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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, 1996
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 _____
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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 traded on the NASDAQ National Market under the
symbol SASR. The aggregate market value of the 4,750,507 shares of Common Stock
of the registrant issued and outstanding held by nonaffiliates on March 10,
1997, was approximately $165.1 million based on the closing sales price of
$34.75 per share of the registrant's Common Stock on March 17, 1997. 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 10, 1997, 4,911,461 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, 1996 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual
Meeting of Shareholders to be held on April 16, 1997 (the
"Proxy Statement").
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FORWARD-LOOKING STATEMENTS
Part I and Part II of this Annual Report on Form 10-K contain forward-
looking statements, including statements of goals, intentions, and expectations,
regarding or based upon general economic conditions, interest rates,
developments in national and local markets, and other matters, and which, by
their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
PART I
ITEM 1. BUSINESS
General
Sandy Spring Bancorp, Inc. ("Bancorp") is the 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 supervision
and regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"). Bancorp began operating 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 19 community offices located in
Montgomery, Howard, and Anne Arundel counties in Maryland. The Bank is a
national bank subject to supervision 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 ("BIF") 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 deposits and in making loans. Direct competition for deposits comes
from other commercial banks, savings associations, and credit unions located in
the Bank's primary market area of Montgomery, Howard, and Anne Arundel Counties
in Maryland. Additional significant competition for 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 lenders. Competitors for loan originations
include other commercial banks, mortgage bankers, mortgage brokers, savings
associations, 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
Following is a brief summary of certain statutes and regulations that
significantly affect Bancorp and the Bank. This summary does not purport to be
complete and is qualified in its entirety by reference to these statutes and
regulations. A number of other statutes and regulations affect Bancorp and the
Bank but are not summarized below.
Bank Holding Company Regulation. Bancorp is registered as a bank holding
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company under the Holding Company Act and, as such, is subject to supervision
and regulation by the Federal Reserve. As a bank holding company, Bancorp is
required to furnish to the Federal Reserve annual and quarterly reports of its
operations and additional information and reports. Bancorp is also subject to
regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any bank or
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bank holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (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.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve 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 related regulations of the Federal
Reserve 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 Federal Reserve before the person or persons acquire control of
Bancorp or the Bank. The Change in Bank Control Act defines "control" as the
direct or indirect power to vote 25% or more of any class of 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 Federal Reserve 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 Federal
Reserve regulations. The Federal Reserve also 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 Federal Reserve 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 Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve'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 earnings 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 Federal Reserve
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
Federal Reserve may disapprove such a purchase or redemption if it determines
that the proposal would violate any law, regulation, Federal Reserve order,
directive, or any condition imposed by, or written agreement with, the Federal
Reserve.
Bank Regulation. As a national bank, the Bank is subject to the primary
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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.
The OCC regularly examines the operations and condition of the Bank,
including but not limited to its capital adequacy, reserves, loans, investments,
and management practices. These examinations are for the protection
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of the Bank's depositors and the BIF. 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."
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
retained 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 that their payment
would 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 Federal Reserve and the FDIC include reserve
requirements and disclosure requirements in connection with personal and
mortgage loans and deposit accounts. In addition, the Bank is subject to
numerous federal and state laws and regulations that include 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 their stock or other securities. These restrictions
prevent Bancorp and the Bank's other affiliates from borrowing from the Bank
unless the loans are secured by specified collateral, and require those
transactions to have terms comparable to terms of arms-length transactions with
third persons. In addition, 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 together to an aggregate of 20% of the Bank's capital
and surplus. Certain exemptions to these limitations apply to extensions of
credit by, and other transactions between, the Bank to its subsidiaries. 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 OCC regulations, national banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit 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") adopted by the federal bank regulators. The Interagency
Guidelines, among other things, call for internal loan-to-value limits for real
estate loans that are not in excess of the limits specified in the Guidelines.
The
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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, based upon 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.
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. Institutions that
do not qualify as either well-capitalized or adequately capitalized are deemed
to be undercapitalized. 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 it poses to the deposit insurance fund. Subgroup A consists of financially
sound institutions with only a few minor weaknesses. Subgroup B consists of
institutions with demonstrated 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. For the semi-annual period beginning June 30, 1995,
the assessment rate for institutions, such as the Bank, with deposits insured by
the Bank Insurance Fund of the FDIC was lowered to between 0.04% and .31% of
insured deposits from 0.23% to 0.31% of insured deposits and was subsequently
reduced to the statutory minimum of $1,000 for the most highly rated banks for
the semi-annual period beginning January 1, 1996. The Bank has been notified
that its assessment rate for the first six months of 1997 is the $1,000
statutory minimum, which also applied to it during 1996.
New Law. The operations of Bancorp and the Bank are affected by new
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federal and state laws. The federal Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "New Act"), enacted in September 1996, includes
provisions that affect banks, bank holding companies, and savings associations.
The New Act had, and is expected to have in the future, its most significant
effect upon bank and savings associations that hold deposits assessed at Savings
Deposit Insurance Fund ("SAIF") rates. The Bank does not have "SAIF" assessed
deposits, and the direct impact on the Bank of the New Act was not material in
1996. Among other things, the New Act recapitalized the SAIF through a special
assessment on savings association deposits and bank deposits that had been
acquired from savings associations. The New Act may increase competition from
savings associations by equalizing, over time, the amount of federal insurance
premiums paid on savings association and bank deposits. The New Act also
provides that, beginning in 1997, institutions with deposits insured by the BIF,
as well as those with SAIF insured deposits, will be responsible for payment of
certain bonds issued in connection with the resolution of failed savings
associations. The result of these provisions will be somewhat higher federal
deposit insurance premiums for the Bank. These higher insurance premiums are
not expected to have a material adverse effect on the Bank or Bancorp.
The New Act also simplifies the regulatory approval process for new
activities of banks and bank holding companies, and reduces a number of other
regulatory burdens. None of these changes is expected to have a significant
effect on the Bancorp or the Bank.
Bank Secrecy Act Compliance. In the fourth quarter of 1996, the Bank
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learned that it had not fully complied with certain requirements of the federal
Bank Secrecy Act and related regulations, including obligations to monitor and
file reports of certain types of currency transactions. Financial institutions
that fail to comply with the requirements of the Bank Secrecy Act may be subject
to penalties, including civil money penalties. It is not now known whether such
penalties or any other action will be sought against the Bank in connection with
its noncompliance, or, if they are, the amount or nature of such penalties.
Management believes that the Bank is now
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in compliance with its current reporting obligations under the Bank Secrecy Act,
and is in discussion with appropriate federal regulatory authorities regarding
the steps it has taken and plans to take to remedy its past noncompliance. See
"Note 24 - Contingencies" of the Notes to the Consolidated Financial Statements
on page 46 of the Annual Report.
Regulatory Capital Requirements. The Federal Reserve and the OCC have
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established guidelines for 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 Federal Reserve 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%. The capital regulations
state, however, 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 this 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. A bank or bank holding company experiencing or anticipating
significant growth is expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve has indicated that it also may
consider 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.
The risk-based capital rules of the Federal Reserve and the OCC require
bank holding companies and national 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 (noncumulative perpetual preferred
stock with respect to banks), and minority interests in the equity accounts of
consolidated subsidiaries; less all intangible assets, except for certain
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; 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 is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for loan losses that may be included in capital to 1.25% of total risk-weighted
assets.
In July 1996, the federal bank regulatory agencies, including the OCC,
issued a joint policy statement regarding the evaluation of commercial banks'
capital adequacy for interest rate risk. Under the policy, the OCC's assessment
of a bank's capital adequacy includes an assessment of the bank's exposure to
adverse changes in interest rates. The OCC has determined to rely on its
examination process for such evaluations rather than on standardized measurement
systems or formulas. The OCC may require banks that are found to have a high
level of interest rate
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risk exposure or weak interest rate risk management systems to take corrective
actions. Management believes its interest rate risk management systems and its
capital relative to its interest rate risk are adequate.
The OCC has established regulations that classify national banks by capital
levels and 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 these 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 a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital
ratio of 6% or more, and a leverage ratio of 5% or more. 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
that does not meet these standards is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, depending on its
capital levels. A national bank that falls within any of the three
undercapitalized categories established by the prompt corrective action
regulation is subject to severe regulatory sanctions. As of December 31, 1996,
the Bank was well-capitalized as defined in 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 Management--Regulatory Capital Requirements" on page 26 of
the Annual Report and "Note 22 - Regulatory Matters" of the Notes to the
Consolidated Financial Statements on pages 45 and 46 of the Annual Report.
Competition
The Bank competes within its market area with numerous bank subsidiaries of
larger bank holding companies, including the subsidiaries of regional and
national bank holding companies with principal operations in states other than
Maryland. It also competes with numerous independent banks, savings
associations, 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, that are not offered directly by
the Bank (but are available indirectly through correspondent institutions), and,
by virtue of their larger total capitalization, such banks have substantially
higher legal lending limits, which are based on bank capital, than does the
Bank. The Bank can arrange loans in excess of its lending limit, or in excess
of the level of risk it desires to take, by arranging participations with other
banks. Other entities, both governmental and in private industry, raise capital
through the issuance and sale of debt and equity securities and indirectly
compete with the Bank in the acquisition of deposits.
In addition to competing with other commercial banks and savings
associations, commercial banks such as the Bank compete with nonbank
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 mutual funds.
These mutual funds have provided substantial competition to banks for deposits,
and it is anticipated they will continue to do so in the future.
The Holding Company Act permits the Federal Reserve 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 that holding company's home state. The
Federal Reserve may not approve the acquisition of a 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 Holding Company Act also prohibits the
Federal Reserve from approving an application if the applicant (and its
depository institution affiliates) controls or would control more
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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 Holding Company 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
limitation does not discriminate against out-of-state banks or bank holding
companies. The effect of these provisions of the Holding Company Act may be to
increase competition within the State of Maryland among banking and savings
associations located in Maryland and from banking companies located anywhere in
the country.
Federal banking laws also authorize the federal banking agencies, effective
June 1, 1997, to approve interstate merger transactions without regard to
whether such transactions are prohibited by the law of any state, unless the
home state of one of the banks adopts 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. In 1995,
however, the State of Maryland acted to authorize interstate mergers by enacting
legislation that allows out-of-state financial institutions to merge with
Maryland banks and to establish branches in Maryland, subject to certain
limitations. Maryland previously had enacted reciprocal interstate banking
statutes that authorized interstate bank and savings association acquisitions.
The effect of the federal and Maryland law may be to increase competition within
the State of Maryland among banking and thrift institutions located in Maryland
and from the major regional and national bank holding companies that acquire
institutions in Maryland, many of which are larger than the Bank. The New Act,
described above, also may increase competition by reducing the deposit insurance
cost advantage on BIF insured deposits, such as those of the Bank, over SAIF
insured deposits, and by making acquisitions of savings associations more
attractive by resolving uncertainties over the costs of SAIF recapitalization.
Employees
As of February 25, 1997, Bancorp and the Bank employed 388 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 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.
<TABLE>
<CAPTION>
Name Age (1) Principal Position(s)
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<S> <C> <C>
James R. Farmer 45 Senior Vice President of the Bank
James H. Langmead 47 Vice President and Treasurer of Bancorp and Senior
Vice President and Chief Financial Officer of the
Bank
Lawrence T. Lewis 48 Senior Vice President of the Bank
Stanley L. Merson 40 Senior Vice President of the Bank
Frank H. Small 50 Senior Vice President of the Bank
</TABLE>
________________
(1) At March 25, 1997
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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.
James R. Farmer became a Senior Vice President of the Bank in 1994.
Prior to that, Mr. Farmer was Vice President of the Bank. Mr. Farmer has been
employed by the Bank since 1979.
James H. Langmead, CPA, became Vice President and Treasurer of Bancorp
and Senior Vice President and Chief Financial Officer of the Bank in 1995.
Prior to that, Mr. Langmead was a Senior Vice President of the Bank (from
January 1994), and Vice President and Controller of the Bank. Prior to joining
the Bank in 1992, Mr. Langmead was Executive Vice President of the Bank of
Baltimore.
Lawrence T. Lewis began his employment with the Bank in 1996 as Senior
Vice President. From January 1984 to December 1995, Mr. Lewis was a managing
director of Clark Melvin Securities Corporation.
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.
Frank H. Small became a Senior Vice President of the Bank in 1994.
Prior to that, Mr. Small was Vice President of the Bank. Before joining the
Bank in 1990, Mr. Small was Vice President in charge of branch operations at
Equitable Bank, N.A.
Tabular Financial Information
Loan Maturity Table. The following table sets forth information as of
December 31, 1996, regarding the loan maturities and interest rate sensitivity
for real estate-construction, commercial, and tax exempt loans (dollars in
thousands).
<TABLE>
<CAPTION>
1 or Less Over 1-5 Over 5 Total
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<S> <C> <C> <C> <C>
Real Estate Construction..................... $47,503 $ 151 $ 0 $ 47,654
Commercial................................... 48,538 18,828 1,101 68,467
Tax Exempt................................... 2 10 15 27
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Total .................................... $96,043 $18,989 $ 1,116 $116,148
======= ======= ======== ========
Rate Terms:
Fixed....................................... $13,774 $18,067 $ 1,101 $ 32,942
Variable or adjustable...................... 82,269 922 15 83,206
-------- ------- ------- --------
Total...................................... $96,043 $18,989 $ 1,116 $116,148
======== ======= ======= ========
</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,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ------------- ------------- --------------- -------------
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...... $ 425 72% $ 512 74% $1,581 76% $2,046 77% $1,756 81%
Real estate--construction.. 745 9 10 8 41 7 34 6 78 6
Consumer................... 193 6 181 6 136 6 324 5 353 6
Commercial................. 1,015 13 907 12 832 11 1,998 12 61 7
Tax exempt................. 0 0 0 0 0 0 0 0 0 0
Unallocated................ 4,013 4,987 4,073 2,279 $1,965
------ ------ ------ ------ ------
Total allowance for
credit losses........ $6,391 $6,597 $6,663 $6,681 $4,213
====== ====== ====== ====== ======
</TABLE>
The Company's policies and practices regarding the allowance for
credit losses, including factors regularly analyzed by management in evaluating
the sufficiency of the allowance, are disclosed in the discussion of Credit Risk
Management on pages 26 and 27 and in Notes 1 and 6 of the Notes to the
Consolidated Financial Statements beginning on page 34 of the Annual Report.
(See also the discussion of loan portfolio composition and trends on pages 23
and 24 of the Annual Report.) The amount of unallocated allowance for credit
losses decreased to 62.8% of the total allowance at December 31, 1996, from
75.6% a year earlier. The percentage was 61.1% at December 31, 1994. The size
of the unallocated reserve at December 31, 1996 reflects management's assessment
of actual loss residing in the loan portfolio which has not been specifically
attributed to any category of loans. The size of the unallocated allowance at
December 31, 1996 was influenced by the merger with Annapolis Bancshares, Inc.,
consummated on August 29, 1996. The amount of potential loss identified in the
due diligence process with particular categories of loans in the existing
Annapolis portfolio is expected to increase, and the unallocated portion
decrease, as Bancorp continues to evaluate and manage this new portfolio.
In establishing the amount of the allowance for credit losses, and
allocating the allowance to particular categories of loans, management also
considered the increase in the amount and percentage to total loans attributable
to commercial and commercial real estate loans, which are viewed as entailing
greater risk than certain other categories of loans, and the resulting increase
in large loans. The significance of these factors, which are believed to have
contributed to the increase in both net charge-offs and nonperforming loans
during 1996 compared to 1995, was mitigated by the Company's historical loss
ratios and the continued concentration in types of credits considered to be of
relatively low risk. Consideration of these and other factors, when balanced
against each other, resulted in an unallocated allowance and in a total
allowance which management deemed appropriate at December 31, 1996.
The tabular financial information set forth on pages 18 through 29 of
the Annual Report is incorporated herein by reference.
