREST EXPENSE
Interest expense in 1994 increased 8.4% or $1,491 due primarily to a 9.8%
rise in interest-bearing liabilities. The average rate paid on those
liabilities was virtually unchanged from the prior year. Money market savings
deposits (costing 3.03%) and time deposits (costing 4.24%) remained essentially
the same in 1994 as in 1993. Average regular savings (costing 3.04%) grew 47.0%
or $34,791 and average interest-bearing demand deposits (costing 2.62%) rose
8.6% or $6,772. Deposit growth did not provide sufficient support for the
significant rise in loans during 1994. Average short-term and other borrowings
(costing 4.26%) increased $10,774 or 53.3%, including an increase in advances
from the Federal Home Loan Bank of Atlanta.
In 1993, interest expense declined 16.4% or $3,472, compared to 1992, due
to the opposing effects of 3.7% higher average interest-bearing liabilities and
an 83 basis point decline in average rate paid.
INTEREST RATE PERFORMANCE
The interest rate spread narrowed to 3.69% in 1994 from 1993's 3.79%,
representing a 10 basis point decline for reasons discussed above. The decline
in net interest margin was even smaller, as the level of interest-free funding
of earning assets increased modestly.
During 1993, the spread and margin both decreased by 17 basis points.
NON-INTEREST INCOME
Total non-interest income decreased 14.1% or $679 during 1994 to $4,129 for
the year, following an increase of 5.1% or $235 in 1993.
<PAGE>
The primary reason for the decline in total non-interest income was an $812
decrease in gains on residential mortgage loan sales to $164 on sales of $15,487
in 1994 from $976 on sales of $48,360 in 1993. During most of 1994, residential
mortgage loan originations were retained in the Company's loan portfolio since
these originations met the Bank's asset/liability management objectives. In the
early months of the year when the Company desired to sell mortgages, rising
interest rates adversely affected both loan production and the secondary market.
Gains on mortgage sales totalled $1,001 on sales of $69,069 in 1992.
Securities losses of $84 were recorded during 1994 compared to gains of
$257 in 1993. Included in the securities gains for 1993 was $117 which
represented the reversal of a valuation allowance for corporate debt securities
established in a prior year. Securities gains were $507 in 1992 with $300
attributable to a reduction in a valuation allowance that year as the credit
position of the issuer improved.
Growth in service charge income amounted to 13.8% or $280 in 1994 preceded
by 12.1% or $219 the prior year.
Other non-interest income was up 12.5% or $194 during 1994 compared to a
gain of 23.2% or $291 in the category in 1993. The majority of other non-
interest income is comprised of commissions and fees from trust services,
annuity and mutual fund sales and servicing of mortgages sold which rose 15.1%
or $136 to $1,035 in 1994, following a 39.2% or $253 increase in 1993 to $899
from 1992's $646.
NON-INTEREST EXPENSES
Non-interest expenses totaled $19,895 for 1994, representing a 17.4%
increase over $16,942 in 1993. Non-interest expenses increased 11.0% in 1993,
compared to 1992. Higher overall operating expense levels over the past two
years, 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.
Salaries and employee benefits increased 22.0% or $1,994 in 1994, compared
to a 9.1% or $759 rise in 1993. A significant part of the growth reported for
1994 is attributable to staff increases related to the Company's growth and, to
a lesser extent, to nonrecurring special early retirement benefits of $291
extended to certain long term employees.
The ratio of net income to average full-time-equivalent employees was $28
for 1994, $32 for 1993 and $34 for 1992 (excluding the accounting change
benefit). The decline in this measure of productivity resulted mainly from an
increase in employees. The number of average full-time-equivalent employees
rose to 286 in 1994 from 250 in 1993 (up 14.4%), reflecting the staffing of
three additional branches (two of which were from the merger with First
Montgomery Bank completed in December 1993).
Occupancy expense grew 14.4% or $230 during 1994 due in large measure to
rental expenses associated with the two branches obtained in the merger with
First Montgomery Bank and additional office space. Equipment expenses grew
23.4% or $293 in 1994, reflecting installation of a new teller terminal system,
the first full year of operation of a new branch and acceleration of
depreciation on automated teller machines. Expenses for occupancy and equipment
rose at rates of 17.2% and 12.8%, respectively, in 1993 as compared to 1992.
Other non-interest expenses, including the FDIC insurance and outside data
services, rose 8.7% or $436 in 1994, compared to 1993. Major increases were
attorney fees incurred for resolution of problem loans and consulting services
related to training and implementing strategic plans.
NET OVERHEAD
Management believes that the net overhead ratio, which indicates the level
of net operating expenses (non-interest expenses less non-interest income) as a
percentage of tax-equivalent net interest income, is the best general measure of
non-interest expense performance. During 1994, the Company's net overhead ratio
was 54.4%, up from a ratio of 46.4% in 1993. Ratios below 50% are considered
generally desirable. However, the 1994 ratio reflects the costs of expansion in
capacity for future growth.
<PAGE>
BALANCE SHEET ANALYSIS
At December 31, 1994, the Company's size, as measured by total assets,
reached $764,135 as compared to $722,465 at December 31, 1993, for an increase
of 5.8% or $41,670. Total assets, including $39,000 acquired from First
Montgomery Bank in 1993, were 15.4% or $96,381 higher at December 31, 1993,
compared to year-end 1992.
Earning assets increased 5.2% in 1994, reaching $711,114 at December 31,
1994 from $675,825 at December 31, 1993.
Total loans rose 23.8% or $77,152 during 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 1994. All major categories of loans
increased during 1994. Real estate mortgages grew $55,341 or 22.1% in part from
loan purchases of $10,301. Construction loans increased $9,258 or 67.5%,
consumer loans were up $9,489 or 50.3% and commercial loans grew $3,199 or 7.9%.
Interest-bearing deposits with banks and federal funds sold together
decreased $29,875 to $5,586, as funds considered excess liquidity earlier in
1994 were either reinvested in medium term securities at more attractive rates
or into loans. By the end of 1994, the investment portfolio, which consists of
investments available-for-sale and held-to-maturity as well as other equity
securities, had decreased by 1.62% or $5,009 to $304,004 from $309,013 at
December 31, 1993 as loan growth during 1994 absorbed available funds. Within
the investment portfolio, securities with fair values totalling $66,925 were
transferred in 1994 from the available-for-sale category to the held-to-maturity
category. In accordance with Statement of Financial Accounting Standards No.
115 (FASB 115), $2,523 of unrealized losses on the securities transferred is
being amortized over the remaining life of the securities. These unrealized
losses along with net unrealized losses from declines in the fair value of
investments available-for-sale (net of taxes) are shown as a component of
stockholders' equity in accordance with FASB 115.
Total deposits increased by $23,653 or 3.8%, primarily as a result of
growth in core deposits (defined to include all deposits, except time deposits
of $100,000 or more). Total deposits were $645,619 at December 31, 1994, up
from $622,056 at December 31, 1993. The 1994 growth in core and total deposits
was below the Company's historical growth experience. Competition for core
deposits has increased, especially competition from investment alternatives
outside banking, including U.S. Treasury securities. Core deposits comprised
86.2% of earning assets at December 31, 1994 compared to 87.5% at December 31,
1993. Total short term borrowings increased by $17.9 million, or 6.6%, in 1994.
Most of this increase was attributable to $10,500 in additional short-term
advances on the Company's line of credit with the Federal Home Loan Bank of
Atlanta. Repurchase agreements, a component of short-term borrowings associated
with business accounts, increased $7,140.
ANALYSIS OF LOANS
(Dollars in thousands)
The following table presents the trends in the composition of the loan portfolio
over the previous five years.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate-mortgage(1) $306,122 $250,781 $224,494 $251,597 $255,096
Real estate-construction(2) 22,969 13,711 12,234 16,839 24,189
Consumer 28,337 18,848 17,509 21,225 25,688
Commercial 43,560 40,361 18,709 22,040 29,113
Tax exempt 536 671 1,243 1,614 1,986
-------- -------- -------- -------- --------
TOTAL LOANS $401,524 $324,372 $274,189 $313,315 $336,072
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<FN>
(1) Consists of fixed and adjustable rate first and second home mortgage loans,
home equity lines of credit and commercial mortgage loans.
(2) Includes both residential and commercial properties.
</TABLE>
<PAGE>
ANALYSIS OF SECURITIES
(Dollars in thousands)
The composition of Securities at December 31 for each of the latest three fiscal
years was:
<TABLE>
<CAPTION>
Available- Held-to-maturity Total Available- Held-to-maturity Total Investment
for-sale(1) and other equity Securities for-sale(1) and other equity Securities Securities
---------------------------------------------------------- --------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 1993 1992
- ----------------------------------------------------------------- --------------------------------------------- ------------
U.S. Treasury $ 23,272 $ -- $ 23,272 $ 32,691 $ -- $ 32,691 $ 32,702
U.S. Agency 23,579 77,959 101,538 19,093 42,242 61,335 52,335
State and municipal 39,836 29,627 69,463 51,084 27,883 78,967 74,232
Corporate debt
obligations 3,260 -- 3,260 7,230 -- 7,230 9,749
Mortgage-backed
securities (2) 37,307 64,680 101,987 119,151 -- 119,151 107,268
Marketable and other
equity securities 518 3,966 4,484 5,715 3,924 9,639 8,713
------------------------------------------- --------------------------------------------- ------------
TOTAL SECURITIES (3) $127,772 $176,232 $304,004 $234,964 $74,049 $309,013 $284,999
------------------------------------------- --------------------------------------------- ------------
------------------------------------------- --------------------------------------------- ------------
<FN>
(1) At estimated fair value.
(2) Mortgage-backed securities are either issued by a federal agency or are secured by U.S. Agency collateral and therefore are
believed to be high-quality.
(3) The outstanding balance of no single issuer exceeded ten percent of stockholders' equity at December 31, 1994, 1993 or 1992.
</TABLE>
Maturities and weighted average yields for held-to-maturity debt securities at
December 31, 1994 are shown below:
<TABLE>
<CAPTION>
Years to Maturity
---------------------------------------------------------------------------
Within Over 1 Over 5 Over
1 through 5 through 10 10
---------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield TOTAL YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency $ 3,398 5.70% $ 57,548 5.61% $12,013 6.10% $5,000 7.60% $ 77,959 5.82%
State and municipal 490 8.56 1,287 5.42 27,850 7.34 -- -- 29,627 7.28
Mortgage-backed securuties 7,498 5.95 52,769 6.99 4,413 7.37 -- -- 64,680 6.79
------- -------- ------- ------ --------
TOTAL INVESTMENTS
HELD-TO-MATURITY $11,386 5.99% $111,604 6.20% $44,276 7.01% $5,000 7.60% $172,266 6.43%
------- -------- ------- ------ --------
------- -------- ------- ------ --------
</TABLE>
Note--The yields on state and municipal securities have been calculated on a
tax-equivalent basis assuming a 34% marginal federal income tax rate.
<PAGE>
Maturities (1) and weighted average yields for investments available-for-sale at
December 31, 1994 are shown below:
<TABLE>
<CAPTION>
Years to Maturity
----------------------------------------------------------------------------
Within Over 1 Over 5 Over
1 through 5 through 10 10
----------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield TOTAL YIELD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 7,042 4.65% $16,917 5.68% $ -- -% $ -- -% $ 23,959 5.37%
U.S. Agency 1,002 8.95 21,859 8.08 1,984 9.06 -- -- 24,845 5.86
State and municipal(2) 8,923 8.55 30,594 8.26 202 7.00 -- 39,719 8.32
Corporate debt obligations 270 4.70 2.002 7.24 1,000 5.69 -- -- 3,272 6.56
Mortgage-backed securities 4,418 6.79 19,852 5.69 8,011 5.97 7,009 5.89 39,290 5.91
------- -------- ------- ------ --------
Total Debt Securities $21,655 6.69% $91,224 6.52% $11,197 6.51% $7,009 5.89% 131,085 6.55%
------- -------- ------- ------
------- -------- ------- ------
Marketable equity
securities 5
--------
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE $131,090
--------
--------
<FN>
(1) Amounts shown at amortized cost without market value adjustments required by FASB 115 (see notes 1 and 4 of Notes to the
Consolidated Financial Statements.
(2) The yields on state and municipal securities have been calculated on a tax-equivalent basis assuming a 34% marginal federal
income tax rate.
</TABLE>
CAPITAL MANAGEMENT
(Dollars in thousands)
Stockholders' equity grew slightly to $66,956 at December 31, 1994 from
$66,391 at December 31, 1993 as capital additions from earnings net of dividends
and stock issuances were nearly offset by valuation adjustments to investments
available-for-sale recorded in stockholders' equity. Internal capital
generation (net income less dividends) provided $5,747 in additional equity
during 1994, for a growth rate on average equity of 8.7% versus 10.3% for 1993.
Stockholder's equity was negatively affected by a $(3,287) net unrealized
loss, net of taxes, on investments available-for-sale at December 31, 1994
compared to a $2,958 net unrealized gain, net of taxes, at December 31, 1993,
for a net decrease in stockholders' equity from year end to year end of
$(6,245). While these unrealized gains and losses are considered to be a part
of stockholders' equity under generally accepted accounting principles, they are
currently not included in capital for purposes of computing regulatory capital
ratios.
Sources of external capital formation over the two year period 1994-1993
included the Company's dividend reinvestment plan, resulting in $785 of
additional equity through the issuance of 16,613 shares (1994) and $632 through
14,982 new shares (1993), and employee investment programs, which added $278 and
$200 in the respective years to the Company's capital position. In 1993, new
equity capital of $1,940 was raised as a result of the issuance of 44,605 shares
of the Company's common stock in exchange for First Montgomery Bank stock in the
merger transaction.
REGULATORY CAPITAL REQUIREMENTS
The Company's capital position exceeds regulatory requirements which relate
to safety and soundness. Year-end capital adequacy ratios were similar in 1994
and 1993. The total risk-based capital ratio was 17.52% at December 31, 1994
versus 17.74% at December 31, 1993. This ratio is the primary regulatory
measure of capital adequacy and relates capital adequacy to the level of credit
risk inherent in assets on and off the balance sheet, with higher-risk assets
requiring a greater commitment of capital.
The tier-1 risk-based capital ratio comparison was 16.27% at year-end 1994
versus 16.48% at year-end 1993.
The leverage ratio, which measures the availability of tangible capital to
average total assets, was 9.45% at December 31, 1994 versus 9.48% at December
31, 1993.
The regulators continue to formulate policies for incorporation of interest
rate risk into capital requirements, as mandated by the Federal Deposit
Insurance Corporation Improvement Act of 1991. When new standards emerge,
perhaps in 1995, management expects that the Company's capital adequacy will
remain significantly above regulatory minimums.
Management monitors historical and projected earnings, dividends and asset
growth, as well as risks associated with the various types of on and off-balance
sheet assets, in order to determine the appropriate capital levels and the
action needed, if any, to preserve capital adequacy.
<PAGE>
The capital position of the Company and the Bank are analyzed in the following
table as of December 31, 1994 and December 31, 1993.
<TABLE>
<CAPTION>
December 31, Regulatory
----------------------
1994 1993 Standards
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPANY:
Tier 1 Capital(1) $69,658 $62,331
Tier 1 Risk-based Capital Ratio 16.27% 16.48% 4.00%
Total Risk-based Capital(2) $74,974 $67,076
Total Risk-based Capital Ratio 17.52% 17.74% 8.00%
Capital Leverage Ratio 9.45% 9.48% 3-5%(3)
BANK:
Tier 1 Capital (1) $61,423 $54,584
Tier 1 Risk-based Capital Ratio 14.36% 14.44% 4.00%
Total Risk-based Capital (2) $66,736 $59,325
Total Risk-based Capital Ratio 15.61% 15.70% 8.00%
Capital Leverage Ratio 8.34% 8.31% 3-5%(3)
- --------------------------------------------------------------------------------
(1) Total stockholders' equity less intangibles and the net unrealized gain
(loss) on investments available-for-sale.
(2) Tier 1 capital plus a permitted amount of the allowance for credit losses.
(3) Established on an individual basis for each bank.
</TABLE>
CREDIT RISK MANAGEMENT
(Dollars in thousands)
The allowance for credit losses is available for future loan charge-offs.
The allowance is funded at a level deemed appropriate by charges to earnings
through the provision for credit losses. The allowance is decreased for loan
charge-offs and increased by recoveries of loans previously charged-off. The
amount of provision necessary is determined by loss allocations for specific
problem credits, historical loss experience and consideration of other factors
including economic conditions, portfolio trends and credit concentrations, based
upon data and analysis provided by the Company's loan review department.
Management believes credit quality in the Bank's loan portfolio is
satisfactory, as indicated by a ratio of nonperforming loans to total loans of
0.39% at December 31, 1994, down from 1.06% at December 31, 1993. The amount of
total nonperforming loans declined by $1.9 million, or 54.2%, during 1994. The
allowance for credit losses was nearly four times greater than nonperforming
loans at December 31, 1994. During the year, net charge-offs of $229 were
recorded out of an average loan portfolio totalling $340,585, a ratio of 0.07%.
Other real estate owned was $277, net of allowance of $66, at December 31, 1994.
Due to improved asset quality indicators, the 1994 provision for credit
losses was lower than the $950 recorded in 1993. The amount of provision set
aside in 1993 was influenced by 1993's higher nonperforming and problem loans,
which were due in part to the merger with First Montgomery Bank.
In 1993, the Company's allowance was increased by $1,158 as part of the
merger transaction with First Montgomery Bank.
The Company continues to experience a low level of charge-offs. While net
charge-offs registered 0.07% of average loans during 1994, recoveries exceeded
charge-offs by $253 in 1993.
The major concentrations of credit risk for the Company arise by customer
location, because it operates only in two counties in the State of Maryland, and
by loan portfolio composition. Real estate credits represented 82.0% of total
loans at December 31, 1994 and 81.5% at December 31, 1993. Within the real
estate loan portfolio, commercial construction and development credits,
generally considered to be a higher risk category of loans, comprised 3.6% of
total real estate loans and 2.9% of total loans at December 31, 1994. By
contrast, traditional first and second home mortgages, generally considered to
be a lower risk category, amounted to 44.5% of total real estate loans and 36.5%
of total loans. The remaining balances of real estate loans consist of
mortgages on commercial properties, home equity lines of credit and residential
lot loans.