ITEM 2. DESCRIPTION OF PROPERTY
Airpark
7653 Lindbergh Drive
Gaithersburg, Maryland 20879
(301) 774-8408
Annapolis
2024 West Street
Annapolis, Maryland 21401
(410) 266-3000
Ashton
1 Ashton Road
Ashton, Maryland 20861
(301) 774-8405
Aspenwood
(Aspenwood Residents
and Employees Only)
14400 Homecrest Road
Silver Spring, Maryland 20906
(301) 774-8406
Bedford Court
(Bedford Court Residents
and Employees Only)
3701 International Drive
Silver Spring, Maryland 20906
(301) 774-8407
Bethesda
7126 Wisconsin Avenue
Bethesda, Maryland 20814
(301) 951-0800
Executive Offices
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-6400
Burtonsville
3535 Spencerville Road
Burtonsville, Maryland 20866
(301) 774-8404
Clarksville
12276 Clarksville Pike
Clarksville, Maryland 21029
(410) 531-2650
Colesville
13300 New Hampshire Avenue
Silver Spring, Maryland 20904
(301) 774-8403
Damascus
26250 Ridge Road
Damascus, Maryland 20872
(301) 253-0133
East Gude Drive
1601 East Gude Drive
Rockville, Maryland 20850
(301) 570-8330
Gaithersburg Square
596 A North Frederick Avenue
Gaithersburg, Maryland 20877
(301) 963-3600
Layhill
14241 Layhill Road
Silver Spring, Maryland 20906
(301) 774-8406
Leisureworld Plaza
3801 International Drive
Silver Spring, Maryland 20906
(301) 774-8407
Lisbon
710-N Lisbon Centre Drive
Woodbine, Maryland 21797
(410) 442-1878
Montgomery Village
9921 Stedwick Road
Montgomery Village, Maryland 20879
(301) 990-3800
Olney
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-8402
Rockville
611 Rockville Pike
Rockville, Maryland 20852
(301) 217-0555
Sandy Spring
908 Olney-Sandy Spring Road
Sandy Spring, Maryland 20860
(301) 774-8401
Customer Service Center
(301) 774-8477
(800) 399-5919
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Note 18 on page 43 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 1996, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
RECENT STOCK PRICES AND DIVIDENDS
(Dollars in thousands, except per share data)
Shareholders received quarterly cash dividends totaling $3,620 in 1996 and
$2,755 in 1995. Regular dividends have been declared for ninety-six consecutive
years. The Company has increased its dividends per share each year for the past
sixteen years. Since 1991, dividends per share have risen at an annual compound
growth rate of 15.5%, with an increase of 21.9% in 1996.
Per share dividends, expressed as a percentage of earnings per share, were
33.1% in 1996 and 30.6% in 1995. 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 35,273 in 1996
and 35,300 in 1995.
The number of common shareholders of record was approximately 2,400 as of
February 10, 1997 compared to approximately 2,000 a year earlier.
Shares of Sandy Spring Bancorp commenced trading on The Nasdaq Stock
Market's National Market on April 17, 1996 under the trading symbol SASR. Since
that date, the price information provided below reflects actual high and low
sales prices as quoted on The Nasdaq Stock Market. Prior to April 17, 1996,
sales prices reported below were based upon reports of broker transactions
published by third parties and any other transactions known to the Company to
have occurred in each quarter.
<TABLE>
<CAPTION>
QUARTERLY STOCK INFORMATION
1996 1995
---------------------------------- ----------------------------------
Stock Price Range Per Share Stock Price Range Per Share
----------------- -----------------
Quarter Low High Dividend Low High Dividend
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $35.00 $38.75 $0.18 $24.50 $26.25 $0.15
2nd 35.75 41.00 0.19 25.38 32.00 0.15
3rd 34.00 39.50 0.20 29.25 39.00 0.16
4th 31.25 34.75 0.21 35.00 39.00 0.18
- ----------------------------------------------------------------------------------------------------------------
Total $0.78 $0.64
===== =====
</TABLE>
For information regarding regulatory restrictions on the Bank's and,
therefore, Bancorp's payment of dividends, see Note 11 -- "Stockholders' Equity"
on page 40 of the Annual Report, which is hereby incorporated by reference.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
HISTORICAL TRENDS IN FINANCIAL DATA 1992-1996(1)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS (for the year):
<S> <C> <C> <C> <C> <C>
Interest income $ 66,621 $ 62,115 $ 51,578 $ 46,189 $ 48,177
Interest expense 30,233 29,342 21,496 19,793 23,129
Net interest income 36,388 32,773 30,082 26,396 25,048
Provision for credit losses 308 180 212 1,056 1,880
Net interest income after provision
for credit losses 36,080 32,593 29,870 25,340 23,168
Noninterest income 6,547 4,478 4,189 4,870 4,656
Noninterest expenses 25,344 22,424 21,462 18,340 16,243
Income before taxes and cumulative
effect of accounting change 17,283 14,647 12,597 11,870 11,581
Income tax expense 5,789 4,653 3,694 3,261 3,252
Income before cumulative effect of
accounting change 11,494 9,994 8,903 8,609 8,329
Cumulative effect of accounting change 0 0 0 0 744
Net income 11,494 9,994 8,903 8,609 9,073
PER SHARE DATA:
Net income $ 2.36 $ 2.09 $ 1.90 $ 1.92 $ 2.01(2)
Dividends declared 0.78 0.64 0.54 0.49 0.43
Book value 19.70 18.04 15.72 15.63 13.39
FINANCIAL CONDITION (at year end):
Assets $978,595 $876,203 $830,834 $784,274 $675,418
Deposits 806,341 743,592 700,340 676,422 602,073
Loans 523,166 492,540 457,052 374,740 313,924
Securities 361,806 290,786 309,622 314,283 285,120
Stockholders' equity 96,581 86,941 73,766 72,420 59,205
MEASUREMENTS (for the year):
Return on average assets 1.27% 1.18% 1.14% 1.23% 1.30%(2)
Return of average equity 12.81 12.37 12.24 13.55 16.95(2)
Average equity to average assets 9.90 9.57 9.28 9.10 7.65
Dividends declared to net income 33.05 30.62 28.42 25.52 21.39(2)
</TABLE>
(1) Adjusted to give retroactive effect to a 2-for-1 stock split declared on
March 29, 1995 and, except with respect to dividends declared per share, the
acquisition of Annapolis Bancshares, Inc. on August 29, 1996, which was
accounted for as a pooling of interests.
(2) Excludes the cumulative benefit recorded in 1992 from the change in
accounting for income taxes.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
OVERVIEW
The Company's 1996 financial results and performance were favorable. During
1996, the Company recorded growth in core deposits, interest and noninterest
revenues, and net income. Substantially all profitability measures showed
improvement in 1996 when compared to 1995. At year-end 1996, capital remained
well above minimum regulatory requirements.
Also in 1996, Bancorp completed its second merger, when Annapolis
Bancshares, Inc. was merged into Sandy Spring Bancorp and The Bank of Annapolis
was merged into Sandy Spring National Bank. This transaction had little impact
on consolidated earnings growth for 1996, after merger related expenses were
recorded, but gives the Company opportunity for future growth in an attractive
new market. This merger was accounted for as a pooling of interests.
Accordingly, all financial data except dividend and stock price information have
been retroactively restated to include the operations and position of Annapolis
Bancshares.
In December 1996, Sandy Spring National Bank completed the acquisition of
an existing bank branch on Wisconsin Avenue in Bethesda from Bank of Maryland.
This acquisition provides a new business base along the Route 355 corridor and
is a natural extension of the Bank's branch system.
For 1996, net earnings amounted to $11,494 ($2.36 per share) versus $9,994
($2.09 per share) for 1995, a 15% increase. Return on average assets was 1.27%
compared to 1.18% for 1995, and return on average equity was 12.81% versus
12.37% for 1995. Total deposits grew by 8.4% while loan growth amounted to 6.2%.
Asset quality remains acceptable, as measured by net loans charged off and the
level of problem assets continuing to indicate moderate levels of risk.
The following more detailed discussion of our financial results is intended
to give you the reader a clear and succinct view of the various significant
components of our operating results and financial position. Please refer to the
Selected Glossary and Abbreviations on page 29 for further definition of
technical terms.
<TABLE>
<CAPTION>
CHANGES IN NET INCOME PER COMMON SHARE
1995 to 1996 1994 to 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Prior year net income per share $ 2.09 $ 1.90
Change attributed to:
Net interest income 0.48 0.33
Provision for credit losses (0.02) 0.00
Noninterest income 0.28 0.04
Noninterest expenses (0.39) (0.13)
Income taxes (0.04) (0.01)
Increased shares outstanding (0.04) (0.04)
------ ------
Total 0.27 0.19
------ ------
NET INCOME PER SHARE $ 2.36 $ 2.09
====== ======
</TABLE>
13
<PAGE>
HISTORICAL TRENDS IN FINANCIAL DATA 1992-1996(1)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS (for the year):
<S> <C> <C> <C> <C> <C>
Interest income $ 66,621 $ 62,115 $ 51,578 $ 46,189 $ 48,177
Interest expense 30,233 29,342 21,496 19,793 23,129
Net interest income 36,388 32,773 30,082 26,396 25,048
Provision for credit losses 308 180 212 1,056 1,880
Net interest income after provision
for credit losses 36,080 32,593 29,870 25,340 23,168
Noninterest income 6,547 4,478 4,189 4,870 4,656
Noninterest expenses 25,344 22,424 21,462 18,340 16,243
Income before taxes and cumulative
effect of accounting change 17,283 14,647 12,597 11,870 11,581
Income tax expense 5,789 4,653 3,694 3,261 3,252
Income before cumulative effect of
accounting change 11,494 9,994 8,903 8,609 8,329
Cumulative effect of accounting change 0 0 0 0 744
Net income 11,494 9,994 8,903 8,609 9,073
PER SHARE DATA:
Net income $ 2.36 $ 2.09 $ 1.90 $ 1.92 $ 2.01(2)
Dividends declared 0.78 0.64 0.54 0.49 0.43
Book value 19.70 18.04 15.72 15.63 13.39
FINANCIAL CONDITION (at year end):
Assets $978,595 $876,203 $830,834 $784,274 $675,418
Deposits 806,341 743,592 700,340 676,422 602,073
Loans 523,166 492,540 457,052 374,740 313,924
Securities 361,806 290,786 309,622 314,283 285,120
Stockholders' equity 96,581 86,941 73,766 72,420 59,205
MEASUREMENTS (for the year):
Return on average assets 1.27% 1.18% 1.14% 1.23% 1.30%(2)
Return of average equity 12.81 12.37 12.24 13.55 16.95(2)
Average equity to average assets 9.90 9.57 9.28 9.10 7.65
Dividends declared to net income 33.05 30.62 28.42 25.52 21.39(2)
</TABLE>
(1) Adjusted to give retroactive effect to a 2-for-1 stock split declared on
March 29, 1995 and, except with respect to dividends declared per share, the
acquisition of Annapolis Bancshares, Inc. on August 29, 1996, which was
accounted for as a pooling of interests.
(2) Excludes the cumulative benefit recorded in 1992 from the change in
accounting for income taxes.
14
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES/(1)/
(Dollars in thousands and tax-equivalent)
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:(2)
Real estate(3) $417,161 $37,866 9.08% $400,176 $36,154 9.03%
Consumer 28,600 2,682 9.38 26,710 2,437 9.12
Commercial 62,999 6,125 9.72 54,677 5,320 9.73
Tax exempt 169 16 9.65 479 63 13.15
-------- ------- -------- -------
Total loans 508,929 46,689 9.17 482,042 43,974 9.12
Securities:
Taxable 250,763 15,062 6.01 234,354 13,769 5.88
Nontaxable 65,847 5,005 7.60 65,696 5,177 7.88
-------- ------- -------- -------
Total securities 316,610 20,067 6.34 300,050 18,946 6.31
Interest-bearing deposits
with banks 3,585 187 5.22 740 39 5.27
Federal funds sold 25,319 1,342 5.30 15,252 872 5.72
-------- ------- -------- -------
TOTAL EARNING
ASSETS 854,443 68,285 7.99 798,084 63,831 8.00
Less: allowance for
credit losses (6,668) (6,647)
Cash and due from banks 25,923 24,188
Premises and equipment, net 20,559 17,019
Other assets 12,305 11,174
-------- --------
Total Assets $906,562 $843,818
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 96,940 $ 2,529 2.61% $ 86,688 $ 2,263 2.61%
Regular savings deposits 95,636 2,695 2.82 104,971 3,218 3.07
Money market
savings deposits 149,358 4,935 3.30 154,644 5,646 3.65
Time deposits 324,842 17,730 5.46 277,804 15,578 5.61
-------- ------- -------- -------
Total interest-bearing
deposits 666,776 27,889 4.18 624,107 26,705 4.28
Short-term borrowings 41,864 2,021 4.83 40,605 2,284 5.62
Long-term borrowings 4,854 323 6.65 6,097 353 5.79
-------- ------- -------- -------
TOTAL INTEREST-
BEARING
LIABILITIES 713,494 30,233 4.24 670,809 29,342 4.37
------- ---- ------- ----
Net interest income
and spread $ 38,052 3.75% $34,489 3.63%
Noninterest-bearing
demand deposits 100,127 90,260
Other liabilities 3,231 1,987
Stockholders' equity 89,710 80,762
-------- --------
Total liabilities and
stockholders' equity $906,562 $843,818
-------- --------
Interest income/
earning assets 7.99% 8.00%
Interest expense/
earning assets 3.54 3.68
---- ----
Net interest margin 4.45% 4.32%
==== ====
<CAPTION>
1994
-----------------------------------
Average Yield/
Balance Interest Rate
- ----------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans:(2)
Real estate(3) $327,485 $27,046 8.26%
Consumer 20,357 1,765 8.67
Commercial 45,241 3,785 8.37
Tax exempt 611 77 12.60
-------- -------
Total loans 393,694 32,673 8.30
Securities:
Taxable 258,102 14,299 5.54
Nontaxable 75,136 5,911 7.87
-------- -------
Total securities 333,238 20,210 6.06
Interest-bearing deposits
with banks 1,028 38 3.70
Federal funds sold 13,948 549 3.94
-------- -------
TOTAL EARNING
ASSETS 741,908 53,470 7.21
Less: allowance for
credit losses (6,841)
Cash and due from banks 22,730
Premises and equipment, net 16,239
Other assets 10,332
--------
Total Assets $784,368
--------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 87,591 $ 2,293 2.62%
Regular savings deposits 115,839 3,525 3.04
Money market
savings deposits 183,949 5,641 3.07
Time deposits 199,448 8,573 4.30
-------- -------
Total interest-bearing
deposits 586,827 20,032 3.41
Short-term borrowings 28,973 1,175 4.06
Long-term borrowings 5,149 289 5.61
-------- -------
TOTAL INTEREST-
BEARING
LIABILITIES 620,949 21,496 3.46
------- -----
Net interest income
and spread
Noninterest-bearing
demand deposits 90,238
Other liabilities 427
Stockholders' equity 72,754
--------
Total liabilities and
stockholders' equity $784,368
========
Interest income/
earning assets 7.21%
Interest expense/
earning assets 2.90
-----
Net interest margin 4.31%
=====
</TABLE>
(1) Income and yields are presented on a tax-equivalent basis using the maximum
applicable federal income tax rate.
(2) Nonaccrual loans are included in the average balances.
(3) Includes residential mortgage loans held for sale.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
NET INTEREST INCOME
Net interest income for 1996 was $36,388, representing an increase of $3,615 or
11.0% from 1995. An 8.9% rise was achieved in 1995, compared to 1994, resulting
in net interest income of $32,773, up from $30,082. On a tax-equivalent basis,
net interest income amounted to $38,052 in 1996, representing a 10.3% annual
rise, and $34,489 in 1995, representing a 7.9% annual rise, preceded by $31,974
in 1994.
Since net interest income is the most important category of earnings,
performance in this area is emphasized by management. The analysis of net
interest income performance presented in the "Consolidated Average Balances,
Yields and Rates" table shows a 1996 net interest margin of 4.45%, up 13 basis
points, compared to 1995. The net interest margin for 1995 of 4.32% was
essentially the same as for 1994. The table entitled "Effect of Volume and Rate
Changes on Net Interest Income" shows that the increases in net interest income
during 1996 and 1995, compared to each prior year, were primarily driven by
increases in the volumes of earning assets.
<TABLE>
<CAPTION>
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
1996 vs. 1995 1995 vs. 1994
--------------------------------------------------------------------------------------
Increase or in Average: (1)(2) Increase or in Average: (1)(2)
---------------------- ----------------------
(Tax-equivalent basis) (Decrease) Volume Rate (Decrease) Volume Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from
earnings assets:
Loans $2,715 $2,464 $ 251 $11,301 $ 7,837 $3,464
Taxable securities 1,293 981 312 (530) (1,363) 833
Nontaxable securities (172) 12 (184) (734) (744) (10)
Other investments 618 687 (69) 324 42 282
------ -------
Total interest income 4,454 4,503 (49) 10,361 4,230 6,131
Interest expense on funding
of earnings assets:
Interest-bearing demand deposits 266 268 (2) (30) (24) (6)
Regular savings deposits (523) (274) (249) (307) (333) 26
Money market savings deposits (711) (188) (523) 5 (976) 981
Time deposits 2,152 2,578 (426) 7,005 3,945 3,060
Borrowings (293) 1 (294) 1,173 632 541
------ -------
Total interest expense............ 891 1,829 (938) 7,846 1,833 6,013
------ ------ ----- ------- ------- ------
Net interest income............... $3,563 $2,674 $ 889 $ 2,515 $ 2,397 $ 118
====== ====== ===== ======= ======= ======
</TABLE>
(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.