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses for the preceding five years ended
December 31, is shown below:
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $6,177 $3,816 $2,690 $2,566 $2,137
Provision for credit losses 160 950 1,750 835 560
Allowance from merger transaction -- 1,158 -- -- --
Loan charge-offs:
Real estate-mortgage (135) -- (506) (50) (25)
Real estate-construction -- -- - (5) (9)
Consumer (32) (104) (243) (294) (111)
Commercial (342) (29) (76) (412) (22)
-------- -------- --------- -------- --------
Total charge-offs (509) (133) (825) (761) (167)
Loan recoveries:
Real estate-mortgage 16 54 -- -- --
Real estate-construction -- -- 5 -- --
Consumer 40 79 61 40 34
Commercial 224 253 135 8 4
-------- -------- ---------- --------- --------
Total recoveries 280 386 201 480 38
-------- -------- ---------- --------- --------
Net recoveries (charge-offs) (229) 253 (624) (713) (129)
-------- -------- ---------- --------- --------
BALANCE, DECEMBER 31 $6,108 $6,177 $3,816 $2,690 $2,568
-------- -------- ---------- ---------- --------
-------- -------- ---------- ---------- --------
Net recoveries (charge-offs) to average loans (0.07)% 0.09% (0.22)% (0.22)% (0.04)%
Allowance to total loans 1.52% 1.90% 1.39% 0.86% 0.76%
Balance sheet risk inherent in the lending function
is presented as follows for a five year period:
December 31,
-------------------------------------------------------------------------------
1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
Non-accrual loans(1) $ 866 $2,933 $ 508 $ 580 $ 147
Loans 90 days past due 571 517 953 1,318 1,128
Restructured loans 44 -- -- -- --
----- ------ ----- ------ -----
Total Nonperforming Loans(2) 1,581 3,450 1,461 1,898 1,276
Other real estate owned, net 277 1,387 999 1,097 1,869
----- ------ ------ ------ ------
TOTAL NONPERFORMING ASSETS $1,858 $4,837 $2,460 $2,995 $3,144
----- ------ ------ ------ ------
----- ------ ------ ------ ------
NONPERFORMING ASSETS TO TOTAL ASSETS 0.24% 0.67% 0.39% 0.52% 0.61%
<FN>
(1) Gross interest income that would have been recorded in 1994 if non-accrual
loans had been current and in accordance with their original terms approximated
$131, while no interest was recognized on such loans during the year.
(2) Those performing loans considered potential problem loans, as defined and
identified by management, amounted to $13,949 at December 31, 1994. Although
these are loans where known information about the borrowers' possible credit
problems causes management to have 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>
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity
The Company's liquidity position, considering both internal and external
sources available, exceeds anticipated short and long term funding needs at
December 31, 1994. Core deposits, defined to include all deposits except
certificates of deposit of $100,000 or more, equal 86.2% of total earning assets
at December 31, 1994. In addition, substantial amortizing residential mortgage
loans, maturities and paydowns of securities, deposit growth and earnings have
contributed a flow of funds available to meet liquidity requirements.
Management monitors current and expected liquidity in order that sufficient
funds are available on short notice to meet operating requirements, satisfy
deposit withdrawals, fund loans, and to enable the Company to pursue new
business opportunities.
Internally generated funds available at December 31, 1994, consisted
primarily of cash and cash equivalents, interest-bearing deposits with banks,
maturities of investments held-to-maturity due within one year at fair value and
investments available-for-sale and totalled $177,184 or 23.2% of total assets.
Excluding investments available-for-sale, which have experienced depreciation in
value due to the increase in general interest rates, funds available totalled
$49,412 or 6.5% of total assets at year-end 1994, a position that may cause the
Company to increase borrowing to meet loan demand in future periods.
The Company's external sources of liquidity include a line of credit for
$145,000 from the Federal Home Loan Bank of Atlanta of which approximately
$23,520 was outstanding at December 31, 1994. Core deposits increased by
$21,644 during 1994, while loans grew by $77,152, resulting in an increase in
borrowed funds.
The Bank's time deposits of $100,000 or more represented 5.0% of total
deposits at December 31, 1994 and are broken out by maturity in the table below.
Months to Maturity
---------------------------------------------
3 or Over 3 Over 6 Over
less to 6 to 12 12 TOTAL
- --------------------------------------------------------------------------------
Time deposits --
$100,000 or more $10,620 $5,659 $6,041 $10,257 $32,577
------- ------ ------ ------- -------
------- ------ ------ ------- -------
<PAGE>
Management's Discussion and Analysis (Dollars in thousands)
Interest Rate Sensitivity
The Company's rate sensitivity at December 31, 1994 is set forth in the
table below. It shows a liability sensitive position cumulative to one year of
$5,593 or 0.73% of total assets, indicating the assumption of relatively low
interest rate risk.
Interest sensitivity is one measure of the way earnings may react to
changes in the general levels of interest rates. Whenever earning assets
reprice to market interest rates at a different pace than interest-bearing
liabilities, net interest income will be affected. Risk factors not reflected
in gap analysis in the table below include differences in the speed and amount
of response by the specific types of assets and liabilities to a change in
general market interest rates. Management believes its overall rate sensitivity
position is appropriate for current rate conditions.
There is a prepayment risk associated with the Bank's portfolio of
mortgage-backed securities, especially collateralized mortgage obligations,
whose maturities can be significantly affected when interest rates change.
However, based on current prepayment assumptions, these assets have a relatively
short weighted average life.
In addition to the analysis of rate sensitivity, management performs
simulation analysis to more closely evaluate the short-term impact of changing
interest rates on net interest income and the long-term impact on the value of
equity. This approach is more is believed to provide a more accurate assessment
of the economic impact of alternative investment and pricing decisions than the
use of rate sensitivity analysis alone.
The Board of Directors has established the limits of acceptable risk as a
policy which the Asset-Liability Committee implements in its management of
interest rate risk. The Committee, comprised of senior management, meets weekly
and conducts comprehensive quarterly reviews with the Board of Directors.
The following schedule sets out the time frames from December 31, 1994 in
which the Company's assets and liabilities are subject to repricing:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
0-90 91-365 Over 1-3 Over 3-5 Over 5-10 Over 10-20 Over 20
Days Days Years Years Years Years Years
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Loans $87,451 $108,351 $117,479 $60,849 $22,709 $4,663 $1,002
Taxable securities 39,773 46,550 80,215 52,384 19,281 -- --
Nontaxable securities 2,466 8,740 11,504 18,613 27,793 -- --
Other investments 17,915 -- -- -- -- -- --
-------------------------------------------------------------------------------------------
TOTAL 147,605 163,641 209,198 131,846 69,783 4,663 1,002
RATE SENSITIVE LIABILITIES:
Noninterest-bearing demand deposits 16,679 -- -- -- -- -- --
Interest-bearing demand deposits 4,592 13,777 36,738 36,737 -- -- --
Regular savings deposits 5,459 16,376 43,670 43,669 -- -- --
Money market savings deposits 7,825 86,062 62,590 -- -- -- --
Time deposits 53,940 66,866 29,845 32,810 -- -- --
Short-term borrowings and other
rate sensitive liabilities 24,749 20,514 44 1,079 2,038 -- --
----------------------------------------------------------------------------------------------------------------------------
TOTAL 113,244 203,595 172,887 114,295 2,038 -- --
----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE GAP $34,361 $(5,593) $30,718 $48,269 $116,014 $120,677 $121,679
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
As a Percent of Total Assets 4.50% (0.73)% 4.02% 6.32% 15.18% 15.79% 15.92%
CUMULATIVE RATE SENSITIVE
ASSETS TO RATE SENSITIVE
LIABILITIES 1.30 0.98 1.06 1.08 1.19 1.20 1.20
</TABLE>
NOTE: This analysis is based upon a number of significant assumptions including
the following: Loans are repaid/rescheduled by contractual maturity.
Securities, except mortgage-backed securities, are repaid according to
contractual maturity adjusted for call features. Mortgage-backed security
repricing is adjusted for estimated early paydowns. In order to reflect the
temporary seasonal influx of noninterest-bearing demand deposits at year end,
which inflates short-term rate sensitive assets, such deposits in excess of
their average balance for the year are shown in 0-90 days. Interest-bearing
demand, regular savings and money market savings deposits are estimated to
exhibit some rate sensitivity based on management's analysis of deposit
withdrawals. Time deposits are shown in the table based on contractual maturity.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(from pages 24-42 of the Annual Report)
REPORT OF INDEPENDENT AUDITORS
STEGMAN & COMPANY
Certified Public Accountants
BOARD OF DIRECTORS AND SHAREHOLDERS
SANDY SPRING BANCORP
OLNEY, MARYLAND
We have audited the accompanying consolidated balance sheets of Sandy
Spring Bancorp and Subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the management of Sandy
Spring Bancorp and Subsidiaries. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sandy Spring
Bancorp and Subsidiaries as of December 31, 1994 and 1993, and the results of
its operations and cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, the
Company changed its methods of accounting for income taxes in 1992 and
investment securities in 1993.