Interest Income
The Company's tax-equivalent interest income increased by 7.0% or $4,454 in
1996, compared to 1995, as a result of a 7.1% or $56,359 increase in average
earning assets accompanied by a modest decline in average yield earned on those
funds. During 1996, average loans, yielding 9.17%, rose $26,887 or 5.6%. Average
commercial loans increased by 15.2% or $8,322 in 1996. Management has targeted
commercial loans for growth, in part because they produce the highest rate
(average yield of 9.72% for 1996) of any major category of earning assets.
However, lower yielding average securities (yielding only 6.34%), increased
$16,560 in 1996, representing virtually the same percentage rise as achieved for
average loans. Less significantly, federal funds sold, which are short-term
investments primarily benefitting liquidity, increased $10,067 or 66.0%, and
earned an average yield of 5.30% for 1996. The Company generated a greater
amount of interest income in 1996 in the face of stiff industrywide competition
with banks and nonbanking entities for desirable lending opportunities.
Tax-equivalent interest income increased 19.4% or $10,361 in 1995, compared
to 1994, due to the combination of higher average earning assets, up 7.6%, and
higher average yield earned, up 79 basis points. However, when higher funding
costs are taken into consideration, the resulting interest rate spread achieved
on those earning assets declined 12 basis points in 1995 versus 1994.
Interest Expense
Interest expense increased $891 or 3.0% in 1996 compared to 1995, attributable
to the offsetting effects of 6.4% or $42,685 greater average interest-bearing
liabilities and a 13 basis point decline in the average rate paid for those
funds. Most of the rise in interest-bearing funds was generated by deposit
growth of 6.8% or $42,669. By contrast, average interest free funding of earning
assets increased 10.7% or $13,674 over the same period, primarily due to a rise
in demand deposits attributable in part to the introduction of a new product
around mid-year. By far, the largest increase in interest-bearing
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
deposits occurred in average time deposits, which were 16.9% or $47,038 above
1995, and comprised the most expensive deposit type, paying an average rate of
5.46% in 1996, compared to 4.18% for all interest-bearing deposits. In addition,
the average rate paid on time deposits declined only 15 basis points in 1996,
compared to 1995, much less than declines recorded by most other deposit and
borrowing categories.
In 1995, interest expense increased significantly more than interest
income, rising 36.5% or $7,846, reflecting the effects of a 91 basis point rise
in average rate on 8.0% higher average interest-bearing liabilities.
Interest Rate Performance
Interest rate performance has been relatively stable over the past three years.
The same interest rate spread was achieved in 1996 and 1994, with a small
decline in 1995. The net interest margin increased slightly in 1996, after
remaining virtually the same the prior two years. The change in margin was due
to the beneficial effects of the higher level of interest-free funding of
earning assets in 1996 than in 1995 as well as to growth in interest-bearing
deposits at favorable interest spreads. By maintaining, and then improving, its
net interest margin from 1994 to 1996, the Company has been able to preserve,
and then enhance, its net interest income performance during a period of
significant growth.
NONINTEREST INCOME
Total noninterest income rose 46.2% or $2,069 to $6,547 in 1996 from $4,478 in
1995. An increase of 6.9% or $289 was posted for 1995 versus 1994.
Securities gains totaled $30 in 1996 as compared with securities losses of
$279 in 1995 and $84 in 1994. The sale of available-for-sale debt securities
generated net losses of $66 for 1996 compared with $89 in net gains from sales
of available-for-sale equity securities and $7 in net gains from securities
calls, maturities and paydowns. During 1995, the sale of available-for-sale debt
securities generated $277 in net losses, while calls, maturities and paydowns
generated $2 in net losses.
Service charges on deposit accounts increased 15.4% or $395 during 1996. In
1995, an increase of 9.4% or $221 was realized. Management continuously monitors
the service fee structure and makes changes where appropriate.
Mortgage banking operations generated $825 in gains on loan sales of
$56,457 in 1996 as management placed great emphasis upon originations and sales
of residential mortgage loans in the secondary market at a profit margin, versus
building a mortgage portfolio on the Company's books. By comparison, gains of
$244 were realized on loan sales of $19,246 during 1995, and $175 in gains were
realized on loan sales of $15,476 in 1994.
Other noninterest income rose 40.3% or $784 in 1996 over 1995, with fees
from trust services, mutual funds and annuities increasing 44.2% or $385. Newer
fee based businesses, credit cards and debit cards (new in 1996), generated
another $118 in additional income during 1996, compared to 1995, and other fee
income increased 23.8% or $143. Among nonrecurring items, sales of other real
estate owned were responsible for $147 of the overall rise in other noninterest
income, while asset dispositions during 1996 versus 1995 resulted in net losses
of $47. Other noninterest income increased 11.1% or $194 in 1995 over 1994,
attributable in large part to fees for trust services, which rose 20.8% or $131,
and to gains on sales of student loans, which generated $131 in additional
income.
NONINTEREST EXPENSES
Noninterest expenses increased 13.0% or $2,920 in 1996 over 1995 and 4.5% or
$962 in 1995 over 1994. However, nonrecurring expenses significantly affected
these changes, reducing the size of the core increase in noninterest expenses by
$750 in 1996, compared to 1995, and by $342 in 1995, compared to 1994. Items of
nonrecurring expenses included an industry-wide FDIC insurance premium reduction
enacted in 1995, which effectively reduced noninterest expenses by $814 in 1996
and $692 in 1995, and merger related costs associated with the acquisition of
Annapolis Bancshares, Inc., which increased noninterest expenses in 1996 by
$724, along with costs of conversion to a new data processing center in 1995 and
early retirement benefits extended to certain long-term employees in 1995 and
1994. Excluding nonrecurring items, increases in core noninterest expenses
amounted to 17.5% or $3,670 in 1996 compared with an increase of 6.6% or $1,304
for 1995.
Salaries and employee benefits increased 13.5% or $1,721 in 1996 and 6.4%
or $767 in 1995. Excluding nonrecurring items, an increase of 14.8% or $1,842
was realized in 1996 compared with an increase of 6.6% or $766 for 1995. The
increase for 1996 was, for the most part, due to growth in staff, including
staffing for two new branches, and an expanded incentive program called
"Stakeholder" which relates compensation throughout the business to the
Company's performance as measured against key performance indicator goals.
Quarterly "Stakeholder" payouts amounted to $479 in 1996. The increase in salary
and benefit costs for 1995 was due significantly to merit increases.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
The Company's net income, as measured on a per employee basis, continue to
grow, which is favorable. The ratio of net income per average full-time-
equivalent employee was $33 for 1996, $31 for 1995 and $29 for 1994. Average
full-time equivalent employees increased in 1996 by 8.8% to 346, compared to 318
for 1995 and 310 for 1994. The increase in average full-time equivalent
employees is largely a reflection of the Company's expansion over the period.
All other noninterest expenses increased 12.4% or $1,199 in 1996 and
increased 2.1% or $195 in 1995. Excluding nonrecurring expenses, an increase of
21.4% or $1,828 was realized in 1996 compared with an increase of 6.7% or $538
for 1995. The increase for 1996 included a 95.7% or $560 rise in marketing
expenses due to intensified marketing associated with entry into new markets,
40.9% or $322 higher data services costs, reflecting growth and conversion to a
new provider with expanded capabilities in late 1995, a 58.1% or $291 increase
in building and grounds maintenance attributable to the merger, new branches and
maintenance of existing facilities, and a 100.0% or $181 rise in attorneys'
fees, in large part associated with merger activity, partially offset by a $370
increase in rental income which is netted against rental expenses. The increase
for 1995 included increases in equipment expenses, primarily depreciation
charges and software expenses, and in marketing expense, supply expenses, and
data services costs.
Operating Expense Performance
Management believes that the net overhead ratio (lower ratios indicate improved
productivity), which expresses the level of net operating expenses (noninterest
expenses less noninterest income) as a percentage of tax-equivalent net interest
income, is a good measure of overall operating expense performance and cost
management. During 1996, the Company's net overhead ratio was 49.4%, compared to
ratios of 52.0% achieved in 1995 and 54.0% in 1994. Ratios close to 50% are
considered desirable.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $5,789 in 1996, compared with $4,653 in 1995 and
$3,694 in 1994. The Company's effective tax rate for 1996 was 33.5%, compared
with 31.8% in 1995 and 29.3% in 1994. The increase in effective tax rate has
been due primarily to a decline in the nontaxable component of income before
taxes each year. During 1996, the Company's taxable income surpassed $10,000,
triggering an increase in the applicable corporate tax rate from 34% to 35%.
This increased rate resulted in additional income tax expense of $24 for 1996 on
taxable earnings in excess of $10,000.
BALANCE SHEET ANALYSIS
During 1996, the Company's size, as measured by total assets, grew by $102,392
or 11.7%, to $978,595 at December 31, 1996 from $876,203 at December 31, 1995.
Earning assets at year end increased $97,977 or 12.0%, to $917,096 from
$819,119. The rise in loans, a core business for commercial banks, amounted to
$30,626 or 6.2% compared to a $71,020 or 24.4% increase in securities. On an
average basis, however, total loans increased $26,887 or 5.6% versus a $16,560
or 5.5% increase in average total securities. The types and characteristics of
the growth in loans is discussed in detail below.
LOANS
Real estate mortgage loans rose 3.4% to $376,205 in 1996. Included in this
category are commercial mortgages, which increased 12.5% during 1996 and
totalled $178,639 at December 31, 1996. These mortgages mainly consist of owner
occupied properties where an established banking relationship exists. Home
equity lines and home equity loans, types of real estate mortgages that permit
homeowning consumers to leverage their equity and possibly receive an income tax
deduction on the interest, increased 7.7% during 1996 to $65,420 at year end.
One to four family residential loans, down 11.5% in 1996, represented $116,444
of the real estate mortgage portfolio at December 31, 1996. This represents an
increased emphasis by the Company on mortgage banking, where most residential
mortgage loan production is sold in the secondary market rather than being
maintained as a loan asset. In this type of business, the bank serves as the
customer service and delivery channel for investors, while continuing to meet
the needs of area residents for funds to finance their homes. Other real estate
mortgages, including primarily residential lot loans, collectively rose 23.1% to
$15,702.
Real estate construction loans increased 14.2% to $47,654 from 1995,
attributable to a substantial rise in residential construction activity. The
Company conducts its commercial construction lending in the markets it knows and
understands, works selectively with local, top-quality builders and developers,
and requires substantial equity from its borrowers.
The consumer loan portfolio rose 7.1% to $30,813 at December 31, 1996. In
recent years, much of consumer lending has shifted from traditional installment
credits into home equity lines and credit cards. During 1996, the Company
achieved a 6.6% increase in home equity lines, which are included above in real
estate mortgage loans. Credit cards, introduced in 1995, are showing growth,
more than doubling in 1996 to an outstanding balance of $1,321 at year end.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Consumer lending continues to be important to the full service community banking
business conducted by the Company despite a smaller balance sheet presence in
recent years.
Commercial loans advanced the most among the major categories on a
percentage basis, up 18.6% to $68,467 during 1996. For the most part, these are
loans to a diverse cross-section of small to mid-size local businesses, many of
whom are existing customers of the Company. These types of banking relationships
are a natural fit for the Company, which is experienced in serving and lending
to this market segment and has knowledge of the marketplace through its
community roots and involvement. The Company continues to place special emphasis
on this part of its loan portfolio in its business planning.
Analysis of Loans
The following table presents the trends in the composition of the loan portfolio
over the previous five years.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate -- mortgage(1) $376,205 $363,927 $345,547 $286,542 $252,706
Real estate -- construction(2) 47,654 41,725 31,853 21,770 18,592
Consumer 30,813 28,762 28,892 19,352 17,906
Commercial 68,467 57,718 50,224 46,405 23,477
Tax exempt 27 408 536 671 1,243
-------- -------- -------- -------- --------
TOTAL LOANS $523,166 $492,540 $457,052 $374,740 $313,924
======== ======== ======== ======== ========
</TABLE>
(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.
Securities
The investment portfolio, in the aggregate, increased 24.4% or $71,020 during
1996 to $361,806 at December 31, 1996 from $290,786 at December 31, 1995.
Investments are managed to generate interest revenue, provide liquidity and
achieve asset/liability management goals. During 1996, funds provided by the
increase in deposits exceeded the increase in the loan portfolio, and the excess
was invested primarily in securities. A significant portion of the rise in
investments occurred toward the end of 1996, when funds were borrowed from the
Federal Home Loan Bank of Atlanta and invested in securities at a favorable
interest rate spread in order to leverage the balance sheet and enhance the
return on shareholders' equity (see discussion on page 25 in "Deposits and
Short-term Borrowings" section). On an average basis, aggregate investments rose
5.5% during 1996, compared to 1995.
Analysis of Securities
The composition of Securities at December 31 for each of the latest three fiscal
years was:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------
AVAILABLE-FOR-SALE(1)
<S> <C> <C> <C>
U.S. Treasury $ 26,940 $ 15,991 $ 23,272
U.S. Agency 145,275 70,106 23,579
State and municipal 26,628 35,330 39,836
Corporate debt obligations 1,483 2,458 3,260
Mortgage-backed securities(2) 31,876 40,282 37,307
Marketable equity securities 2,221 1,786 518
-------- -------- --------
Total 234,423 165,953 127,772
HELD-TO-MATURITY AND OTHER EQUITY
U.S. Treasury 0 500 1,499
U.S. Agency 42,932 40,185 79,816
State and municipal 37,152 30,522 29,717
Mortgage-backed securities(2) 42,188 48,579 65,902
Certificates of deposit 0 100 0
Other equity securities 5,111 4,947 4,916
-------- -------- --------
Total 127,383 124,833 181,850
-------- -------- --------
TOTAL SECURITIES(3) $361,806 $290,786 $309,622
======== ======== ========
</TABLE>
(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, except for the U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1996, 1995 or 1994.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Maturities and weighted average yields for investments available-for-sale
and held-to-maturity at December 31, 1996, 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
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS
AVAILABLE-FOR-SALE(1)
U.S. Treasury $12,996 5.61% $ 13,957 5.63% $ 0 0% $ 0 0%
U.S. Agency 8,998 5.55 131,520 6.16 4,999 6.78 0 0
State and municipal(2) 4,374 8.18 19,639 7.68 2,264 6.61 0 0
Corporate debt obligations 0 0 500 5.76 1,000 5.65 0 0
Mortgage-backed
securities 3,061 6.18 16,553 5.93 9,734 6.06 2,847 6.74
------- -------- ------- -------
Total debt securities $29,429 6.03% $182,169 6.26% $17,997 6.31% $ 2,847 6.74%
======= ======== ======= =======
Marketable equity securities
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE
INVESTMENTS HELD-
TO-MATURITY
U.S. Agency $ 0 0% $20,090 5.86% $ 9,320 7.04% $13,522 7.93%
State and municipal(2) 0 0 18,113 7.51 18,439 7.02 600 7.79
Mortgage-backed
securities 12,926 6.32 29,262 6.89 0 0 0 0
------- -------- ------- ------
TOTAL INVESTMENTS
HELD-TO-MATURITY $12,926 6.32% $ 67,465 6.75% $27,759 7.03% $14,122 7.92%
======= ======== ======= =======
<CAPTION>
- ----------------------------------------------------
TOTAL YIELD
- ----------------------------------------------------
<S> <C> <C>
INVESTMENTS
AVAILABLE-FOR-SALE(1)
U.S. Treasury $ 26,953 5.63%
U.S. Agency 145,517 6.14
State and municipal(2) 26,277 7.68
Corporate debt obligations 1,500 5.69
Mortgage-backed
securities 32,195 6.07
--------
Total debt securities 232,442 6.24%
Marketable equity securities 470
--------
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE $232,912
========
INVESTMENTS HELD-
TO-MATURITY
U.S. Agency $ 42,932 6.76%
State and municipal(2) 37,152 7.28%
Mortgage-backed
securities 42,188 6.76%
--------
TOTAL INVESTMENTS
HELD-TO-MATURITY $122,272 6.92%
========
</TABLE>
(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 using the maximum applicable federal income tax rate.
Other Earning Assets
Residential mortgage loans held for sale increased 69.0% or $3,260 in 1996.
Originations and sales of these loans, and the resulting gains on sales,
increased substantially as presented on the Consolidated Statements of Cash
Flows, reflecting the change to a mortgage banking philosophy of residential
mortgage lending.
The aggregate of federal funds sold and interest-bearing deposits with
banks decreased 22.3% or $6,929 in 1996.
Deposits and Short-term Borrowings
Total deposits increased 8.4% or $62,749 during 1996 to $806,341 at December 31,
1996 from $743,592 at December 31, 1995. Noninterest-bearing deposits increased
22.0% or $21,077, attributable primarily to growth in commercial checking
balances and the introduction of a "free" checking account product around mid-
year. Interest-bearing deposits increased 6.4% or $41,672 in 1996, with the
majority of the rise occurring in time deposits for amounts less than $100,000.
Short-term borrowings increased 95.7% or $33,323 in 1996 to $68,127 at
December 31, 1996 from $34,804 at December 31, 1995. Borrowings from the Federal
Home Loan Bank of Atlanta increased $17,200, reflecting funds borrowed late in
the year and invested in securities in order to leverage the balance sheet and
enhance the shareholders' return on investment. Repurchase agreements, the other
major category of short-term borrowings, increased 44.6% or $13,639, due
primarily to an increase in sweep accounts associated with cash management
services to commercial customers.
CAPITAL MANAGEMENT
During 1996, stockholders' equity increased 11.1% or $9,640 to $96,581 at
December 31, 1996 from $86,941 at December 31, 1995. The increase for 1996 was,
for the most part, due to internal capital generation, which represents net
earnings less dividends as a percent of average equity. The resulting internal
capital generation rate was 8.7% for 1996, compared with 8.8% for 1995 and 9.0%
for 1994. The amount of the increase in stockholders' equity attributable to
internal capital generation was $7,776 in 1996, $7,096 in 1995 and $6,528 in
1994. External capital formation from dividend reinvestment, the exercise of
warrants, and employee stock purchases under the Company's stock option and
profit sharing plans totaled $1,741 in 1996, $2,379 in 1995 and $1,063 in 1994.
The ratio of average equity to average assets amounted to 9.90% for 1996,
compared with 9.57% for 1995 and 9.28% for 1994.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Regulatory Capital Requirements
The Company achieved a total risk-based capital ratio of 17.56% at December 31,
1996, compared to 17.67% at December 31, 1995, a Tier 1 risk-based capital ratio
of 16.44% compared to 16.42%, and a capital leverage ratio of 10.38% compared to
10.09%. A discussion of these quantitative measures of capitalization and the
regulatory capital requirements which pertain to them, along with a presentation
of the Company's and the Bank's capital and ratios compared to the various
regulatory standards, appears in Note 22 of the Notes to the Consolidated
Financial Statements. At December 31, 1996, the Company and its banking
subsidiary exceeded all capital requirements and were considered to be "well-
capitalized" under regulatory definitions.
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.
CREDIT RISK MANAGEMENT
The allowance for credit losses is a valuation reserve established by management
in an amount it deems adequate to absorb losses on loans which may become
uncollectible. The adequacy of the allowance for credit losses is determined
through careful and continuous review and evaluation of the loan portfolio and
involves the balancing of a number of factors to establish a prudent level.
Management records provisions for credit losses in order to increase the
allowance to the level it deems adequate. Loan charge-offs decrease the
allowance. Management believes that the allowance for credit losses is adequate.
The level of nonperforming loans increased to $4,655 (.89% of year-end
loans) at December 31, 1996 from $898 (.18% of year-end loans) at December 31,
1995, due to increases in nonaccrual loans and loans which are past due 90 days
or more. The rise in nonaccruals involved loans to a single borrower which
management believes will be collected in full during 1997. The increase in loans
reported as 90 days or more past due was attributable primarily to the inclusion
of credit line expirations at December 31, 1996, which were not included in
prior years, and to Annapolis Bancshares credits, which became subject to the
Company's more stringent loan review and classification practices subsequent to
the merger. It is anticipated that many of the expired lines of credit, which
are still current as to principal and interest payments, will be renewed or
otherwise return to performing status. The Company also had an increase in loans
90 or more days past due associated with growth and diversification of the loan
portfolio. The allowance for credit losses represented 137% of nonperforming
loans at December 31, 1996, compared to coverage of 735% a year earlier, with
the change attributable to an increase in the level of nonperforming loans.
Significant variation in the coverage ratio may occur from period to period
because the amount of nonperforming loans depends largely on the condition of a
small number of individual loans and borrowers relative to the total loan
portfolio. There were no real estate owned properties at December 31, 1996 as
compared to a modest $47 at December 31, 1995. The balance of impaired loans was
$1,280 at December 31, 1996 and the reserve on these loans was $127. There were
no impaired loans at December 31, 1995. Although $590 of loans were classified
as being in nonaccrual status at December 31, 1995, the insignificant delay of
projected payments caused the loans not to be classified as impaired.
The major concentrations of credit risk for the Company arise by customer
location, because it operates only in three counties in the State of Maryland,
and by loan portfolio composition. Real estate secured credits represented 81.0%
of total loans at December 31, 1996, and 82.4% at December 31, 1995. In the
past, the Company has experienced low loss levels, especially in real estate
secured loans, through various economic cycles and conditions. The risk of the
Company's real estate loan concentration is mitigated by the nature of real
estate collateral, the Bank's substantial experience in most of its markets and
its intention to maintain risk averse lending practices.
The provision for credit losses charged against earnings was $308 in 1996
compared with $180 in 1995, an increase of 71.1%. The provision was $211 in
1994. In each year, net charge-offs exceeded the provision for credit losses.
The ratio of net charge-offs to average loans was .10% in 1996, compared to .05%
in 1995 and .06% in 1994. The allowance for credit losses was decreased to
$6,391 (1.22% of year-end loans) at December 31, 1996 from $6,597 (1.34% of
year-end loans) at December 31, 1995. The allowance has been maintained at
levels believed consistent with the increased risk potential inherent in the
increase in the amount and percentage to total loans attributable to commercial
and commercial real estate loans (see the discussion of loan growth earlier in
this report), which are viewed as entailing greater risk than certain other
categories of loans, and the associated increase in large loans, as balanced
against other factors, as described above. For additional discussion of the
allowance for credit losses, see Note 1 of the Notes to the Consolidated
Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
Analysis of Credit Risk
Activity in the allowance for credit losses for the preceding five years ended December 31 is shown below:
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $6,597 $6,663 $6,681 $4,213 $2,957
Provision for credit losses 308 180 211 1,057 1,880
Allowance from merger transaction 0 0 0 1,158 0
Loan charge-offs:
Real estate - mortgage (3) (33) (135) 0 (506)
Real estate - construction 0 0 0 0 0
Consumer (143) (209) (32) (104) (243)
Commercial (469) (507) (342) (29) (76)
------ ------ ------ ------ ------
Total charge-offs (615) (749) (509) (133) (825)
Loan recoveries:
Real estate - mortgage 0 153 16 54 0
Real estate - construction 0 0 0 0 5
Consumer 37 30 40 79 61
Commercial 64 320 224 253 135
------ ------ ------ ------ ------
Total recoveries 101 503 280 386 201
------ ------ ------ ------ ------
Net recoveries (charge-offs) (514) (246) (229) 253 (624)
------ ------ ------ ------ ------
BALANCE, DECEMBER 31 $6,391 $6,597 $6,663 $6,681 $4,213
====== ====== ====== ====== ======
Net charge-offs to average loans 0.10% 0.05% 0.06% * 0.19%
Allowance to total loans 1.22% 1.34% 1.46% 1.78% 1.34%
</TABLE>
* The Company had net recoveries in 1993.
The following table presents nonperforming assets for a five year period:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans/(1)/ $1,291 $ 590 $ 866 $2,969 $ 508
Loans 90 days past due 3,337 272 832 517 953
Restructured loans 27 36 44 394 0
------ ------ ------ ------ ------
Total nonperforming loans/(2)//(3)/ 4,655 898 1,742 3,880 1,461
Other real estate owned, net 0 47 277 1,387 999
------ ------ ------ ------ ------
TOTAL NONPERFORMING ASSETS $4,655 $ 734 $2,019 $5,267 $2,460
====== ====== ====== ====== ======
NONPERFORMING ASSETS TO TOTAL ASSETS 0.48% 0.11% 0.24% 0.67% 0.36%
</TABLE>
/(1)/ Gross interest income that would have been recorded in 1996 if nonaccrual
loans had been current and in accordance with their original terms was
$192, while interest actually recorded on such loans was $89.
/(2)/ Those performing loans considered potential problem loans, as defined and
identified by management, amounted to $3,440 at December 31, 1996.
Although these are loans where known information about the borrowers'
possible credit problems causes management to have doubts as to the
borrowers' ability to comply with the present loan repayment terms, most
are well collateralized and are not believed to present significant risk
of loss. Loans classified for regulatory purposes not included in
nonperforming loans consist only of "other loans especially mentioned" and
do not in management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact further operating
results, liquidity or capital resources or represent material credits
where known information about the borrowers' possible credit problems
causes management to have doubts as to the borrowers' ability to comply
with the loan repayment terms.
/(3)/ Installment loans past due by 90 days or more are included in the totals
for the "loans 90 days past due" line in the table above and were
immaterial at December 31, 1996 and 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity
The Company's liquidity position, considering both internal and external sources
available, exceeded anticipated short- and long-term funding needs at December
31, 1996. Core deposits, considered to be stable funds sources and defined to
include all deposits except time deposits of $100,000 or more, equaled 81.7% of
total earning assets at December 31, 1996. In addition, substantial amortizing
residential mortgage loans, maturities, calls and paydowns of securities,
deposit growth and earnings contribute a flow of funds available to meet
liquidity requirements. In assessing liquidity, management considers operating
requirements, the seasonality of deposit flows, investment, loan and deposit
maturities, expected fundings of loans and deposit withdrawals, and the market
values of available-for-sale investments, so that sufficient funds are available
on short notice to meet obligations as they arise and to ensure that the Company
is able to pursue new business opportunities.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Internally generated funds on hand at December 31, 1996, consisting of cash
and cash equivalents, interest-bearing deposits with banks, residential mortgage
loans held for sale, maturities of investments held-to-maturity due within one
year at fair value and investments available-for-sale, totalled $312,390 or
31.9% of total assets.
The primary external source of liquidity available is a line of credit for
$145,000 with the Federal Home Loan Bank of Atlanta of which $20,200 was
outstanding at December 31, 1996. Core deposits increased by $56,862 during
1996, while loans grew by $30,626, so that borrowed funds were not required to
support loan growth. As discussed previously in the section entitled "Deposits
and Short-term Borrowings", Federal Home Loan Bank advances increased in 1996
due to management's desire to leverage the balance sheet at favorable interest
spreads to enhance return on stockholder's equity.
The Company's time deposits of $100,000 or more represented 7.1% of total
deposits at December 31, 1996 and are shown by maturity in the table below.
<TABLE>
<CAPTION>
Months to Maturity
------------------------------------------------
3 or Over 3 Over 6 Over
less to 6 to 12 12 TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time deposits--$100,000 or more $23,373 $9,735 $10,399 $13,667 $57,174
======= ====== ======= ======= =======
</TABLE>
Interest Rate Sensitivity
The Bank's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 1996 is presented in
the following table. As indicated in the note to the table, the data is based in
part on assumptions that are regularly reviewed for propriety. The accompanying
analysis indicates a moderate level of interest rate risk based on the Bank's
having about 51% of its rate sensitive assets versus about 49% of its rate
sensitive liabilities subject to maturity or repricing within a one year period
from December 31, 1996 (termed GAP analysis). By managing to approximately match
the dollar amount of assets and liabilities whose interest rates are subject to
change, the Bank seeks to control the risk that a net interest margin decline
would have a pronounced adverse impact on its revenues (net interest income).
While the Bank's senior management, through its Asset Liability Management
Committee (ALCO), has a preference for maintaining a moderate level of interest
rate risk as measured by the repricing GAP, the Company's interest rate risk
policies are guided by results of simulation analysis which takes into account
more factors than does simple GAP analysis. The ALCO analyzes balance sheet,
income statement, and margin trends monthly. A detailed quarterly interest rate
risk profile is performed for ALCO and is reviewed with the Board of Directors.
The Bank's Board of Directors has established a comprehensive interest rate
risk management policy, which is administered by ALCO. The policy establishes
limits of risk, which are quantitative measures of percentage change in net
interest income and equity capital resulting from a hypothetical plus or minus
200 basis point change in U.S. Treasury interest rates for maturities from one
month to thirty years. By employing simulation analysis through use of a
computer model, the Bank intends to effectively manage the potential adverse
impacts that changing interest rates can have on the institution's short term
earnings, long term value, and liquidity. Measured from December 31, 1996, the
simulation analysis indicates that the Bank's net interest income would decline
by 8.1% over a twelve month period given a decline in interest rates of 200
basis points, against a policy limit of 15%. In terms of equity capital on a
fair value basis, a 200 basis point decline in interest rates, is estimated to
reduce the fair value of capital (as computed) by 18.5% as compared to a policy
limit of 25%. The simulation model captures optionality factors such as call
features and interest rate caps and floors imbedded in investment and loan
portfolio contracts.
In addition to the potential adverse impact that changing interest rates
may have on the Bank's interest margin and operating results, potential adverse
impacts on liquidity can occur as a result of changes in the estimated cash
flows from investment, loan and deposit portfolios. The Bank manages this
inherent risk by maintaining a sizeable portfolio of available for sale
investments as well as a secondary source of liquidity from Federal Home Loan
Bank advances.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
The following schedule sets out the time frames from December 31, 1996 in
which the Bank's rate sensitive assets and liabilities are subject to repricing:
<TABLE>
<CAPTION>
-----------------------------------------------------------
0-90 91-365 Over 1-3 Over 3-5 Over 5
Days Days Years Years Years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Loans $180,441 $ 92,100 $162,500 $ 47,186 $ 40,939
Taxable securities 72,898 78,826 105,662 18,349 15,555
Nontaxable securities 1,980 3,935 17,110 19,395 21,009
Other investments 42,023 0 0 0 0
-------- -------- -------- -------- --------
TOTAL 297,342 174,861 285,272 84,930 77,503
RATE SENSITIVE LIABILITIES:
Noninterest-bearing demand deposits 11,711 3,513 42,159 42,159 17,566
Interest-bearing demand deposits 5,936 17,808 47,487 27,701 0
Regular savings deposits 4,749 14,246 37,989 36,408 1,583
Money market savings deposits 13,974 41,922 111,794 0 0
Time deposits 107,022 146,882 67,733 16,235 28
Short-term borrowings and other rate
sensitive liabilities 55,930 12,002 1,000 0 3,920
-------- -------- -------- -------- --------
TOTAL................................. 199,322 236,373 308,162 122,503 23,097
-------- -------- -------- -------- --------
CUMULATIVE GAP........................ $ 98,020 $ 36,508 $ 13,618 $(23,955) $ 30,451
======== ======== ======== ======== ========
As a percent of total assets 10.02% 3.73% 1.39% (2.45)% 3.11%
CUMULATIVE RATE SENSITIVE ASSETS
TO RATE SENSITIVE LIABILITIES 1.49 1.08 1.02 0.97 1.03
</TABLE>
NOTE: This analysis is based upon a number of significant assumptions including
the following: Loans are repaid/rescheduled by contractual maturity and
repricings. 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.
SELECTED GLOSSARY AND ABBREVIATIONS
Basis Point: One hundredth of one percent. An increase in yield from 7.00% to
7.50% could be expressed as a change of 50 basis points.
Book Value Per Share: Total stockholders' equity divided by the number of shares
of common stock outstanding at year-end.
Capital Leverage Ratio: Year-end core capital (stockholders' equity less
intangibles and the net unrealized gain or loss on investments available-for-
sale) as a percentage of average total assets for the fourth quarter.
The Company: Sandy Spring Bancorp, Sandy Spring National Bank of Maryland and
Sandy Spring Insurance Corporation.
Internal Capital Generation Rate: The percent of return on average equity
multiplied by the percent of earnings retained (net earnings less dividends).
Net Interest Margin: Fully tax-equivalent net interest income as a percentage of
average earning assets.
Net Interest Spread: Fully tax-equivalent yield on earning assets less the
average rate paid on interest-bearing liabilities.
Net Overhead Ratio: A measure of cost management and productivity. Net overhead
(noninterest expenses less non-interest income) divided by fully tax-
equivalent net interest income.
Nonperforming Assets: The sum of loans which are nonaccrual, 90 days past due or
restructured and other real estate owned.
Return on Average Assets: Net income as a percentage of average total assets.
Return on Average Equity: Net income as a percentage of average total
stockholders' equity.
Total Risk-based Capital Ratio: Qualifying regulatory capital (stockholders'
equity less intangibles and the net unrealized gain or loss on investments
available-for-sale, plus a portion of the allowance for credit losses) as a
percentage of risk-adjusted total assets.