/s/ Stegman & Company
- -------------------------------
Towson, Maryland
February 2, 1995
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
--------------------
1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $32,549 $29,595
Interest-bearing deposits with banks 211 12,076
Federal funds sold 5,375 23,385
Residential mortgage loans held for sale -- 6,979
Investments available-for-sale (at fair value) 127,772 234,964
Investments held-to-maturity --
fair value of $164,103 (1994) and $72,032 (1993) 172,266 70,125
Other equity securities 3,966 3,924
Total Loans (net of unearned income) 401,524 324,372
Less: Allowance for credit losses (6,108) (6,177)
--------- ----------
Net Loans 395,416 318,195
Premises and equipment 14,230 13,914
Accrued interest receivable 5,726 4,631
Other real estate owned, net of allowance
of $66 (1994) and $81 (1993) 277 1,387
Other assets 6,347 3,290
--------- ---------
TOTAL ASSETS $764,135 $722,465
--------- ---------
--------- ---------
LIABILITIES
Noninterest-bearing deposits $104,663 $ 99,899
Interest-bearing deposits 540,956 522,157
--------- ---------
Total deposits 645,619 622,056
Short-term borrowings 45,243 27,307
Long-term borrowings 3,180 2,206
Accrued interest and other liabilities 3,137 4,505
--------- ---------
TOTAL LIABILITIES 697,179 656,074
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00;
shares authorized 6,000,000;
shares issued and outstanding
2,140,149 (1994) and 2,110,244 (1993) 2,140 2,110
Surplus 27,133 26,100
Retained earnings 40,970 35,223
Net unrealized gain (loss) on investments
available-for-sale, net of taxes (3,287) 2,958
-------- --------
TOTAL STOCKHOLDERS' EQUITY 66,956 66,391
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $764,135 $722,465
--------- --------
--------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $27,672 $23,695 $26,725
Interest on loans held for sale 57 300 648
Interest on deposits with banks 37 399 187
Interest and dividends on securities:
Taxable 14,030 12,350 12,196
Nontaxable 4,037 4,247 3,999
Interest on federal funds sold 431 683 765
------- -------- --------
TOTAL INTEREST INCOME 46,264 41,674 44,520
Interest expense:
Interest on deposits 17,864 16,990 20,777
Interest on short-term borrowings 1,165 641 389
Interest on long-term borrowings 150 64 22
------- -------- --------
TOTAL INTEREST EXPENSE 19,179 17,695 21,188
------- -------- --------
NET INTEREST INCOME 27,085 23,979 23,332
Provision for Credit Losses 160 950 1,750
------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 26,925 23,029 21,582
Non-Interest Income:
Securities gains (losses) (84) 257 507
Service charges on deposit accounts 2,308 2,028 1,809
Gains on mortgage sales 164 976 1,001
Other income 1,741 1,547 1,256
------- -------- --------
TOTAL NON-INTEREST INCOME 4,129 4,808 4,573
Non-Interest Expenses:
Salaries and employee benefits 11,060 9,066 8,307
Occupancy expense of premises 1,828 1,598 1,364
Equipment expenses 1,545 1,252 1,110
FDIC insurance expense 1,388 1,275 1,184
Outside data services 582 519 646
Other expenses 3,492 3,232 2,658
------- -------- --------
TOTAL NON-INTEREST EXPENSES 19,895 16,942 15,269
------- -------- --------
Income Before Income Taxes and Cumulative Effect of Accounting Change 11,159 10,895 10,886
Income Tax Expense 3,139 2,888 2,981
------- -------- --------
Income before Cumulative Effect of Accounting Change 8,020 8,007 7,905
Cumulative effect of accounting change -- -- 744
------- -------- --------
NET INCOME $8,020 $8,007 $ 8,649
------- -------- --------
------- -------- --------
PER SHARE DATA:
Income before Cumulative Effect of Accounting Change $3.78 $3.89 $ 4.14
Cumulative effect of accounting change -- -- .39
------- -------- --------
NET INCOME $3.78 $3.89 $ 4.53
------- -------- --------
------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $8,020 $8,007 $ 8,649
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change -- -- (744)
Depreciation and amortization 1,435 1,078 1,008
Provision for credit losses 160 950 1,750
Deferred income taxes (267) (508) (532)
Origination of loans held for sale (8,508) (49,787) (70,189)
Proceeds from sales of loans held for sale 15,651 49,336 70,070
Gains on sales of loans held for sale (164) (976) (1,001)
Securities (gains) losses 84 (139) (507)
Net change in:
Accrued interest receivable (1,095) 213 (112)
Accrued income taxes (133) (499) 104
Other accrued expenses (263) 433 (1,358)
Other -- net 492 1,678 2,444
--------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,412 9,786 9,582
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks 11,865 (11,976) --
Purchases of investment securities -- (81,561) (178,131)
Purchases of investments held-to-maturity (56,191) -- --
Origination of investments held for sale -- (39,693) --
Purchases of investments available-for-sale (65,782) -- --
Proceeds from sales of investment securities -- 6,132 18,136
Proceeds from sales of investments held for sale -- 10,683 --
Proceeds from sales of investments available-for-sale 33,879 -- --
Proceeds from maturities and principal payments of investment
securities -- 83,955 65,558
Proceeds from maturities and principal payments of investments
held-to-maturity 15,286 -- --
Proceeds from principal payments of investments held for sale -- 516 --
Proceeds from maturities and principal payments of investments
available-for-sale 66,955 -- --
Proceeds from sales of other real estate owned 1,459 752 1,733
Net (increase) decrease in loans receivable (67,174) (50,183) 36,634
Purchases of loans (10,301) -- --
Expenditures for premises and equipment (1,727) (2,409) (1,325)
----------- ---------- ------------
NET CASH USED BY INVESTING ACTIVITIES (71,731) (83,784) (57,395)
<PAGE>
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 5,372 67,265 84,066
Net increase (decrease) in time and other deposits 18,191 (3,166) (43,218)
Net increase (decrease) in short-term borrowings 17,936 17,543 (1,289)
Proceeds from long-term borrowings 1,000 2,020 --
Retirement of long-term borrowings (26) (24) (22)
Proceeds from issuance of common stock 1,063 726 8,159
Dividends paid (2,273) (2,014) (1,641)
--------- --------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,263 82,350 46,055
---------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,056) 8,352 (1,758)
Cash and Cash Equivalents at Beginning of Year 52,980 44,628 46,386
----------- --------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR * $37,924 $52,980 $ 44,628
----------- --------- -----------
----------- --------- -----------
Supplemental Disclosures:
Interest payments $18,211 $18,105 $ 22,650
Income tax payments $3,547 $ 4,127 $ 3,384
Noncash Investing Activities:
Transfers from loans to other real estate owned $323 $ -- $ 1,667
Transfers from investments available-for-sale to investments
held-to-maturity $66,925 $ -- $ --
Unrealized gain (loss) on investments available-for-sale
net of deferred tax effect of $(3,929) in 1994 and
$1,861 in 1993 $(6,245) $ 2,958 $ --
<FN>
*Cash and cash equivalents include those amounts under the captions "Cash and
due from banks" and "Federal funds sold" on the Consolidated Balance Sheets.
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock:
Balance at beginning of year $2,110 $2,044 $1,797
Employee stock purchases - shares issued 4,950 (1994),
5,276 (1993) and 5,677 (1992) 5 5 6
Exercise of stock options - shares issued 8,356 (1994),
1,524 (1993) and 3,900 (1992) 8 2 4
Dividend reinvestment plan stock purchases - shares
issued 16,613 (1994) and 14,982 (1993) 17 15 --
Common stock sold - 237,426 shares -- -- 237
Common stock issued pursuant to merger with
First Montgomery Bank - 44,605 shares -- 44 --
------- ------- ------
COMMON STOCK AT END OF YEAR 2,140 2,110 2,044
Surplus:
Balance at beginning of year 26,100 23,394 15,482
Employee stock purchases 223 195 176
Exercise of stock options 42 (2) 23
Dividend reinvestment stock purchases 768 617 --
Sale of common stock -- -- 7,713
Common stock issued in merger -- 1,896 --
------- ------- -------
SURPLUS AT END OF YEAR 27,133 26,100 23,394
Retained Earnings:
Balance at beginning of year 35,223 29,230 22,222
Net income 8,020 8,007 8,649
Cash dividends - $1.07 (1994), $0.98 (1993)
and $0.85 (1992) per share (2,273) (2,014) (1,641)
--------- ----------- --------
RETAINED EARNINGS AT END OF YEAR 40,970 35,223 29,230
Net Unrealized Gain (Loss) on Investments Available-for-Sale,
net of taxes:
Balance at beginning of year 2,958 -- --
Initial valuation adjustments, net of taxes -- 2,958 --
Net decrease in fair value of investments available-for-sale,
net of taxes (4,994) -- --
Net unrealized losses, net of taxes, on securities transferred
from investments available-for-sale to investments held-to-
maturity (1,251) -- --
--------- -------- --------
NET UNREALIZED GAIN (LOSS), NET OF TAXES,
AT END OF YEAR (3,287) 2,958 --
--------- -------- --------
TOTAL STOCKHOLDERS' EQUITY $66,956 $66,391 $54,668
--------- -------- ---------
--------- -------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Sandy Spring Bancorp and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company, which includes Sandy
Spring Bancorp, its wholly owned subsidiary, Sandy Spring National Bank of
Maryland (the Bank), and Sandy Spring Insurance Corporation, the Bank's
subsidiary, 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 the classifications made in 1994.
The following is a summary of the more significant accounting policies:
POLICY FOR CONSOLIDATION
The consolidated financial statements include the accounts of Sandy Spring
Bancorp and its subsidiaries. Consolidation has resulted in the elimination of
all significant intercompany balances and transactions.
The financial statements of Sandy Spring Bancorp (Parent Only) include the
Bank under the equity method of accounting.
INVESTMENTS HELD-TO-MATURITY AND OTHER EQUITY SECURITIES
Under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities"(FASB
115), adopted as of December 31, 1993, investments held-to-maturity are those
securities which the Company has the ability and positive intent to hold until
maturity. Securities so classified at time of purchase are recorded at cost.
Securities transferred into held-to-maturity from the available-for-sale
portfolio are recorded at fair value at time of transfer with unrealized gains
or losses reflected in equity and amortized over the remaining life of the
security. The carrying values of securities held-to-maturity are adjusted for
premium amortization and discount accretion.
Other equity securities represent Federal Reserve Bank and Federal Home
Loan Bank stock which are considered restricted as to marketability.
Prior to adoption of FASB 115, the Company had investment securities,
defined somewhat differently than investments held-to-maturity to include
securities for which there was the ability and intent to hold on a long term
basis or until maturity. The Company's holdings of investment securities
included debt securities, carried at cost adjusted for amortization of premiums
and accretion of discounts, and marketable equity securities stated at the lower
of aggregate cost or market value. Realized gains and losses on disposition of
investment securities were recognized using the specific identification method
and were reported as non-interest income.