Tax-Equivalent Net Interest Income: Interest income, plus the addition of tax
savings from nontaxable loans and investments, less interest expense.
Tier 1 Risk-based Capital Ratio: Regulatory core capital (stockholders' equity
less intangibles and the net unrealized gain or loss on investments available-
for-sale) as a percentage of risk-adjusted total assets.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 30 through 47 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.
25
<PAGE>
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" on pages 3 through 5 of the Proxy Statement, and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" on pages
15 and 16 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 the compensation of Bancorp's directors and executive
officers is included under the captions "Executive Compensation," "Report of the
Human Resources Committee," and "Stock Performance Graph" on pages 6 through 14
of the Proxy Statement, and is hereby incorporated by reference.
26
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Bancorp's common stock by
certain beneficial owners and directors and executive officers 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 15 of the Proxy Statement and is hereby incorporated by
reference.
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 Shareholders for the year ended December 31, 1996, 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:
Consolidated Balance Sheets at December 31, 1995 and 1996
Consolidated Statements of Income for the years ended December 31,
1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996
Notes to the Consolidated Financial Statements
Report of Independent Auditors
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated
financial statements or related notes.
27
<PAGE>
The following exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3(a) Articles of Incorporation of Sandy Spring Exhibit 3.1 to Form 10-Q for the Quarter
Bancorp, Inc., as Amended Ended June 30, 1996, SEC File No. 0-
19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 to Form 8-K dated May 13,
1992, SEC File No. 0-19065.
10(a)* Sandy Spring Bancorp, Inc., Cash and Deferred Exhibit 10(b) to Form 10-K for the year
Profit Sharing Plan and Trust, as Amended ended December 31, 1989, SEC File No. 0-
19065, Exhibits 4.2, 4.3, 4.4, and 4.5 to
Form S-8 and Post Effective Amendment
No. 2 to Form S-8 Registration Statements
No. 33-29316 and 33-48453, filed with the
Securities and Exchange Commission on
December 16, 1996.
10(b)* Sandy Spring Bancorp, Inc. 1982 Incentive Exhibit 10(c) to Form 10-Q for the quarter
Stock Option Plan ended June 30, 1990, SEC File No. 0-
19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Option Exhibit 10(i) to Form 10-K for the year
Plan ended December 31, 1991, SEC File No. 0-
19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Exhibit 4 to Registration Statement on
Restated Stock Option Plan for Employees of Form S-8, Registration Statement No. 333-
Annapolis Bancshares, Inc. 11-049.
10(e)* Sandy Spring National Bank of Maryland Exhibit 10(g) to Form 10-K for the year
Executive Health Insurance Plan ended December 31, 1991, SEC File No. 0-
19065.
10(f)* Sandy Spring National Bank of Maryland Exhibit 10(k) to Form 10-K for the year
Executive Health Expense Reimbursement Plan ended December 31, 1991, SEC File No. 0-
19065.
10(g)* Employment Agreement with Hunter R. Hollar, Exhibit 10(e) to Form 10-K for the year
as Amended ended December 31, 1990, SEC File No. 0-
19065, and Exhibit 10(f) to Form 10-K for
the year ended December 31, 1991, SEC
File No. 0-19065.
10(h)* Forms of Supplemental Executive Retirement Exhibit 10(g) to Form 10-K for the year
Agreements with Willard H. Derrick, Hunter R. ended December 31, 1991, SEC File No. 0-
Hollar, Thomas O. Keech and A. Hardy 19065.
Pickett, with 1992 Amendments
10(i)* Forms of Executive Severance Agreements with Exhibit 10(h) to Form 10-K for the year
Willard H. Derrick, Thomas O. Keech and A. ended December 31, 1991, SEC File No. 0-
Hardy Pickett, with 1992 Amendments 19065.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
13 Specified Portions of the 1996 Annual Report
to Shareholders
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
* Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
14(c) of this Report.
(b) No Current Reports on Form 8-K were filed during the three month period
ended December 31, 1996.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) None.
29
<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 20, 1997.
Principal Executive Officer and Director: Principal Financial and
Accounting Officer:
/s/ Hunter R. Hollar /s/ James H. Langmead
- -------------------- ---------------------
Hunter R. Hollar James H. Langmead
President and Chief Executive Officer Vice President and Treasurer
A majority of the directors of Bancorp executed a power of attorney
appointing Marjorie S. Holsinger 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, 1996. This report has been signed below by such
attorney-in-fact as of March 20, 1997.
By: /s/ Marjorie S. Holsinger
-------------------------
Marjorie S. Holsinger
Attorney-in-Fact for Majority of the
Directors of Bancorp
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
3(a) Articles of Incorporation of Sandy Spring Exhibit 3.1 to Form 10-Q for the Quarter
Bancorp, Inc., as Amended Ended June 30, 1996, SEC File No. 0-
19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 to Form 8-K dated May 13,
1992, SEC File No. 0-19065.
10(a)* Sandy Spring Bancorp, Inc., Cash and Deferred Exhibit 10(b) to Form 10-K for the year
Profit Sharing Plan and Trust, as Amended ended December 31, 1989, SEC File No. 0-
19065, Exhibits 4.2, 4.3, 4.4, and 4.5 to
Form S-8 and Post Effective Amendment
No. 2 to Form S-8 Registration Statements
No. 33-29316 and 33-48453, filed with the
Securities and Exchange Commission on
December 16, 1996.
10(b)* Sandy Spring Bancorp, Inc. 1982 Incentive Exhibit 10(c) to Form 10-Q for the quarter
Stock Option Plan ended June 30, 1990, SEC File No. 0-
19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Option Exhibit 10(i) to Form 10-K for the year
Plan ended December 31, 1991, SEC File No. 0-
19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Exhibit 4 to Registration Statement on
Restated Stock Option Plan for Employees of Form S-8, Registration Statement No. 333-
Annapolis Bancshares, Inc. 11-049.
10(e)* Sandy Spring National Bank of Maryland Exhibit 10(g) to Form 10-K for the year
Executive Health Insurance Plan ended December 31, 1991, SEC File No. 0-
19065.
10(f)* Sandy Spring National Bank of Maryland Exhibit 10(k) to Form 10-K for the year
Executive Health Expense Reimbursement Plan ended December 31, 1991, SEC File No. 0-
19065.
10(g)* Employment Agreement with Hunter R. Hollar, Exhibit 10(e) to Form 10-K for the year
as Amended ended December 31, 1990, SEC File No. 0-
19065, and Exhibit 10(f) to Form 10-K for
the year ended December 31, 1991, SEC
File No. 0-19065.
10(h)* Forms of Supplemental Executive Retirement Exhibit 10(g) to Form 10-K for the year
Agreements with Willard H. Derrick, Hunter R. ended December 31, 1991, SEC File No. 0-
Hollar, Thomas O. Keech and A. Hardy 19065.
Pickett, with 1992 Amendments
10(i)* Forms of Executive Severance Agreements with Exhibit 10(h) to Form 10-K for the year
Willard H. Derrick, Thomas O. Keech and A. ended December 31, 1991, SEC File No. 0-
Hardy Pickett, with 1992 Amendments 19065.
13 Specified Portions of the 1996 Annual Report
to Shareholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
* Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
14(c) of this Report.
<PAGE>
Exhibit 13
Sandy Spring Bancorp
1996 Annual Report
[PHOTO APPEARS HERE]
<PAGE>
CONTENTS
2 Letter to Shareholders
6 Our Customers
16 Board of Directors
17 Financial Section
FINANCIAL HIGHLIGHTS*
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 % Change
- -------------------------------------------------------------------------------------------------------------------------
PROFITABILITY FOR THE YEAR:
<S> <C> <C> <C>
Net Interest Income $ 36,388 $ 32,773 11.0%
Income before Taxes 17,283 14,647 18.0
Net Income 11,494 9,994 15.0
Return on Average Assets 1.27% 1.18%
Return on Average Equity 12.81% 12.37%
Net Interest Margin 4.45% 4.32%
PER SHARE DATA:
Net Income $ 2.36 $ 2.09 12.9%
Dividends Declared 0.78 0.64 21.9
Book Value 19.70 18.04 9.2
AT YEAR END:
Assets $978,595 $876,203 11.7%
Deposits 806,341 743,592 8.4
Loans 523,166 492,540 6.2
Securities 361,806 290,786 24.4
Stockholders' Equity 96,581 86,941 11.1
CAPITAL AND CREDIT QUALITY RATIOS:
Average Equity to Average Assets 9.90% 9.57%
Total Risk-based Capital Ratio 17.56% 17.67%
Allowance for Credit Losses to Loans 1.22% 1.34%
Nonperforming Assets to Total Assets 0.48% 0.11%
Net Charge-Offs to Average Loans 0.10% 0.05%
</TABLE>
* Adjusted to give retroactive effect to a 2-for-1 stock split declared on
March 29, 1995 and, except with respect to dividends declared per share, the
acquisition of Annapolis Bancshares, Inc., completed on August 29, 1996.
Forward-looking Statements
The following letter to shareholders and other portions of this Annual Report
contain forward-looking statements, including statements of goals, intentions,
and expectations, regarding or based upon general economic conditions, interest
rates, developments in national and local markets, and other matters, and which,
by their nature, are subject to significant uncertainties. Because of these
uncertainties and the assumptions on which statements in this report are based,
the actual future results may differ materially from those indicated in this
report.
<PAGE>
Sandy Spring Bancorp
SANDY SPRING BANCORP
Sandy Spring Bancorp is the holding company
for Sandy Spring National Bank of Maryland, the
oldest banking business native to Montgomery
County. Sandy Spring National Bank, independent
and community-oriented, traces its origin to 1868
and conducts a full-service commercial banking
business through nineteen community offices
located in Montgomery, Howard and Anne Arundel
Counties in Maryland.
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders It is a pleasure to report to you Sandy Spring Bancorp
results for 1996 and the vision for this successful community-oriented bank
holding company. Our success has been due to consistent results, and 1996
continued our record of earnings growth and superior customer service.
After our first bank acquisition in 1993, 1996 saw our second acquisition:
Annapolis Bankshares, Inc., the holding company for Bank of Annapolis. This
acquisition was completed on August 29, 1996 and represents a unique opportunity
for us to fill a locally-owned, community bank niche in this vibrant market
served by many out-of-state organizations. A healthy institution with a
significant deposit and loan base, Bank of Annapolis was located only about 30
miles from our Clarksville office. All financial results in this Annual Report,
unless otherwise noted, have been restated as if Bank of Annapolis had been part
of our organization in all the prior periods mentioned.
Financial Highlights
Net income grew from $10.0 million in 1995 to $11.5 million in 1996, a 15.0%
increase. Assets grew 11.7% (from $876.2 million to $978.6 million). Loans grew
6.2% (from $492.5 million to $523.2 million), while deposits grew 8.4% (from
$743.6 million to $806.3 million). These figures demonstrate our desire to grow
while putting significant emphasis on profitability gains as a way to enhance
shareholder value.
The major contributors to our earnings increase were an improved net
interest margin and increases in noninterest income. After three straight years
of modest changes in the net interest margin, the figure rose to 4.45% in 1996
from 4.32% in 1995. This improvement was due largely to our ability to grow
noninterest-bearing deposits as well as interest-bearing deposits at favorable
interest spreads, which permitted us to earn more than in previous years.
Noninterest income grew in virtually all categories including service charges,
fees on sales of annuities and mutual funds, trust fees, and gains on sales of
residential mortgage loans and student loans. We believe our ability to grow
noninterest income is a reflection of our ability to meet customer needs and
provide excellent customer service at fair prices. While our net interest margin
grew in 1996, we believe that over the long term, competitive pressure will
compress margins and increase the importance of fee-based income.
Our return on assets grew to 1.27% in 1996 from 1.18% in 1995, putting us
approximately in the top one-third of our peers (as to total asset size)
nationwide in this important measure of profitability. Return on equity grew
from 12.37% in 1995 to 12.81% in 1996, reflecting better utilization of our
total capital.
Earnings per share grew 12.9% (from $2.09 to $2.36) and dividends increased
21.9% (from $0.64 per share to $0.78). While the dividends increased
significantly, our stock price declined from $35.00 per share at year-end 1995
to $32.00 at year-end 1996. Considering dividends and the price decrease, the
total return for the year was -6.3%. However, the similar calculation for the
prior year gave a positive return of 45.5%. At year-end 1995 and into 1996, our
stock was becoming widely traded and stock brokers took a more active interest,
driving our price to record highs as a percentage of book value and earnings per
share. By year end 1996, the euphoria had subsided and our stock began to trade
closer to historic book and earnings multiples for Sandy Spring Bancorp, which
are also similar to multiples for other financial institutions. Our goal is to
continue to manage your company such that the fundamentals of earnings, loan and
deposit growth, asset quality, noninterest income growth, and expense control
are among the best in the industry.
The Year in Review
Due to the increased interest in Sandy Spring Bancorp in 1996, we decided to
list our stock on the National Association of Securities Dealers (NASDAQ)
National Market in April. This listing permits a more orderly market for those
interested in buying or selling Sandy Spring Bancorp stock. Further, being on a
recognized exchange provides better liquidity in our stock.
In March of 1996, we opened a new office on East Gude Drive in Rockville.
This office fits our strategy of better covering the Rockville area. In
December, we acquired another financial institution's branch office, including
deposits of $19 million, on Wisconsin Avenue in Bethesda. This location fits our
intention of better serving the entire I-270/Route 355 corridor in Montgomery
County. Bethesda is a thriving "city" in which we think Sandy Spring style
banking will be welcomed. We will be offering a full range of services there
including business and consumer loans, trust and investment services, and
residential mortgages. Both of these new offices support
2
<PAGE>
our strategy of making ourselves more accessible to potential customers.
Our Asset and Trust Management Department continues to grow. At the end of
1996, we had $166 million in assets under management and we had earned $943
thousand in fees.
One of our goals for 1996 was to significantly increase our noninterest-
bearing checking accounts. These deposits are attractive because they are
noninterest-bearing, but, more importantly, they are the primary means by which
consumers are allied with a primary bank. In June, we launched an aggressive GO
FOR THE GOLD campaign which offered the best checking account for consumers in
our market. As a result, Sandy Spring Bank and our BONUS GOLD account were
featured in a June 30th news story in The Baltimore Sun. In addition to no
service charges until the year 2000, the account provided numerous other
benefits. Partly as a result of this special limited-time offer of BONUS GOLD
CHECKING, our noninterest deposits grew from $96.0 million at year-end 1995 to
$117.1 million by December 31, 1996.
In 1996, we continued to devote more resources to our residential mortgage
lending. This market has become crowded with competitors and we have responded
with many new mortgage products and with very competitive pricing. We continue
to believe that the mortgage loan is a key component of the relationship with a
family. We originated over $95 million in residential mortgage loans in 1996,
almost double the figure for 1995. We want to distinguish ourselves from other
competitors through our commitment to this segment of our business over time and
through superior customer service. The comments we received from customers in
1996 indicate that we are succeeding.
The View Forward
One aspect of our view of the future doesn't change; we continue to believe that
a community bank like Sandy Spring has a bright future. As long as we provide
superior customer service and value to our shareholders through solid financial
results, we will be a survivor on the competitive battlefield of financial
services providers. Real people continue to look for personal service delivered
in a caring way by people they know, like, and trust. Our goal is to provide
such service.
In addition to the personal touch, we believe that we must provide those
products and services which people
[PHOTO APPEARS HERE]
Hunter R. Hollar
President and Chief Executive Officer
Willard H. Derrick
Chairman of the Board
3
<PAGE>
want in a way which is convenient and effective for the customer, not just for
us as bankers. In the first quarter of 1997, we introduced BANKXPRESS, allowing
our customers to bank with us using their personal computer or a screen
telephone. In the not-too-distant future we may even be able to provide "cash"
through the telephone lines by loading a smart card which can be used like cash.
While the percentage of individuals using electronic/computer access is
projected to increase dramatically, we believe that we must constantly search
for the mix of access points which best serves our customers. For this reason,
branches are very much in our future. Our office in Gaithersburg Square is
opening in early April. In addition, we have recently reached an agreement to
occupy a new branch in the Milestone area of Germantown, a fast-growing part of
upper Montgomery County.
In accordance with plans mentioned here last year, we will be offering more
formal financial planning services during 1997. We continue to believe that our
customers and others in our markets are looking for help and advice as they
assess their future financial needs, particularly as these needs require
investment decisions, estate planning, and insurance purchases. We want to
become a trusted advisor for people in all of these areas. We believe such a
direction fits well with our already strong Asset and Trust Management
Department efforts.
We are looking forward in 1997 to occupying the former Coles Furniture
building adjacent to our headquarters in Olney. This will allow us to
consolidate some administrative employees permitting more convenient
communication and planning between departments.
Our advertising and promotion emphasis will be on increasing the "top of
mind awareness" of Sandy Spring Bank. In addition, we want to let non-customers
know that our existing customers are very happy with us. We have all heard it
said that the best advertising is word of mouth and we want to encourage that
method with a campaign: You should hear what our customers say about us. We are
proud of the great relationship we have with our customers and we want to tell
others about it. At the same time, we know there is absolutely no substitute for
continuing to take care of our existing and new customers very well.
We are open to acquisitions of other financial institutions, but only in
cases where we feel that earnings per share of the combined institution will be
enhanced in a reasonably short period of time. As mentioned earlier, we plan to
continue careful additions of new branches as well. Our desire is to concentrate
our expansion efforts in 1) Annapolis and Anne Arundel County; 2) areas of
Montgomery and Howard Counties we do not presently serve; and 3) the area
between our existing markets and our new market in Annapolis/Anne Arundel
County. Our strategy, as always, will be to approach any growth in a way that
enhances profitability and maintains our ability to manage prudently and to
provide high quality service.
In Conclusion
Under our age 70 retirement policy, two Directors, Andrew Adams and Willard
Derrick, will leave the Board as of April 16. Please see additional comments on
page 16. Their wisdom and perspective will be missed by those remaining on the
Board. Further, we were saddened by the passing on July 27, 1996 of our Director
Emeritus John F. Wilson. Mr. Wilson left the board in 1991 after 21 years of
service.
One of the few certainties in our lives and in the business world is
change. Things will be different tomorrow than they are today. We must
constantly adapt to remain strong, healthy, and independent. Technologies will
change. New products and services will wax and wane in popularity. New buildings
will be built and new locations occupied. One constant will remain: the
importance of our people in providing the service level needed for us to be
different. We sincerely appreciate the loyalty and dedication of our employees,
who, we believe, continue to distinguish Sandy Spring National Bank as the best
financial institution in our trade area.
Thank you for your support and interest in Sandy Spring Bancorp.
Respectfully,
/s/ Willard H. Derrick
Willard H. Derrick
Chairman of the Board
/s/ Hunter R. Hollar
Hunter R. Hollar
President and Chief Executive Officer
4
<PAGE>
[PHOTO APPEARS HERE]
You should hear what our
customers say about us...
<PAGE>
"Annapolis is a special place to live or own
a business and Sandy Spring Bank is a
welcome addition. They're a Maryland
bank with a long heritage."
[PHOTO APPEARS HERE]
Michael Swift, Owner
Griffins Restaurant
Annapolis, Maryland
6
<PAGE>
[PHOTO APPEARS HERE]
Michael Swift at his restaurant, Griffins, a landmark on the city dock in
Annapolis.
7
<PAGE>
[PHOTO APPEARS HERE]
Kristine Mitchell (left), Vice President and John Corgan (right), President of
Mitchell & Best Homebuilders, LLC, an award winning Maryland home builder, with
Jeff Wood (center), Sandy Spring Bank Vice President of the Commercial Real
Estate Group.
8
<PAGE>
"When I call my Sandy Spring banker, I
don't need to explain how the construction
business works. He knows."
[PHOTO APPEARS HERE]
Kristine Mitchell, Vice President
Mitchell & Best Homebuilders
Rockville, Maryland
9
<PAGE>
"I'd rather fly than do almost anything,
so I own a 1939 Stearman bi-plane
and a twin engine Beechcraft Baron.
They're the best of the old and new. Just
like Sandy Spring Bank. Sandy Spring
combines old-fashioned service with
modern technology."
[PHOTO APPEARS HERE]
Gustavus McLeod, President
Lawson Surgical
Gaithersburg, Maryland
10
<PAGE>
[PHOTO APPEARS HERE]
Gustavus McLeod (left), President of Lawson Surgical in Gaithersburg and Mike
Penyak, Sandy Spring Bank Vice President of Community Lending.
11
<PAGE>
[PHOTO APPEARS HERE]
Le Cress, Controller of the quality furniture company, Mastercraft Interiors,
Ltd., headquartered in Beltsville.
12
<PAGE>
"Things get pretty busy around here, but
Sandy Spring makes banking easy. When
I need to look up company account infor-
mation or to transfer funds, all I do is
turn on my computer."
[PHOTO APPEARS HERE]
Le Cress, Controller
Mastercraft Interiors, Ltd.
Beltsville, Maryland
13
<PAGE>
"Sandy Spring gets high marks for commu-
nity service. Their in-school bank program
helps our students in so many ways."
[PHOTO APPEARS HERE]
Laura Czankner, Teacher
Sherwood Elementary School
Sandy Spring, Maryland
14
<PAGE>
[PHOTO APPEARS HERE]
Laura Czankner (upper right), teacher at Sherwood Elementary School in Sandy
Spring and Sandy Spring Bank mascot, Sandy Dog, assist at the in-school bank.
15
<PAGE>
DIRECTORS RETIRE
Board of Directors
Willard H. Derrick
Chairman of the Bank and Bancorp
Andrew N. Adams, Jr.
Retired President of Ten Oaks Nursery
and Gardens, Inc.
John Chirtea
Retired from LCOR, a national real estate
development company
Susan D. Goff
President of M.D.IPA, Inc.
Solomon Graham
President and Chief Executive Officer
of Quality Biological, Inc.
Joyce Riggs Hawkins
Real Estate Agent
Hunter R. Hollar
President and Chief Executive Officer
of the Bank and Bancorp
Thomas O. Keech
Retired Executive Vice President of
the Bank and Bancorp
Charles F. Mess, M.D.
General Orthopaedic Practice
Robert L. Mitchell
President and Chief Executive Officer
of C-I/Mitchell & Best Company
Robert L. Orndorff, Jr.
President of RLO Contractors, Inc.
Lewis R. Schumann
Partner in the law firm of
Miller, Miller and Canby, Chtd.
W. Drew Stabler
Partner in Pleasant Valley Farm
Directors Emeritus
Daniel Ligon, Chairman Emeritus
Samuel Riggs, IV, Chairman Emeritus
Thomas A. Ladson
Charles H. Ligon
Louisa W. Riggs
Francis Snowden
Stanley P. Stabler
Clyde W. Unglesbee
Robert H. White
In accordance with established board policy pertaining to age limitations,
Chairman of the Board Willard H. Derrick and Director Andrew N. Adams will be
retiring from the boards of the Bank and Bancorp on April 16, 1997. Mr. Derrick
and Mr. Adams have consistently exhibited integrity and sound judgment as they
have helped guide the Bank through many successful years.
[PHOTO APPEARS HERE]
Willard H. Derrick Willard Derrick began his career at the Bank in 1952.
At that time he actually worked for two banks housed under the same roof, the
Savings Institution of Sandy Spring and the First National Bank of Sandy Spring.
He joined the boards of both banks in 1971. In 1972 he was named President when
the two banks, due in large part to his efforts, were unified into Sandy Spring
National Bank. During Mr. Derrick's 44 years of dedicated service, the Bank has
grown from one office and $5 million in assets to 19 offices and almost $1
billion in assets. This tremendous growth and the Bank's enviable reputation are
a tribute to Mr. Derrick's strong leadership.
A native of Montgomery County, Mr. Derrick has participated in leadership
positions in numerous organizations including Montgomery General Hospital, the
Sandy Spring Lions Club, the Sandy Spring Museum, the Asbury Foundation, the
Montgomery County Community Foundation and the Montgomery Mutual Insurance
Company. He has earned the respect of those whose lives have been touched by his
energy, devotion to others and his tireless support of worthwhile charitable
causes. Mr. Derrick has been given innumerable awards in recognition of his
outstanding leadership.
The Board of Directors, management, the entire bank staff, shareholders and
bank customers are indebted to him for the legacy he leaves.
[PHOTO APPEARS HERE]
Andrew N. Adams, Jr. Andrew (Andy) Adams joined the board in 1968. Since
that time, he has served on several of the board's committees. In recent years,
he was a member of the nominating committee and the audit committee.
Mr. Adams is retired President of Ten Oaks Nursery, Inc., a family-owned
business begun by his father in 1925. He has been widely recognized in the
nursery trade for his development of new varieties of plants.
Mr. Adams is a native of Howard County and has lived there his entire life.
Active in the community, he was an organizer and charter member of the Columbia
Rotary Club.
The Bank's presence in the Howard County market area is due in large
measure to his encouragement and support. He has done an outstanding job of
representing the Bank to the people and businesses of Howard County.
16
<PAGE>
<TABLE>
<CAPTION>
INDEX TO FINANCIAL SECTION
<S> <C>
Recent Stock Prices and Dividends 17
Management's Discussion and Analysis of Operations and Financial Condition 18
Selected Glossary and Abbreviations 29
Financial Statements:
At December 31, 1996 and 1995:
Consolidated Balance Sheets 30
For the Years Ended December 31, 1996, 1995 and 1994:
Consolidated Statements of Income 31
Consolidated Statements of Cash Flows 32
Consolidated Statements of Changes in Stockholders' Equity 33
Notes to the Consolidated Financial Statements 34
Management's Statement of Responsibility 47
Report of Independent Auditors 47
</TABLE>
RECENT STOCK PRICES AND DIVIDENDS
(Dollars in thousands, except per share data)
Shareholders received quarterly cash dividends totaling $3,620 in 1996 and
$2,755 in 1995. Regular dividends have been declared for ninety-six consecutive
years. The Company has increased its dividends per share each year for the past
sixteen years. Since 1991, dividends per share have risen at an annual compound
growth rate of 15.5%, with an increase of 21.9% in 1996.
Per share dividends, expressed as a percentage of earnings per share, were
33.1% in 1996 and 30.6% in 1995. 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 35,273 in 1996
and 35,300 in 1995.
The number of common shareholders of record was approximately 2,400 as of
February 10, 1997 compared to approximately 2,000 a year earlier.
Shares of Sandy Spring Bancorp commenced trading on The Nasdaq Stock
Market's National Market on April 17, 1996 under the trading symbol SASR. Since
that date, the price information provided below reflects actual high and low
sales prices as quoted on The Nasdaq Stock Market. Prior to April 17, 1996,
sales prices reported below were based upon reports of broker transactions
published by third parties and any other transactions known to the Company to
have occurred in each quarter.
<TABLE>
<CAPTION>
QUARTERLY STOCK INFORMATION
1996 1995
---------------------------------- ----------------------------------
Stock Price Range Per Share Stock Price Range Per Share
----------------- -----------------
Quarter Low High Dividend Low High Dividend
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $35.00 $38.75 $0.18 $24.50 $26.25 $0.15
2nd 35.75 41.00 0.19 25.38 32.00 0.15
3rd 34.00 39.50 0.20 29.25 39.00 0.16
4th 31.25 34.75 0.21 35.00 39.00 0.18
- ----------------------------------------------------------------------------------------------------------------
Total $0.78 $0.64
===== =====
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
OVERVIEW
The Company's 1996 financial results and performance were favorable. During
1996, the Company recorded growth in core deposits, interest and noninterest
revenues, and net income. Substantially all profitability measures showed
improvement in 1996 when compared to 1995. At year-end 1996, capital remained
well above minimum regulatory requirements.
Also in 1996, Bancorp completed its second merger, when Annapolis
Bancshares, Inc. was merged into Sandy Spring Bancorp and The Bank of Annapolis
was merged into Sandy Spring National Bank. This transaction had little impact
on consolidated earnings growth for 1996, after merger related expenses were
recorded, but gives the Company opportunity for future growth in an attractive
new market. This merger was accounted for as a pooling of interests.
Accordingly, all financial data except dividend and stock price information have
been retroactively restated to include the operations and position of Annapolis
Bancshares.
In December 1996, Sandy Spring National Bank completed the acquisition of
an existing bank branch on Wisconsin Avenue in Bethesda from Bank of Maryland.
This acquisition provides a new business base along the Route 355 corridor and
is a natural extension of the Bank's branch system.
For 1996, net earnings amounted to $11,494 ($2.36 per share) versus $9,994
($2.09 per share) for 1995, a 15% increase. Return on average assets was 1.27%
compared to 1.18% for 1995, and return on average equity was 12.81% versus
12.37% for 1995. Total deposits grew by 8.4% while loan growth amounted to 6.2%.
Asset quality remains acceptable, as measured by net loans charged off and the
level of problem assets continuing to indicate moderate levels of risk.
The following more detailed discussion of our financial results is intended
to give you the reader a clear and succinct view of the various significant
components of our operating results and financial position. Please refer to the
Selected Glossary and Abbreviations on page 29 for further definition of
technical terms.
<TABLE>
<CAPTION>
CHANGES IN NET INCOME PER COMMON SHARE
1995 to 1996 1994 to 1995
- ---------------------------------------------------------------------------
<S> <C> <C>
Prior year net income per share $ 2.09 $ 1.90
Change attributed to:
Net interest income 0.48 0.33
Provision for credit losses (0.02) 0.00
Noninterest income 0.28 0.04
Noninterest expenses (0.39) (0.13)
Income taxes (0.04) (0.01)
Increased shares outstanding (0.04) (0.04)
------ ------
Total 0.27 0.19
------ ------
NET INCOME PER SHARE $ 2.36 $ 2.09
====== ======
</TABLE>
18
<PAGE>
HISTORICAL TRENDS IN FINANCIAL DATA 1992-1996(1)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS (for the year):
<S> <C> <C> <C> <C> <C>
Interest income $ 66,621 $ 62,115 $ 51,578 $ 46,189 $ 48,177
Interest expense 30,233 29,342 21,496 19,793 23,129
Net interest income 36,388 32,773 30,082 26,396 25,048
Provision for credit losses 308 180 212 1,056 1,880
Net interest income after provision
for credit losses 36,080 32,593 29,870 25,340 23,168
Noninterest income 6,547 4,478 4,189 4,870 4,656
Noninterest expenses 25,344 22,424 21,462 18,340 16,243
Income before taxes and cumulative
effect of accounting change 17,283 14,647 12,597 11,870 11,581
Income tax expense 5,789 4,653 3,694 3,261 3,252
Income before cumulative effect of
accounting change 11,494 9,994 8,903 8,609 8,329
Cumulative effect of accounting change 0 0 0 0 744
Net income 11,494 9,994 8,903 8,609 9,073
PER SHARE DATA:
Net income $ 2.36 $ 2.09 $ 1.90 $ 1.92 $ 2.01(2)
Dividends declared 0.78 0.64 0.54 0.49 0.43
Book value 19.70 18.04 15.72 15.63 13.39
FINANCIAL CONDITION (at year end):
Assets $978,595 $876,203 $830,834 $784,274 $675,418
Deposits 806,341 743,592 700,340 676,422 602,073
Loans 523,166 492,540 457,052 374,740 313,924
Securities 361,806 290,786 309,622 314,283 285,120
Stockholders' equity 96,581 86,941 73,766 72,420 59,205
MEASUREMENTS (for the year):
Return on average assets 1.27% 1.18% 1.14% 1.23% 1.30%(2)
Return of average equity 12.81 12.37 12.24 13.55 16.95(2)
Average equity to average assets 9.90 9.57 9.28 9.10 7.65
Dividends declared to net income 33.05 30.62 28.42 25.52 21.39(2)
</TABLE>
(1) Adjusted to give retroactive effect to a 2-for-1 stock split declared on
March 29, 1995 and, except with respect to dividends declared per share, the
acquisition of Annapolis Bancshares, Inc. on August 29, 1996, which was
accounted for as a pooling of interests.
(2) Excludes the cumulative benefit recorded in 1992 from the change in
accounting for income taxes.