INVESTMENTS AVAILABLE-FOR-SALE
Under the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities", adopted
as of December 31, 1993, marketable equity securities and debt securities not
classified as held-to-maturity are classified as available-for-sale. Securities
available-for-sale are acquired as part of the Company's asset/liability
management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities
available-for-sale are carried at fair value, with unrealized gains or losses
based on the difference between amortized cost and fair value, reported as a
separate component of shareholders' equity, net of deferred tax. Realized gains
and losses, using the specific identification method, are included as a separate
component of non-interest income. Related interest and dividends are included
in interest income.
<PAGE>
LOANS
Loans are stated at their principal balance outstanding net of any deferred
fees and costs. Interest income on loans is accrued at the contractual rate
based on the principal outstanding. The Company places loans, except for
installment, on non-accrual when any portion of the principal or interest is
ninety days past due and collateral is insufficient to discharge the debt in
full. Interest accrual may also be discontinued earlier if, in management's
opinion, collection is unlikely. Generally, installment loans are not placed on
non-accrual, but are charged off when they are five months past due.
RESIDENTIAL MORTGAGE LOANS HELD FOR SALE
The Bank engages in sales of fixed rate mortgage loans. These loans are
originated by the Bank and are sold without recourse. Mortgage loans held for
sale are carried at the lower of aggregate cost or fair value. Gains and losses
on sales of these mortgage loans are recorded as a component of non-interest
income in the Consolidated Statements of Income.
The Company typically retains the servicing rights to collect and remit
principal and interest payments, manage escrow account matters and handle
borrower relationships on the mortgage loans it sells. Service fee income on
these loans is included in non-interest income.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses represents an amount which, in management's
judgement, will be adequate to absorb probable losses on existing loans and
other extensions of credit that may become uncollectible. The allowance for
credit losses is available for future loan charge-offs. The adequacy of the
allowance is determined by regular review and evaluation of the loan portfolio
considering current economic conditions, past and expected future loss
experience, changes in the character and size of the portfolio and management's
judgement. Loans deemed uncollectible are charged against, while recoveries are
credited to, the allowance. Management adjusts the level of the allowance
through the provision for credit losses, which is recorded as a current period
operating expense.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization computed using the straight-line method. Premises and equipment
are depreciated over the useful lives of the assets, except for leasehold
improvements which are amortized over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. The costs of
major renewals and betterments are capitalized, while the costs of ordinary
maintenance and repairs are expensed as incurred.
OTHER REAL ESTATE OWNED (OREO)
OREO comprises properties acquired in partial or total satisfaction of
problem loans and those that have been "insubstance" foreclosed. The properties
are recorded at the lower of cost or fair value at the date acquired. Losses
arising at the time of acquisition of such properties are charged against the
allowance for credit losses. Subsequent write-downs that may be required are
charged to the asset balance. Gains and losses realized from the sale of OREO,
as well as valuation adjustments, are included in non-interest income. Expenses
of operation are included in non-interest expense.
INCOME TAXES
The Company computes its tax expense and deferred income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" (FASB 109). Under this standard, deferred tax assets and
liabilities are recorded at current statutory tax rates. The Company recorded a
$744 cumulative benefit on its 1992 income statement, reflecting application of
FASB 109 as of January 1, 1992.
NEW ACCOUNTING STANDARD - DERIVATIVE FINANCIAL INSTRUMENT AND FAIR VALUE
DISCLOSURE
Statement of Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments" (FASB
119), was issued by the Financial Accounting Standards Board in October 1994 and
is effective for financial statements for fiscal years ending after December 15,
1994. The new standard amends Statement of Financial Accounting Standards No.
105, "Disclosure of Information about Financial Instruments with Off-Balance-
Sheet Risk and Financial Instruments with Concentrations of Credit Risk" and
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments". FASB 119 covers certain derivative financial
instruments not currently held by the Company. FASB 119 also requires that
disclosures concerning the fair value of financial instruments, together with
related carrying amounts, be presented in either the body of the financial
statements, a single note, or summary table and that the disclosures clearly
present amounts which represent assets or liabilities. See Note 19 for a
presentation of the Company's fair value disclosures.
<PAGE>
NOTE 2 -- ACQUISITION OF FIRST MONTGOMERY BANK
On November 10, 1993, the shareholders of First Montgomery Bank of Maryland
(FMB), headquartered in Gaithersburg, Maryland approved a merger transaction
between FMB, the Company and the Bank whereby outstanding shares of FMB were
exchanged for shares of the Company and the assets and liabilities of FMB were
merged into the Bank. Upon completion of the merger on December 1, 1993, each
share of FMB common stock outstanding immediately prior to the merger was
converted into .17857 of a share of Sandy Spring Bancorp common stock par value
$1.00 per share, and cash in lieu of fractional shares. As a result of the
transaction, 44,605 new shares were issued. A contingent cash payment to FMB
shareholders was made in February 1994, in accordance with terms of the
agreement. The merger has been accounted for under the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16
(Accounting for Business Combination) and, accordingly, the results of
operations of FMB are included in the accompanying consolidated financial
statements since December 1, 1993 only. Goodwill resulting from the
transaction, consisting of the excess of purchase price over the fair value of
FMB net assets including the cost of acquisition, amounted to $650, and is
included in other assets on the consolidated balance sheet. Goodwill will be
amortized on the straight-line method over ten years. At the time of merger,
FMB had total assets of approximately $39,000, representing approximately 5% of
total assets of the company.
NOTE 3 -- CASH AND DUE FROM BANKS
Regulation D of the Federal Reserve Act requires that banks maintain
reserve balances with the Federal Reserve Bank based principally on the type and
amount of their deposits. At its option, the Bank maintains additional balances
to compensate for clearing and safekeeping services. The average daily balance
maintained in 1994 was $5,868 and in 1993 was $5,343.
<PAGE>
NOTE 4 -- INVESTMENTS AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of investments available-for-
sale at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------- ---------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $23,959 $ 12 $ (699) $23,272 $31,811 $890 $(10) $32,691
U.S. Agency 24,845 6 (1,272) 23,579 18,945 206 (57) 19,093
State and municipal 39,719 337 (220) 39,836 48,803 2,285 (4) 51,084
Corporate debt
obligations 3,272 6 (18) 3,260 7,117 123 (10) 7,230
Mortgage-backed
securities 39,290 4 (1,987) 37,307 118,465 1,060 (374) 119,151
------------------------------------------------- ----------------------------------------------------
Total Debt Securities 131,085 365 (4,196) 127,254 225,141 $4,563 $(455) 229,249
Marketable equity
securities 5 513 -- 518 6,005 $ 710 $ -- 5,715
------------------------------------------------- ----------------------------------------------------
Total Investments
Available-for-Sale $131,090 $878 $(4,196) $127,772 $230,146 $5,273 $(459) $234,984
------------------------------------------------- ----------------------------------------------------
------------------------------------------------- ----------------------------------------------------
</TABLE>
The book and estimated fair values of investments available-for-sale at
December 31, 1994 and 1993 by contractual maturity, except mortgage-backed
securities for which an average life is used, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
1994 1993
----------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $21,655 $ 21,576 $79,426 $80,134
Due after one through five
years 91,224 88,537 113,225 115,864
Due after five years through
ten years 11,197 10,706 26,644 27,284
Due after ten years 7,009 6,435 5,846 5,967
-------- --------- --------- ---------
Total Debt Securities $131,085 $127,254 $225,141 $229,249
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
Proceeds from sales of investments available-for-sale were $33,879 in 1994,
and gross gains of $139 and gross losses of $284 were realized on those sales.
At December 31, 1994 and 1993, investments available-for-sale with a book
value of $27,020 and $25,774, respectively, were pledged as collateral for
certain government deposits and for other purposes as required or permitted by
law. The outstanding balance of no single issuer exceeded ten percent of
stockholders' equity at December 31, 1994 and 1993.
During 1993, prior to adoption of FASB 115, the Company had proceeds from
sales of its investments held for sale of $10,683, and gross gains of $188 and
gross losses of $44 were realized on those sales.
<PAGE>
NOTE 5 -- INVESTMENTS HELD-TO-MATURITY AND OTHER EQUITY SECURITIES
The amortized cost and estimated fair values of investments held-to-
maturity at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------- ---------------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency $77,959 $ 10 $(4,516) $73,482 $42,242 $629 $(97) $42,774
State and municipal 29,627 31 (1,273) 28,385 27,882 1,418 (41) 28,258
Mortgage-backed
securities 64,680 -- (2,424) 62,258 -- -- -- --
------------------------------------------------- -----------------------------------------------------
Total Investments
Held-to-Maturity $172,266 $ 50 $(8,213) $184,103 $ 70,125 $2,045 $(138) $ 72,032
------------------------------------------------- ----------------------------------------------------
------------------------------------------------- ----------------------------------------------------
</TABLE>
The amortized cost and estimated fair values of debt securities at December
31 by contractual maturity, except mortgage-backed securities for which an
average life is used, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1994 1993
----------------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $11,388 $11,277 $7,170 $7,178
Due after one through five
years 111,804 105,910 30,692 31,200
Due after five years through
ten years 44,276 42,100 30,868 32,020
Due after ten years 5,000 4,816 1,395 1,534
-------- --------- --------- ---------
Total Investments
Held-to-Maturity $172,286 $164,103 $70,125 $72,032
-------- --------- --------- ---------
-------- --------- --------- ---------
</TABLE>
At December 31, 1994 and 1993, investments held-to-maturity with a book
value of $24,975 and $11,398, respectively, were pledged as collateral for
certain government deposits and for other purposes as required or permitted by
law. The outstanding balance of no single issuer exceeded ten percent of
stockholders' equity at December 31, 1994 or 1993.
Other equity securities at December 31, 1994 and 1993 include the Company's
required investments in stock of the Federal Home Loan Bank of Atlanta of $3,110
and $3,071, respectively, and in the Federal Reserve Bank of $855 and $853,
respectively.
During the two years prior to adoption of FASB 115, the Company had
proceeds, gross gains and gross losses on sales of its investment securities as
follows:
<TABLE>
<CAPTION>
1993 1992
- --------------------------------------------
<S> <C> <C>
Proceeds $6,132 $18,136
Gross Gains 10 239
Gross Losses (48) (45)
</TABLE>
<PAGE>
NOTE 6 -- LOANS
Book values for the two most recent years are presented below for the major
loan categories at December 31:
<TABLE>
<CAPTION>
1994 1993
- --------------------------------------------------------------
<S> <C> <C>
Real estate-mortgage $306,122 $250,781
Real estate-construction 22,969 13,711
Consumer 28,337 18,848
Commercial 43,560 40,361
Tax exempt 536 671
----------- -----------
Total Loans 401,524 324,372
Less: Allowance for credit
losses (6,108) (6,177)
----------- ----------
NET LOANS $395,416 $318,195
---------- ----------
---------- ----------
</TABLE>
Loan fees amounting to $207 (1994), $250 (1993) and $283 (1992) were
included in interest and fees on loans.
The servicing portfolio of mortgage loans sold totalled $112,456 at
December 31, 1994 and $115,419 at December 31, 1993.
Activity in the allowance for credit losses for the preceding three years
ended December 31 is shown below:
<TABLE>
<CAPTION>
1994 1993 1992
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $6,177 $3,816 $2,690
Provision for credit losses 160 950 1,750
Allowance from merger transaction -- 1,158 --
Loan charge-offs (509) (133) (825)
Loan recoveries 280 386 201
------- --------- ---------
Net recoveries (charge-offs) (229) 253 (624)
------- --------- ---------
BALANCE AT END OF YEAR $6,108 $6,177 $3,816
------- --------- ---------
------- --------- ---------
</TABLE>
<PAGE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1994 1993
- --------------------------------------------------------------------------
<S> <C> <C>
Land $4,307 $3,777
Buildings and leasehold improvements 9,228 8,633
Equipment 9,373 8,951
- -------------------------------------------------------------------------
22,908 21,361
Less: Accumulated depreciation and
amortization (8,678) (7,447)
----------- ----------
NET PREMISES AND EQUIPMENT $14,230 $13,914
----------- ----------
----------- ----------
</TABLE>
Depreciation and amortization expense amounted to $1,435 for 1994, $1,078
for 1993, and $1,008 for 1992.
Total rental expenses for premises and equipment for the three years ended
December 31 were $700 (1994), $525 (1993) and $446 (1992). Lease commitments
bear initial terms varying from 3 to 10 years and are associated with premises.
Future minimum payments as of December 31, 1994 for all noncancelable
operating leases are:
<TABLE>
<CAPTION>
Year Ending December 31, Premises and
Equipment
------------
<S> <C>
1995 $ 671
1996 568
1997 425
1998 158
1999 111
Thereafter --
-------
TOTAL $1,933
-------
-------
</TABLE>
NOTE 8 -- DEPOSITS
Deposits outstanding at December 31 consist of:
<TABLE>
<CAPTION>
1994 1993
- ------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing Demand $104,663 $99,899
Interest-bearing:
Demand 91,844 85,099
Money market savings 156,477 185,365
Regular savings 109,174 86,423
Time deposits 150,884 134,612
Time deposits -- $100,000 or more 32,577 30,658
-------- --------
Total Interest-bearing 540,956 522,157
-------- --------
TOTAL DEPOSITS $645,619 $622,056
-------- --------
-------- --------
</TABLE>
Interest expense on time deposits of $100,000 or more amounted to $1,317, $1,239
and $1,747 for 1994, 1993 and 1992 respectively.
<PAGE>
NOTE 9 -- SHORT-TERM BORROWINGS
Short term borrowings consist of securities sold under agreements to
repurchase, a U.S. Treasury demand note, federal funds purchased and advances
from the Federal Home Loan Bank of Atlanta (FHLB).
During 1992, the Company entered into a line of credit arrangement with the
FHLB under which it may borrow up to $70,000, increased to $145,000 during 1994,
at interest rates based upon current market conditions. Advances outstanding on
this line credit totalled $23,520 (including $3,020 of long-term borrowings) at
December 31, 1994 and $12,020 (including $2,020 of long-term borrowings) at
December 31, 1993.
Information relating to short-term borrowings is as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at year end $45,243 $27,307 $9,764
Weighted-average interest rate at
year end 5.5% 3.1% 3.1%
Maximum amount outstanding at any
month end $52,927 $27,307 $12,908
Average amount outstanding $28,717 $19,761 $10,729
Weighted-average interest rate during
the year 4.1% 3.3% 3.6%
</TABLE>
NOTE 10 -- LONG-TERM BORROWINGS
The Company had outstanding mortgages with a book value of $160 at December
31, 1994 and $186 at December 31, 1993. Interest rates range up to 10% and the
maximum maturity is July 2000.
In addition, the Company had long-term advances from the Federal Home Loan
Bank of Atlanta of $3,020 at December 31, 1994 and $2,020 at December 31, 1993.
Interest rates as of December 31, 1994 range up to 8.21% and the maximum
maturity is August 2003.
NOTE 11 -- STOCKHOLDERS' EQUITY
Bancorp's Articles of Incorporation authorize 6,000,000 shares of capital
stock, par value $1.00 per share, to be initially classified as common stock.
However, as set out in the Articles of Incorporation, remaining unissued stock
may in the future be designated as either common or preferred stock.
On July 24, 1992, Sandy Spring Bancorp issued and sold 237,426 shares of
common stock for $34.00 per share in a combined shareholder rights and community
offering. Net proceeds from the stock offering were $7,950, and are being used
for general corporate purposes, including contributions to the Bank of $2,000.
On December 16, 1992, the Board of Directors approved the Sandy Spring
Bancorp Dividend Reinvestment Plan (the "Plan") effective for the first dividend
of 1993. The Plan provides shareholders with the opportunity to increase their
equity ownership in Bancorp by electing to have cash dividends automatically
reinvested in additional shares of common stock without payment of any brokerage
commission or service charge. The Board has reserved 100,000 shares for
issuance under the Plan.
Bank and holding company regulations, as well as Maryland law, impose
certain restrictions on dividend payments by the Bank, as well as restricting
extensions of credit and transfers of assets between the Bank and the holding
company. These restrictions have had no impact on Bank dividend payments in
prior years and none is anticipated in future periods. There were no loans
outstanding between the Bank and Bancorp at December 31, 1994 and 1993.
<PAGE>
NOTE 12 -- INCENTIVE STOCK OPTION PLAN
The Company's 1992 Stock Option Plan, which essentially replaced the
expired 1982 Incentive Stock Option Plan, provides for the granting of incentive
and non-incentive options to selected key employees on a periodic basis at the
discretion of the Board. The 1992 Plan authorizes the issuance of up to 135,000
shares of common stock, has a term of ten years, and will be administered by the
Compensation Committee of the Board. Options are granted at market value at
date of grant, are immediately exercisable, and must be exercised within ten
years.
A total of 51,950 shares of common stock were granted under the 1982 Plan,
of which 23,100 are outstanding, and the outstanding options will continue until
exercise or expiration.
The following is a summary of changes in shares under option for the years
ended December 31:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year 41,650 40,500
Granted 5,500 3,150
Exercised (12,250) (2,000)
--------- ----------
BALANCE, END OF YEAR 34,900 41,650
--------- ----------
--------- ----------
</TABLE>
The following is a summary of option prices per share:
<TABLE>
<CAPTION>
1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C>
Prices of shares under option at
December 31 $13.00 to $49.00 $10.00 to $46.00
Weighted average price of shares under
option at December 31 $31.95 $25.81
Prices of shares exercised during year $10.00 to $38.00 $10.00
</TABLE>
NOTE 13 -- PENSION, PROFIT SHARING AND OTHER EMPLOYEE BENEFIT PLANS
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits are based on years of service
and the employee's compensation during the last five years of employment. The
Company's funding policy is to contribute the maximum amount deductible for
federal income tax purposes. Contributions provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future. Net pension cost for the previous three years include the following
components:
<TABLE>
<CAPTION>
1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned $316 $253 $ 231
Interest cost on projected benefit
obligation 307 307 257
Actual (return) loss on plan assets 5 (427) (185)
Net amortization and deferral (370) 92 (118)
--------- --------- ----------
PENSION EXPENSE FOR THE YEAR $258 $225 $185
--------- --------- ----------
</TABLE>
<PAGE>
Key Assumptions used in determining the actuarial present value of the
projected benefit obligations included, at December 31:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted-average discount rate 7.50% 7.50% 8.00%
Rate of increase in future salary
levels 5.50 5.50 6.50
Expected long-term return on assets 8.50 8.50 8.50
</TABLE>
The Plan's funded status as of December 31 is:
<TABLE>
<CAPTION>
1994 1993
- ------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $2,678 in 1994 and
$3,327 in 1993 $2,922 $3,490
Additional liability based upon
projected compensation 1,148 999
------- ------
Projected benefit obligation for service
rendered to date (PBO) 4,070 4,489
Plan assets at fair value 3,484 4,759
------- ------
Plan Assets greater than (less than) PBO (586) 270
Unrecognized net gain 1,535 767
Prior service cost not yet recognized in
net periodic pension expense 10 11
Unrecognized net asset, net of amortization (16) (21)
------ -------
PREPAID PENSION COST INCLUDED
IN OTHER ASSETS $943 $1,027
------ -------
------ -------
</TABLE>
The Company has a qualified, noncontributory profit sharing plan that
covers all employees after one year of service. The Plan was amended on May 31,
1989 to permit employees to purchase shares of Sandy Spring Bancorp's common
stock with their profit sharing allocations and other contributions under the
Plan. Profit sharing contributions by the Company, which are included in
operating expenses, totaled $466 in 1994, $320 in 1993 and $402 in 1992.