19
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES/(1)/
(Dollars in thousands and tax-equivalent)
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:(2)
Real estate(3) $417,161 $37,866 9.08% $400,176 $36,154 9.03%
Consumer 28,600 2,682 9.38 26,710 2,437 9.12
Commercial 62,999 6,125 9.72 54,677 5,320 9.73
Tax exempt 169 16 9.65 479 63 13.15
-------- ------- -------- -------
Total loans 508,929 46,689 9.17 482,042 43,974 9.12
Securities:
Taxable 250,763 15,062 6.01 234,354 13,769 5.88
Nontaxable 65,847 5,005 7.60 65,696 5,177 7.88
-------- ------- -------- -------
Total securities 316,610 20,067 6.34 300,050 18,946 6.31
Interest-bearing deposits
with banks 3,585 187 5.22 740 39 5.27
Federal funds sold 25,319 1,342 5.30 15,252 872 5.72
-------- ------- -------- -------
TOTAL EARNING
ASSETS 854,443 68,285 7.99 798,084 63,831 8.00
Less: allowance for
credit losses (6,668) (6,647)
Cash and due from banks 25,923 24,188
Premises and equipment, net 20,559 17,019
Other assets 12,305 11,174
-------- --------
Total Assets $906,562 $843,818
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 96,940 $ 2,529 2.61% $ 86,688 $ 2,263 2.61%
Regular savings deposits 95,636 2,695 2.82 104,971 3,218 3.07
Money market
savings deposits 149,358 4,935 3.30 154,644 5,646 3.65
Time deposits 324,842 17,730 5.46 277,804 15,578 5.61
-------- ------- -------- -------
Total interest-bearing
deposits 666,776 27,889 4.18 624,107 26,705 4.28
Short-term borrowings 41,864 2,021 4.83 40,605 2,284 5.62
Long-term borrowings 4,854 323 6.65 6,097 353 5.79
-------- ------- -------- -------
TOTAL INTEREST-
BEARING
LIABILITIES 713,494 30,233 4.24 670,809 29,342 4.37
------- ---- ------- ----
Net interest income
and spread $ 38,052 3.75% $34,489 3.63%
Noninterest-bearing
demand deposits 100,127 90,260
Other liabilities 3,231 1,987
Stockholders' equity 89,710 80,762
-------- --------
Total liabilities and
stockholders' equity $906,562 $843,818
-------- --------
Interest income/
earning assets 7.99% 8.00%
Interest expense/
earning assets 3.54 3.68
---- ----
Net interest margin 4.45% 4.32%
==== ====
<CAPTION>
1994
-----------------------------------
Average Yield/
Balance Interest Rate
- ----------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Loans:(2)
Real estate(3) $327,485 $27,046 8.26%
Consumer 20,357 1,765 8.67
Commercial 45,241 3,785 8.37
Tax exempt 611 77 12.60
-------- -------
Total loans 393,694 32,673 8.30
Securities:
Taxable 258,102 14,299 5.54
Nontaxable 75,136 5,911 7.87
-------- -------
Total securities 333,238 20,210 6.06
Interest-bearing deposits
with banks 1,028 38 3.70
Federal funds sold 13,948 549 3.94
-------- -------
TOTAL EARNING
ASSETS 741,908 53,470 7.21
Less: allowance for
credit losses (6,841)
Cash and due from banks 22,730
Premises and equipment, net 16,239
Other assets 10,332
--------
Total Assets $784,368
--------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 87,591 $ 2,293 2.62%
Regular savings deposits 115,839 3,525 3.04
Money market
savings deposits 183,949 5,641 3.07
Time deposits 199,448 8,573 4.30
-------- -------
Total interest-bearing
deposits 586,827 20,032 3.41
Short-term borrowings 28,973 1,175 4.06
Long-term borrowings 5,149 289 5.61
-------- -------
TOTAL INTEREST-
BEARING
LIABILITIES 620,949 21,496 3.46
------- -----
Net interest income
and spread
Noninterest-bearing
demand deposits 90,238
Other liabilities 427
Stockholders' equity 72,754
--------
Total liabilities and
stockholders' equity $784,368
========
Interest income/
earning assets 7.21%
Interest expense/
earning assets 2.90
-----
Net interest margin 4.31%
=====
</TABLE>
(1) Income and yields are presented on a tax-equivalent basis using the maximum
applicable federal income tax rate.
(2) Nonaccrual loans are included in the average balances.
(3) Includes residential mortgage loans held for sale.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
NET INTEREST INCOME
Net interest income for 1996 was $36,388, representing an increase of $3,615 or
11.0% from 1995. An 8.9% rise was achieved in 1995, compared to 1994, resulting
in net interest income of $32,773, up from $30,082. On a tax-equivalent basis,
net interest income amounted to $38,052 in 1996, representing a 10.3% annual
rise, and $34,489 in 1995, representing a 7.9% annual rise, preceded by $31,974
in 1994.
Since net interest income is the most important category of earnings,
performance in this area is emphasized by management. The analysis of net
interest income performance presented in the "Consolidated Average Balances,
Yields and Rates" table shows a 1996 net interest margin of 4.45%, up 13 basis
points, compared to 1995. The net interest margin for 1995 of 4.32% was
essentially the same as for 1994. The table entitled "Effect of Volume and Rate
Changes on Net Interest Income" shows that the increases in net interest income
during 1996 and 1995, compared to each prior year, were primarily driven by
increases in the volumes of earning assets.
<TABLE>
<CAPTION>
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
1996 vs. 1995 1995 vs. 1994
--------------------------------------------------------------------------------------
Increase or in Average: (1)(2) Increase or in Average: (1)(2)
---------------------- ----------------------
(Tax-equivalent basis) (Decrease) Volume Rate (Decrease) Volume Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from
earnings assets:
Loans $2,715 $2,464 $ 251 $11,301 $ 7,837 $3,464
Taxable securities 1,293 981 312 (530) (1,363) 833
Nontaxable securities (172) 12 (184) (734) (744) (10)
Other investments 618 687 (69) 324 42 282
------ -------
Total interest income 4,454 4,503 (49) 10,361 4,230 6,131
Interest expense on funding
of earnings assets:
Interest-bearing demand deposits 266 268 (2) (30) (24) (6)
Regular savings deposits (523) (274) (249) (307) (333) 26
Money market savings deposits (711) (188) (523) 5 (976) 981
Time deposits 2,152 2,578 (426) 7,005 3,945 3,060
Borrowings (293) 1 (294) 1,173 632 541
------ -------
Total interest expense............ 891 1,829 (938) 7,846 1,833 6,013
------ ------ ----- ------- ------- ------
Net interest income............... $3,563 $2,674 $ 889 $ 2,515 $ 2,397 $ 118
====== ====== ===== ======= ======= ======
</TABLE>
(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.
Interest Income
The Company's tax-equivalent interest income increased by 7.0% or $4,454 in
1996, compared to 1995, as a result of a 7.1% or $56,359 increase in average
earning assets accompanied by a modest decline in average yield earned on those
funds. During 1996, average loans, yielding 9.17%, rose $26,887 or 5.6%. Average
commercial loans increased by 15.2% or $8,322 in 1996. Management has targeted
commercial loans for growth, in part because they produce the highest rate
(average yield of 9.72% for 1996) of any major category of earning assets.
However, lower yielding average securities (yielding only 6.34%), increased
$16,560 in 1996, representing virtually the same percentage rise as achieved for
average loans. Less significantly, federal funds sold, which are short-term
investments primarily benefitting liquidity, increased $10,067 or 66.0%, and
earned an average yield of 5.30% for 1996. The Company generated a greater
amount of interest income in 1996 in the face of stiff industrywide competition
with banks and nonbanking entities for desirable lending opportunities.
Tax-equivalent interest income increased 19.4% or $10,361 in 1995, compared
to 1994, due to the combination of higher average earning assets, up 7.6%, and
higher average yield earned, up 79 basis points. However, when higher funding
costs are taken into consideration, the resulting interest rate spread achieved
on those earning assets declined 12 basis points in 1995 versus 1994.
Interest Expense
Interest expense increased $891 or 3.0% in 1996 compared to 1995, attributable
to the offsetting effects of 6.4% or $42,685 greater average interest-bearing
liabilities and a 13 basis point decline in the average rate paid for those
funds. Most of the rise in interest-bearing funds was generated by deposit
growth of 6.8% or $42,669. By contrast, average interest free funding of earning
assets increased 10.7% or $13,674 over the same period, primarily due to a rise
in demand deposits attributable in part to the introduction of a new product
around mid-year. By far, the largest increase in interest-bearing
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
deposits occurred in average time deposits, which were 16.9% or $47,038 above
1995, and comprised the most expensive deposit type, paying an average rate of
5.46% in 1996, compared to 4.18% for all interest-bearing deposits. In addition,
the average rate paid on time deposits declined only 15 basis points in 1996,
compared to 1995, much less than declines recorded by most other deposit and
borrowing categories.
In 1995, interest expense increased significantly more than interest
income, rising 36.5% or $7,846, reflecting the effects of a 91 basis point rise
in average rate on 8.0% higher average interest-bearing liabilities.
Interest Rate Performance
Interest rate performance has been relatively stable over the past three years.
The same interest rate spread was achieved in 1996 and 1994, with a small
decline in 1995. The net interest margin increased slightly in 1996, after
remaining virtually the same the prior two years. The change in margin was due
to the beneficial effects of the higher level of interest-free funding of
earning assets in 1996 than in 1995 as well as to growth in interest-bearing
deposits at favorable interest spreads. By maintaining, and then improving, its
net interest margin from 1994 to 1996, the Company has been able to preserve,
and then enhance, its net interest income performance during a period of
significant growth.
NONINTEREST INCOME
Total noninterest income rose 46.2% or $2,069 to $6,547 in 1996 from $4,478 in
1995. An increase of 6.9% or $289 was posted for 1995 versus 1994.
Securities gains totaled $30 in 1996 as compared with securities losses of
$279 in 1995 and $84 in 1994. The sale of available-for-sale debt securities
generated net losses of $66 for 1996 compared with $89 in net gains from sales
of available-for-sale equity securities and $7 in net gains from securities
calls, maturities and paydowns. During 1995, the sale of available-for-sale debt
securities generated $277 in net losses, while calls, maturities and paydowns
generated $2 in net losses.
Service charges on deposit accounts increased 15.4% or $395 during 1996. In
1995, an increase of 9.4% or $221 was realized. Management continuously monitors
the service fee structure and makes changes where appropriate.
Mortgage banking operations generated $825 in gains on loan sales of
$56,457 in 1996 as management placed great emphasis upon originations and sales
of residential mortgage loans in the secondary market at a profit margin, versus
building a mortgage portfolio on the Company's books. By comparison, gains of
$244 were realized on loan sales of $19,246 during 1995, and $175 in gains were
realized on loan sales of $15,476 in 1994.
Other noninterest income rose 40.3% or $784 in 1996 over 1995, with fees
from trust services, mutual funds and annuities increasing 44.2% or $385. Newer
fee based businesses, credit cards and debit cards (new in 1996), generated
another $118 in additional income during 1996, compared to 1995, and other fee
income increased 23.8% or $143. Among nonrecurring items, sales of other real
estate owned were responsible for $147 of the overall rise in other noninterest
income, while asset dispositions during 1996 versus 1995 resulted in net losses
of $47. Other noninterest income increased 11.1% or $194 in 1995 over 1994,
attributable in large part to fees for trust services, which rose 20.8% or $131,
and to gains on sales of student loans, which generated $131 in additional
income.
NONINTEREST EXPENSES
Noninterest expenses increased 13.0% or $2,920 in 1996 over 1995 and 4.5% or
$962 in 1995 over 1994. However, nonrecurring expenses significantly affected
these changes, reducing the size of the core increase in noninterest expenses by
$750 in 1996, compared to 1995, and by $342 in 1995, compared to 1994. Items of
nonrecurring expenses included an industry-wide FDIC insurance premium reduction
enacted in 1995, which effectively reduced noninterest expenses by $814 in 1996
and $692 in 1995, and merger related costs associated with the acquisition of
Annapolis Bancshares, Inc., which increased noninterest expenses in 1996 by
$724, along with costs of conversion to a new data processing center in 1995 and
early retirement benefits extended to certain long-term employees in 1995 and
1994. Excluding nonrecurring items, increases in core noninterest expenses
amounted to 17.5% or $3,670 in 1996 compared with an increase of 6.6% or $1,304
for 1995.
Salaries and employee benefits increased 13.5% or $1,721 in 1996 and 6.4%
or $767 in 1995. Excluding nonrecurring items, an increase of 14.8% or $1,842
was realized in 1996 compared with an increase of 6.6% or $766 for 1995. The
increase for 1996 was, for the most part, due to growth in staff, including
staffing for two new branches, and an expanded incentive program called
"Stakeholder" which relates compensation throughout the business to the
Company's performance as measured against key performance indicator goals.
Quarterly "Stakeholder" payouts amounted to $479 in 1996. The increase in salary
and benefit costs for 1995 was due significantly to merit increases.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
The Company's net income, as measured on a per employee basis, continue to
grow, which is favorable. The ratio of net income per average full-time-
equivalent employee was $33 for 1996, $31 for 1995 and $29 for 1994. Average
full-time equivalent employees increased in 1996 by 8.8% to 346, compared to 318
for 1995 and 310 for 1994. The increase in average full-time equivalent
employees is largely a reflection of the Company's expansion over the period.
All other noninterest expenses increased 12.4% or $1,199 in 1996 and
increased 2.1% or $195 in 1995. Excluding nonrecurring expenses, an increase of
21.4% or $1,828 was realized in 1996 compared with an increase of 6.7% or $538
for 1995. The increase for 1996 included a 95.7% or $560 rise in marketing
expenses due to intensified marketing associated with entry into new markets,
40.9% or $322 higher data services costs, reflecting growth and conversion to a
new provider with expanded capabilities in late 1995, a 58.1% or $291 increase
in building and grounds maintenance attributable to the merger, new branches and
maintenance of existing facilities, and a 100.0% or $181 rise in attorneys'
fees, in large part associated with merger activity, partially offset by a $370
increase in rental income which is netted against rental expenses. The increase
for 1995 included increases in equipment expenses, primarily depreciation
charges and software expenses, and in marketing expense, supply expenses, and
data services costs.
Operating Expense Performance
Management believes that the net overhead ratio (lower ratios indicate improved
productivity), which expresses the level of net operating expenses (noninterest
expenses less noninterest income) as a percentage of tax-equivalent net interest
income, is a good measure of overall operating expense performance and cost
management. During 1996, the Company's net overhead ratio was 49.4%, compared to
ratios of 52.0% achieved in 1995 and 54.0% in 1994. Ratios close to 50% are
considered desirable.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $5,789 in 1996, compared with $4,653 in 1995 and
$3,694 in 1994. The Company's effective tax rate for 1996 was 33.5%, compared
with 31.8% in 1995 and 29.3% in 1994. The increase in effective tax rate has
been due primarily to a decline in the nontaxable component of income before
taxes each year. During 1996, the Company's taxable income surpassed $10,000,
triggering an increase in the applicable corporate tax rate from 34% to 35%.
This increased rate resulted in additional income tax expense of $24 for 1996 on
taxable earnings in excess of $10,000.
BALANCE SHEET ANALYSIS
During 1996, the Company's size, as measured by total assets, grew by $102,392
or 11.7%, to $978,595 at December 31, 1996 from $876,203 at December 31, 1995.
Earning assets at year end increased $97,977 or 12.0%, to $917,096 from
$819,119. The rise in loans, a core business for commercial banks, amounted to
$30,626 or 6.2% compared to a $71,020 or 24.4% increase in securities. On an
average basis, however, total loans increased $26,887 or 5.6% versus a $16,560
or 5.5% increase in average total securities. The types and characteristics of
the growth in loans is discussed in detail below.
LOANS
Real estate mortgage loans rose 3.4% to $376,205 in 1996. Included in this
category are commercial mortgages, which increased 12.5% during 1996 and
totalled $178,639 at December 31, 1996. These mortgages mainly consist of owner
occupied properties where an established banking relationship exists. Home
equity lines and home equity loans, types of real estate mortgages that permit
homeowning consumers to leverage their equity and possibly receive an income tax
deduction on the interest, increased 7.7% during 1996 to $65,420 at year end.
One to four family residential loans, down 11.5% in 1996, represented $116,444
of the real estate mortgage portfolio at December 31, 1996. This represents an
increased emphasis by the Company on mortgage banking, where most residential
mortgage loan production is sold in the secondary market rather than being
maintained as a loan asset. In this type of business, the bank serves as the
customer service and delivery channel for investors, while continuing to meet
the needs of area residents for funds to finance their homes. Other real estate
mortgages, including primarily residential lot loans, collectively rose 23.1% to
$15,702.
Real estate construction loans increased 14.2% to $47,654 from 1995,
attributable to a substantial rise in residential construction activity. The
Company conducts its commercial construction lending in the markets it knows and
understands, works selectively with local, top-quality builders and developers,
and requires substantial equity from its borrowers.
The consumer loan portfolio rose 7.1% to $30,813 at December 31, 1996. In
recent years, much of consumer lending has shifted from traditional installment
credits into home equity lines and credit cards. During 1996, the Company
achieved a 6.6% increase in home equity lines, which are included above in real
estate mortgage loans. Credit cards, introduced in 1995, are showing growth,
more than doubling in 1996 to an outstanding balance of $1,321 at year end.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Consumer lending continues to be important to the full service community banking
business conducted by the Company despite a smaller balance sheet presence in
recent years.
Commercial loans advanced the most among the major categories on a
percentage basis, up 18.6% to $68,467 during 1996. For the most part, these are
loans to a diverse cross-section of small to mid-size local businesses, many of
whom are existing customers of the Company. These types of banking relationships
are a natural fit for the Company, which is experienced in serving and lending
to this market segment and has knowledge of the marketplace through its
community roots and involvement. The Company continues to place special emphasis
on this part of its loan portfolio in its business planning.