The Company has a Supplemental Executive Retirement Plan (SERP) providing
for retirement income benefits as well as pre-retirement death benefits for
selected executives. Retirement benefits payable under the SERP, if any, are
integrated with other pension plan and Social Security retirement benefits
expected to be received by the SERP plan participants. The Company is accruing
the present value of these benefits over the remaining number of years to the
participants' retirement dates. Benefit accruals included in operating expenses
for 1994, 1993 and 1992 were $55, $48 and $95, respectively.
The Company has an Executive Health Plan effective January 1, 1991 that
provides for payment of defined medical and dental expenses not otherwise
covered for selected executives including their families. Benefits, which are
paid during both employment and retirement, are subject to a $5 limitation for
each executive per year. Expenses paid under the plan, covering insurance
premium and out-of-pocket expense reimbursement benefits, totalled $20 in 1994,
$12 in 1993 and $17 in 1992. The Company recorded a one-time expense of $132 in
1992 in order to cover the present value of post retirement benefits under the
plan.
<PAGE>
NOTE 14 -- INCOME TAXES
Income tax expense for the years ended December 31 consists of:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Income Taxes:
Federal $2,562 $2,539 $2,612
State 844 857 850
------ ------ ------
TOTAL CURRENT 3,406 3,396 3,462
Deferred Income Tax Benefit:
Federal (219) (416) (394)
State (48) (92) (87)
------ ------ ------
TOTAL DEFERRED (267) (508) (481)
------ ------ ------
TOTAL INCOME TAX EXPENSE $3,139 $2,888 $2,981
------ ------ ------
------ ------ ------
</TABLE>
Temporary differences between the amounts reported in the financial
statements and the tax bases of assets and liabilities result in deferred taxes.
Deferred tax assets and liabilities, shown as the sum of the appropriate tax
effect for each significant type of temporary difference, are presented below
for the years ended December 31:
<TABLE>
<CAPTION>
1994 1993
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities:
Depreciation $929 $968
Deferred loan costs 341 296
Pension plan costs 676 527
Deferred gains on mortgage sales -- 32
Unrealized gains on Investments
available-for-sale -- 1,861
Other 273 174
--------- ---------
Gross Deferred Tax Liabilities 2,219 3,858
Deferred Tax Assets:
Allowance for credit losses (1,911) (1,762)
Deferred loan fees (930) (590)
Unrealized losses on investments
available-for-sale (2,068) --
Net operating loss carry forward from merger (513) (553)
Other (257) (217)
---------- ----------
Gross Deferred Tax Assets (5,679) (3,122)
---------- ----------
NET DEFERRED TAX (ASSET) LIABILITY $(3,460) $736
---------- ----------
---------- ----------
</TABLE>
No valuation allowance exists with respect to deferred tax items. The net
deferred tax asset in 1994 is included in other assets while the net deferred
tax liability in 1993 is included in other liabilities.
<PAGE>
A three year reconcilement of the difference between the statutory Federal
income tax rate and the effective tax rate for the Company is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAX RATE 35.0% 35.0% 4.0%
Increase (decrease) resulting from:
Tax-exempt interest income (11.7) (12.2) (11.4)
State income taxes, net of
federal income tax benefits 4.7 4.6 4.6
Other 0.1 (0.9) 0.2
-------- --------- --------
EFFECTIVE TAX RATE 28.1% 26.5% 27.4%
-------- --------- --------
-------- --------- --------
</TABLE>
NOTE 15 -- INCOME PER COMMON SHARE
Income per common share is based in weighted average number of shares
outstanding of 2,124,093 in 1994, 2,058,610 in 1993, and 1,908,631 in 1992. The
dilutive effect of stock options is not material for any of the three years.
NOTE 16 -- RELATED PARTY TRANSACTIONS
Certain directors and senior officers have loan transactions with the Bank.
Such loans were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with outsiders. The following schedule
summarizes changes in amounts of loans outstanding, both direct and indirect, to
these persons during 1994.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Balance at January 1, 1994 $6,732
Additions 7,570
Repayments (4,264)
---------
BALANCE AT DECEMBER 31, 1994 $10,038
---------
---------
</TABLE>
<PAGE>
NOTE 17 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company has various outstanding
credit commitments which are properly not reflected in the financial statements.
These commitments are made to satisfy the financing needs of the Company's
clients. The associated credit risk is controlled by subjecting such activity
to the same credit and quality controls as exist for the Company's lending and
investment activities. The commitments involve diverse business and consumer
customers and are generally well collateralized. Management does not anticipate
that losses, if any, which may occur as a result of these commitments would
materially affect the stockholders' equity of the Company. Since a portion of
the commitments have some likelihood of not being exercised, the amounts do not
necessarily represent future cash requirements.
Loan and credit line commitments, excluding unused portions of home equity
lines of credit, totaled $64,648 at December 31, 1994 and $43,227 at December
31, 1993. These commitments are contingent upon continuing customer compliance
with the terms of the agreement.
Unused portions of equity lines at year end amounted to $56,901 in 1994 and
$56,741 in 1993. The Company's home equity line accounts, which are secured by
the borrower's residence, are reviewed annually.
Irrevocable letters of credit, totalling $6,725 at December 31, 1994 and
$4,380 at December 31, 1993, are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements.
They are primarily used to guarantee a customer's contractual and/or financial
performance, and are seldom exercised.
Commitments to deliver loans under forward sale contracts amount to $0 at
December 31, 1994 and $7,561 at December 31, 1993.
NOTE 18 -- LITIGATION
At December 31, 1994, the Company was involved in litigation arising from
normal banking, financial, and other activities of the Bank. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition.
NOTE 19 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" (FASB 107), as amended by Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments," requires the disclosure in statement
form of estimated fair values of financial instruments. Financial instruments
have been defined broadly to encompass 98% of the Company's assets and 99% of
its liabilities.
Quoted market prices, where available, are shown as estimates of fair
market values. Because no quoted market prices are available for a significant
part of the Company's financial instruments, the fair values of such instruments
have been derived based on the amount and timing of future cash flows and
estimated discount rates.
Present value techniques used in estimating the fair value of many of the
Company's financial instruments are significantly affected by the assumptions
used. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of individual financial assets'
and liabilities' values and should not be considered an indication of the fair
value of the Company.
<PAGE>
The estimated fair values of the Company's financial instruments at December 31
are as follows:
<TABLE>
<CAPTION>
1994 1993
------------------------------ -------------------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
------------------------------ -------------------------------
FINANCIAL ASSETS
- -----------------------------------------
<S> <C> <C> <C> <C>
Cash and temporary investments (1) $ 38,135 $ 38,135 $ 72,035 $ 72,113
Investments available-for-sale 127,772 127,772 234,964 234,964
Investments held-to-maturity and
other equity securities 176,232 168,069 74,049 75,956
Loans, net of allowance 395,416 395,615 318,195 324,685
Accrued interest receivable and other assets(2) 9,495 9,495 4,633 4,633
FINANCIAL LIABILITIES
- ----------------------------------------
Deposits $645,619 $644,454 $622,056 $623,483
Short-term borrowings 45,243 45,175 27,307 27,307
Long-term borrowings 3,180 2,857 2,206 2,208
Accrued interest payable and other liabilities (2) 1,590 1,590 1,547 1,547
Estimated Estimated
Amount Fair Value Amount Fair Value
-------------------------------- ----------------------------------
OFF-BALANCE SHEET FINANCIAL ASSETS
- ----------------------------------------
Commitments to extend credit (3) $121,549 $ (274) $88,988 $ (112)
Irrevocable letters of credit 6,725 (34) 4,380 (33)
Commitments to deliver loans under
forward sale contracts -- -- 7,561 --
Servicing rights on mortgages sold 112,456 1,113 115,419 590
<FN>
(1) Temporary investments include interest-bearing deposits with banks, federal
funds sold and residential mortgage loans held for sale.
(2) Only financial instruments as defined in FASB 107 are included in other
assets and other liabilities.
(3) Includes loan and credit line commitments and unused portions of equity
lines.
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each category of financial instruments for which it is practicable to
estimate that value:
<PAGE>
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD. Book value approximated
fair value.
INTEREST-BEARING DEPOSITS WITH BANKS. The fair value was estimated by
computing the discounted value of contractual cash flows using a current
interest rate for similar instruments.
RESIDENTIAL MORTGAGE LOANS HELD FOR SALE. The fair value of mortgage loans
held for sale was derived from secondary market quotations for similar
instruments.
SECURITIES. The fair value for U.S. Treasury and Agency, state and
municipal, and corporate debt securities is based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and for equity securities upon quoted market prices.
LOANS. Fair value was estimated by computing the discounted value of the
contractual weighted average cash flows, adjusted for potential credit losses,
for pools of loans having similar characteristics. The discount rate was based
on the current loan origination rate for a similar loan. Nonperforming loans
have an assumed interest rate of 0%.
ACCRUED INTEREST RECEIVABLE. Book value approximated the fair value of
accrued interest, considering the short-term nature of the receivable and its
expected collection.
OTHER ASSETS. Book value approximated fair value of certain accrued
commissions in other assets, considering the short-term nature of the receivable
and its expected collection.
DEPOSIT LIABILITIES. Under FASB 107, the fair value of demand, money
market savings and regular savings deposits, which have no stated maturity, must
be considered equal to their book value, representing the amount payable on
demand, regardless of any value which may be derived from retaining those
deposits for an expected future period of time (the deposit base intangible).
The fair value of certificates of deposit was based upon the discounted
value of contractual cash flows at current rates for deposits of similar
remaining maturity.
SHORT-TERM BORROWINGS. Book value approximated fair value of repurchase
agreements and the Treasury demand note due to their variable interest rates.
The fair value of Federal Home Loan Bank advances was estimated by computing the
discounted value of contractual cash flows payable at current interest rates for
obligations with similar remaining terms.
LONG-TERM BORROWINGS. The fair value of these mortgage and Federal Home
Loan Bank advances was estimated by computing the discounted value of
contractual cash flows payable at current interest rates for obligations with
similar remaining terms.
OTHER LIABILITIES. Book value approximated fair value of accrued interest
payable, accrued dividends and premiums payable, considering their short-term
nature and expected payment.
OFF-BALANCE SHEET INSTRUMENTS. The fair value of unused lines of credit,
letters of credit, and commitments to fund and deliver loans was estimated based
upon the amount of unamortized fees collected or paid incident to granting or
receiving the commitment. The fair value of the Bank's serviced mortgage loan
portfolio was estimated utilizing an independent appraisal which considered fees
receivable, number of loans, average loan size, delinquency data, prepayment
risks, and current market supply and demand factors.
<PAGE>
NOTES (Dollars in thousands)
NOTE 20 -- PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for Sandy Spring Bancorp (Parent Only)
pertaining to the periods covered by the Company's consolidated financial
statements are presented below:
<TABLE>
<CAPTION>
December 31,
--------------------------------
Balance Sheets 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $8,107 $7,636
Investment in subsidiary 62,008 55,690
Other assets 259 258
------------ ------------
Total Assets $70,374 $63,584
------------ ------------
------------ ------------
LIABILITIES
Other liabilities $131 $151
------------- -------------
Total Liabilities 131 151
STOCKHOLDERS' EQUITY
Common stock 2,140 2,110
Surplus 27,133 26,100
Retained earnings 40,970 35,223
------------- ------------
Total Stockholders' Equity 70,243 63,433
------------- -------------
Total Liabilities and
Stockholders' Equity $70,374 $63,584
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
STATEMENTS OF INCOME 1994 1993 1992
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Cash dividend from subsidiary $1,705 $1,515 $1,641
Other income 250 236 154
----------- ----------- ----------
Total Income 1,955 1,751 1,795
Interest and other expenses 261 241 118
----------- ----------- ----------
Income before income taxes and
equity in undistributed income
of subsidiary 1,694 1,510 1,677
Income tax expense (benefit) (4) (10) 32
----------- ----------- -----------
Income before equity in
undistributed income
of subsidiary 1,698 1,520 1,645
Equity in undistributed
income of subsidiary 6,322 6,487 7,004
----------- ------------ -----------
NET INCOME $8,020 $8,007 $8,649
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
STATEMENTS OF CASH FLOWS 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $8,020 $ 8,007 $ 8,649
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed income --
subsidiary (6,322) (6,487) (7,004)
Other -- net -- (20) 93
---------- ----------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,698 1,500 1,738
Cash Flows from Investing Activities:
Contributions to the capital of the Bank -- -- (2,000)
---------- ------------ ------------
NET CASH USED BY INVESTING ACTIVITIES -- -- (2,000)
Cash Flows from Financing Activities:
Retirement of long-term debt (17) (14) (14)
Proceeds from issuance of common stock 1,063 726 8,159
Dividends paid (2,273) (2,014) (1,641)
----------- ------------ ------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (1,227) (1,302) 6,504
----------- ------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 471 198 6,242
Cash and Cash Equivalents at Beginning of Year 7,636 7,438 1,196
----------- ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $8,107 $7,636 $7,438
----------- ------------ --------------
</TABLE>
NOTE 21 -- PROSPECTIVE ACCOUNTING CHANGES
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (FASB 114). FASB 114 applies to loans where it is probable that the
creditor will not collect all principal and interest payments according to the
loan's contractual terms. Under FASB 114, impaired loans must be measured by
methods that consider the present value of the expected future cash flows
discounted at the loan's effective interest rate, the observable market price of
the loan, or the fair value of the collateral. If the measure of an impaired
loan is less than the carrying value, a valuation allowance must be established.
In October 1994, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" (FASB 118), which
amends FASB 114 and permits a creditor to use its existing income recognition
methods for impaired loans.
FASB 114, as amended by FASB 118, is effective for financial statements for
fiscal years beginning after December 15, 1994. Management does not expect the
adoption of the standard to have a material impact on the Company's financial
position or results of operations.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State
Subsidiaries Owned of Incorporation
- ------------ ---------- ----------------
Sandy Spring National Bank of Maryland 100% United States
Sandy Spring Insurance Corporation (1) 100% Maryland
__________________
(1) Second-tier subsidiary, 100% owned by Sandy Spring National Bank of
Maryland.
<PAGE>
EXHIBIT 23
<PAGE>
Stegman & Company
Certified Public Accountants
Suite 200
405 East Joppa Road
Towson, Maryland 21286
(410) 823-4815
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sandy Spring Bancorp, Inc.
We hereby consent to the incorporation by reference in the prospectuses
included in Registration Statements No. 33-29316, 33-35319, 33-48453 and
33-56692, each on Form S-8, and Registration Statement No. 33-57182 on Form
S-3 of our report dated February 2, 1995 relating to the consolidated financial
statements of Sandy Spring Bancorp, Inc. and Subsidiaries.
/s/ Stegman & Company
Stegman & Company
Towson, Maryland
March 22, 1995
<PAGE>
EXHIBIT 24
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally constitute and
appoint Marjorie S. Cook our true and lawful attorney and agent, to do any and
all things in our names in the capacities indicated below which said person may
deem necessary or advisable to enable the Registrant to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with the
annual report on Form 10-K for the year ended December 31, 1994, including
specifically, but not limited to, power and authority to sign for us in our
names in the capacities indicated below the annual report and any amendments
thereto; and we hereby approve, ratify and confirm all that said person shall do
or cause to be done by virtue thereof.
Signature Title Date
/s/ Andrew N. Adams, Jr. Director March 13, 1995
- -----------------------------
Andrew N. Adams, Jr.
/s/ John Chirtea Director March 20, 1995
- -----------------------------
John Chirtea
/s/ Willard H. Derrick Chairman of the Board March 15, 1995
- ----------------------------- and Director
Willard H. Derrick
/s/ Charles F. Mess Director March 17, 1995
- -----------------------------
Charles F. Mess
/s/ Robert L. Mitchell Director March 17, 1995
- -----------------------------
Robert L. Mitchell
/s/ Robert L. Ordorff, Jr. Director March 13, 1995
- -----------------------------
Robert L. Orndorff, Jr.
/s/ Louisa W. Riggs Director March 15, 1995
- -----------------------------
Louisa W. Riggs
/s/ Francis Snowden Director March 16, 1995
- -----------------------------
Francis Snowden
/s/ W. Drew Stabler Director March 17, 1995
- -----------------------------
W. Drew Stabler
/s/ Susan D. Goff Director March 17, 1995
- -----------------------------
Susan D. Goff
/s/ Solomon Graham, Jr. Director March 23, 1995
- -----------------------------
Solomon Graham, Jr.
/s/ Lewis R. Schumann Director March 16, 1995
- -----------------------------
Lewis R. Schumann
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 32,549
<INT-BEARING-DEPOSITS> 211
<FED-FUNDS-SOLD> 5,375
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,772
<INVESTMENTS-CARRYING> 172,266
<INVESTMENTS-MARKET> 164,103
<LOANS> 395,416
<ALLOWANCE> (6,108)
<TOTAL-ASSETS> 764,135
<DEPOSITS> 645,619
<SHORT-TERM> 45,243
<LIABILITIES-OTHER> 3,137
<LONG-TERM> 3,180
<COMMON> 2,140
0
0
<OTHER-SE> 64,816
<TOTAL-LIABILITIES-AND-EQUITY> 764,135
<INTEREST-LOAN> 27,672
<INTEREST-INVEST> 18,067
<INTEREST-OTHER> 525
<INTEREST-TOTAL> 46,264
<INTEREST-DEPOSIT> 17,864
<INTEREST-EXPENSE> 19,179
<INTEREST-INCOME-NET> 27,085
<LOAN-LOSSES> 160
<SECURITIES-GAINS> (84)
<EXPENSE-OTHER> 19,895
<INCOME-PRETAX> 11,159
<INCOME-PRE-EXTRAORDINARY> 11,159
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,020
<EPS-PRIMARY> 3.78
<EPS-DILUTED> 3.78
<YIELD-ACTUAL> 3.69
<LOANS-NON> 866
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<LOANS-TROUBLED> 44
<LOANS-PROBLEM> 13,949
<ALLOWANCE-OPEN> 6,177
<CHARGE-OFFS> (509)
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<ALLOWANCE-CLOSE> 6,108
<ALLOWANCE-DOMESTIC> 2,590
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,518
</TABLE>