Analysis of Loans
The following table presents the trends in the composition of the loan portfolio
over the previous five years.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate -- mortgage(1) $376,205 $363,927 $345,547 $286,542 $252,706
Real estate -- construction(2) 47,654 41,725 31,853 21,770 18,592
Consumer 30,813 28,762 28,892 19,352 17,906
Commercial 68,467 57,718 50,224 46,405 23,477
Tax exempt 27 408 536 671 1,243
-------- -------- -------- -------- --------
TOTAL LOANS $523,166 $492,540 $457,052 $374,740 $313,924
======== ======== ======== ======== ========
</TABLE>
(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.
Securities
The investment portfolio, in the aggregate, increased 24.4% or $71,020 during
1996 to $361,806 at December 31, 1996 from $290,786 at December 31, 1995.
Investments are managed to generate interest revenue, provide liquidity and
achieve asset/liability management goals. During 1996, funds provided by the
increase in deposits exceeded the increase in the loan portfolio, and the excess
was invested primarily in securities. A significant portion of the rise in
investments occurred toward the end of 1996, when funds were borrowed from the
Federal Home Loan Bank of Atlanta and invested in securities at a favorable
interest rate spread in order to leverage the balance sheet and enhance the
return on shareholders' equity (see discussion on page 25 in "Deposits and
Short-term Borrowings" section). On an average basis, aggregate investments rose
5.5% during 1996, compared to 1995.
Analysis of Securities
The composition of Securities at December 31 for each of the latest three fiscal
years was:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------
AVAILABLE-FOR-SALE(1)
<S> <C> <C> <C>
U.S. Treasury $ 26,940 $ 15,991 $ 23,272
U.S. Agency 145,275 70,106 23,579
State and municipal 26,628 35,330 39,836
Corporate debt obligations 1,483 2,458 3,260
Mortgage-backed securities(2) 31,876 40,282 37,307
Marketable equity securities 2,221 1,786 518
-------- -------- --------
Total 234,423 165,953 127,772
HELD-TO-MATURITY AND OTHER EQUITY
U.S. Treasury 0 500 1,499
U.S. Agency 42,932 40,185 79,816
State and municipal 37,152 30,522 29,717
Mortgage-backed securities(2) 42,188 48,579 65,902
Certificates of deposit 0 100 0
Other equity securities 5,111 4,947 4,916
-------- -------- --------
Total 127,383 124,833 181,850
-------- -------- --------
TOTAL SECURITIES(3) $361,806 $290,786 $309,622
======== ======== ========
</TABLE>
(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, except for the U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1996, 1995 or 1994.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Maturities and weighted average yields for investments available-for-sale
and held-to-maturity at December 31, 1996, 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
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INVESTMENTS
AVAILABLE-FOR-SALE(1)
U.S. Treasury $12,996 5.61% $ 13,957 5.63% $ 0 0% $ 0 0%
U.S. Agency 8,998 5.55 131,520 6.16 4,999 6.78 0 0
State and municipal(2) 4,374 8.18 19,639 7.68 2,264 6.61 0 0
Corporate debt obligations 0 0 500 5.76 1,000 5.65 0 0
Mortgage-backed
securities 3,061 6.18 16,553 5.93 9,734 6.06 2,847 6.74
------- -------- ------- -------
Total debt securities $29,429 6.03% $182,169 6.26% $17,997 6.31% $ 2,847 6.74%
======= ======== ======= =======
Marketable equity securities
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE
INVESTMENTS HELD-
TO-MATURITY
U.S. Agency $ 0 0% $20,090 5.86% $ 9,320 7.04% $13,522 7.93%
State and municipal(2) 0 0 18,113 7.51 18,439 7.02 600 7.79
Mortgage-backed
securities 12,926 6.32 29,262 6.89 0 0 0 0
------- -------- ------- ------
TOTAL INVESTMENTS
HELD-TO-MATURITY $12,926 6.32% $ 67,465 6.75% $27,759 7.03% $14,122 7.92%
======= ======== ======= =======
<CAPTION>
- ----------------------------------------------------
TOTAL YIELD
- ----------------------------------------------------
<S> <C> <C>
INVESTMENTS
AVAILABLE-FOR-SALE(1)
U.S. Treasury $ 26,953 5.63%
U.S. Agency 145,517 6.14
State and municipal(2) 26,277 7.68
Corporate debt obligations 1,500 5.69
Mortgage-backed
securities 32,195 6.07
--------
Total debt securities 232,442 6.24%
Marketable equity securities 470
--------
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE $232,912
========
INVESTMENTS HELD-
TO-MATURITY
U.S. Agency $ 42,932 6.76%
State and municipal(2) 37,152 7.28%
Mortgage-backed
securities 42,188 6.76%
--------
TOTAL INVESTMENTS
HELD-TO-MATURITY $122,272 6.92%
========
</TABLE>
(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 using the maximum applicable federal income tax rate.
Other Earning Assets
Residential mortgage loans held for sale increased 69.0% or $3,260 in 1996.
Originations and sales of these loans, and the resulting gains on sales,
increased substantially as presented on the Consolidated Statements of Cash
Flows, reflecting the change to a mortgage banking philosophy of residential
mortgage lending.
The aggregate of federal funds sold and interest-bearing deposits with
banks decreased 22.3% or $6,929 in 1996.
Deposits and Short-term Borrowings
Total deposits increased 8.4% or $62,749 during 1996 to $806,341 at December 31,
1996 from $743,592 at December 31, 1995. Noninterest-bearing deposits increased
22.0% or $21,077, attributable primarily to growth in commercial checking
balances and the introduction of a "free" checking account product around mid-
year. Interest-bearing deposits increased 6.4% or $41,672 in 1996, with the
majority of the rise occurring in time deposits for amounts less than $100,000.
Short-term borrowings increased 95.7% or $33,323 in 1996 to $68,127 at
December 31, 1996 from $34,804 at December 31, 1995. Borrowings from the Federal
Home Loan Bank of Atlanta increased $17,200, reflecting funds borrowed late in
the year and invested in securities in order to leverage the balance sheet and
enhance the shareholders' return on investment. Repurchase agreements, the other
major category of short-term borrowings, increased 44.6% or $13,639, due
primarily to an increase in sweep accounts associated with cash management
services to commercial customers.
CAPITAL MANAGEMENT
During 1996, stockholders' equity increased 11.1% or $9,640 to $96,581 at
December 31, 1996 from $86,941 at December 31, 1995. The increase for 1996 was,
for the most part, due to internal capital generation, which represents net
earnings less dividends as a percent of average equity. The resulting internal
capital generation rate was 8.7% for 1996, compared with 8.8% for 1995 and 9.0%
for 1994. The amount of the increase in stockholders' equity attributable to
internal capital generation was $7,776 in 1996, $7,096 in 1995 and $6,528 in
1994. External capital formation from dividend reinvestment, the exercise of
warrants, and employee stock purchases under the Company's stock option and
profit sharing plans totaled $1,741 in 1996, $2,379 in 1995 and $1,063 in 1994.
The ratio of average equity to average assets amounted to 9.90% for 1996,
compared with 9.57% for 1995 and 9.28% for 1994.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Regulatory Capital Requirements
The Company achieved a total risk-based capital ratio of 17.56% at December 31,
1996, compared to 17.67% at December 31, 1995, a Tier 1 risk-based capital ratio
of 16.44% compared to 16.42%, and a capital leverage ratio of 10.38% compared to
10.09%. A discussion of these quantitative measures of capitalization and the
regulatory capital requirements which pertain to them, along with a presentation
of the Company's and the Bank's capital and ratios compared to the various
regulatory standards, appears in Note 22 of the Notes to the Consolidated
Financial Statements. At December 31, 1996, the Company and its banking
subsidiary exceeded all capital requirements and were considered to be "well-
capitalized" under regulatory definitions.
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.
CREDIT RISK MANAGEMENT
The allowance for credit losses is a valuation reserve established by management
in an amount it deems adequate to absorb losses on loans which may become
uncollectible. The adequacy of the allowance for credit losses is determined
through careful and continuous review and evaluation of the loan portfolio and
involves the balancing of a number of factors to establish a prudent level.
Management records provisions for credit losses in order to increase the
allowance to the level it deems adequate. Loan charge-offs decrease the
allowance. Management believes that the allowance for credit losses is adequate.
The level of nonperforming loans increased to $4,655 (.89% of year-end
loans) at December 31, 1996 from $898 (.18% of year-end loans) at December 31,
1995, due to increases in nonaccrual loans and loans which are past due 90 days
or more. The rise in nonaccruals involved loans to a single borrower which
management believes will be collected in full during 1997. The increase in loans
reported as 90 days or more past due was attributable primarily to the inclusion
of credit line expirations at December 31, 1996, which were not included in
prior years, and to Annapolis Bancshares credits, which became subject to the
Company's more stringent loan review and classification practices subsequent to
the merger. It is anticipated that many of the expired lines of credit, which
are still current as to principal and interest payments, will be renewed or
otherwise return to performing status. The Company also had an increase in loans
90 or more days past due associated with growth and diversification of the loan
portfolio. The allowance for credit losses represented 137% of nonperforming
loans at December 31, 1996, compared to coverage of 735% a year earlier, with
the change attributable to an increase in the level of nonperforming loans.
Significant variation in the coverage ratio may occur from period to period
because the amount of nonperforming loans depends largely on the condition of a
small number of individual loans and borrowers relative to the total loan
portfolio. There were no real estate owned properties at December 31, 1996 as
compared to a modest $47 at December 31, 1995. The balance of impaired loans was
$1,280 at December 31, 1996 and the reserve on these loans was $127. There were
no impaired loans at December 31, 1995. Although $590 of loans were classified
as being in nonaccrual status at December 31, 1995, the insignificant delay of
projected payments caused the loans not to be classified as impaired.
The major concentrations of credit risk for the Company arise by customer
location, because it operates only in three counties in the State of Maryland,
and by loan portfolio composition. Real estate secured credits represented 81.0%
of total loans at December 31, 1996, and 82.4% at December 31, 1995. In the
past, the Company has experienced low loss levels, especially in real estate
secured loans, through various economic cycles and conditions. The risk of the
Company's real estate loan concentration is mitigated by the nature of real
estate collateral, the Bank's substantial experience in most of its markets and
its intention to maintain risk averse lending practices.
The provision for credit losses charged against earnings was $308 in 1996
compared with $180 in 1995, an increase of 71.1%. The provision was $211 in
1994. In each year, net charge-offs exceeded the provision for credit losses.
The ratio of net charge-offs to average loans was .10% in 1996, compared to .05%
in 1995 and .06% in 1994. The allowance for credit losses was decreased to
$6,391 (1.22% of year-end loans) at December 31, 1996 from $6,597 (1.34% of
year-end loans) at December 31, 1995. The allowance has been maintained at
levels believed consistent with the increased risk potential inherent in the
increase in the amount and percentage to total loans attributable to commercial
and commercial real estate loans (see the discussion of loan growth earlier in
this report), which are viewed as entailing greater risk than certain other
categories of loans, and the associated increase in large loans, as balanced
against other factors, as described above. For additional discussion of the
allowance for credit losses, see Note 1 of the Notes to the Consolidated
Financial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
Analysis of Credit Risk
Activity in the allowance for credit losses for the preceding five years ended December 31 is shown below:
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $6,597 $6,663 $6,681 $4,213 $2,957
Provision for credit losses 308 180 211 1,057 1,880
Allowance from merger transaction 0 0 0 1,158 0
Loan charge-offs:
Real estate - mortgage (3) (33) (135) 0 (506)
Real estate - construction 0 0 0 0 0
Consumer (143) (209) (32) (104) (243)
Commercial (469) (507) (342) (29) (76)
------ ------ ------ ------ ------
Total charge-offs (615) (749) (509) (133) (825)
Loan recoveries:
Real estate - mortgage 0 153 16 54 0
Real estate - construction 0 0 0 0 5
Consumer 37 30 40 79 61
Commercial 64 320 224 253 135
------ ------ ------ ------ ------
Total recoveries 101 503 280 386 201
------ ------ ------ ------ ------
Net recoveries (charge-offs) (514) (246) (229) 253 (624)
------ ------ ------ ------ ------
BALANCE, DECEMBER 31 $6,391 $6,597 $6,663 $6,681 $4,213
====== ====== ====== ====== ======
Net charge-offs to average loans 0.10% 0.05% 0.06% * 0.19%
Allowance to total loans 1.22% 1.34% 1.46% 1.78% 1.34%
</TABLE>
* The Company had net recoveries in 1993.
The following table presents nonperforming assets for a five year period:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans/(1)/ $1,291 $ 590 $ 866 $2,969 $ 508
Loans 90 days past due 3,337 272 832 517 953
Restructured loans 27 36 44 394 0
------ ------ ------ ------ ------
Total nonperforming loans/(2)(3)/ 4,655 898 1,742 3,880 1,461
Other real estate owned, net 0 47 277 1,387 999
------ ------ ------ ------ ------
TOTAL NONPERFORMING ASSETS $4,655 $ 734 $2,019 $5,267 $2,460
====== ====== ====== ====== ======
NONPERFORMING ASSETS TO TOTAL ASSETS 0.48% 0.11% 0.24% 0.67% 0.36%
</TABLE>
/(1)/ Gross interest income that would have been recorded in 1996 if nonaccrual
loans had been current and in accordance with their original terms was
$192, while interest actually recorded on such loans was $89.
/(2)/ Those performing loans considered potential problem loans, as defined and
identified by management, amounted to $3,440 at December 31, 1996.
Although these are loans where known information about the borrowers'
possible credit problems causes management to have doubts as to the
borrowers' ability to comply with the present loan repayment terms, most
are well collateralized and are not believed to present significant risk
of loss. Loans classified for regulatory purposes not included in
nonperforming loans consist only of "other loans especially mentioned" and
do not in management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact further operating
results, liquidity or capital resources or represent material credits
where known information about the borrowers' possible credit problems
causes management to have doubts as to the borrowers' ability to comply
with the loan repayment terms.
/(3)/ Installment loans past due by 90 days or more are included in the totals
for the "loans 90 days past due" line in the table above and were
immaterial at December 31, 1996 and 1995.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity
The Company's liquidity position, considering both internal and external sources
available, exceeded anticipated short- and long-term funding needs at December
31, 1996. Core deposits, considered to be stable funds sources and defined to
include all deposits except time deposits of $100,000 or more, equaled 81.7% of
total earning assets at December 31, 1996. In addition, substantial amortizing
residential mortgage loans, maturities, calls and paydowns of securities,
deposit growth and earnings contribute a flow of funds available to meet
liquidity requirements. In assessing liquidity, management considers operating
requirements, the seasonality of deposit flows, investment, loan and deposit
maturities, expected fundings of loans and deposit withdrawals, and the market
values of available-for-sale investments, so that sufficient funds are available
on short notice to meet obligations as they arise and to ensure that the Company
is able to pursue new business opportunities.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Internally generated funds on hand at December 31, 1996, consisting of cash
and cash equivalents, interest-bearing deposits with banks, residential mortgage
loans held for sale, maturities of investments held-to-maturity due within one
year at fair value and investments available-for-sale, totalled $312,390 or
31.9% of total assets.
The primary external source of liquidity available is a line of credit for
$145,000 with the Federal Home Loan Bank of Atlanta of which $20,200 was
outstanding at December 31, 1996. Core deposits increased by $56,862 during
1996, while loans grew by $30,626, so that borrowed funds were not required to
support loan growth. As discussed previously in the section entitled "Deposits
and Short-term Borrowings", Federal Home Loan Bank advances increased in 1996
due to management's desire to leverage the balance sheet at favorable interest
spreads to enhance return on stockholder's equity.
The Company's time deposits of $100,000 or more represented 7.1% of total
deposits at December 31, 1996 and are shown by maturity in the table below.
<TABLE>
<CAPTION>
Months to Maturity
------------------------------------------------
3 or Over 3 Over 6 Over
less to 6 to 12 12 TOTAL
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time deposits--$100,000 or more $23,373 $9,735 $10,399 $13,667 $57,174
======= ====== ======= ======= =======
</TABLE>
Interest Rate Sensitivity
The Bank's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 1996 is presented in
the following table. As indicated in the note to the table, the data is based in
part on assumptions that are regularly reviewed for propriety. The accompanying
analysis indicates a moderate level of interest rate risk based on the Bank's
having about 51% of its rate sensitive assets versus about 49% of its rate
sensitive liabilities subject to maturity or repricing within a one year period
from December 31, 1996 (termed GAP analysis). By managing to approximately match
the dollar amount of assets and liabilities whose interest rates are subject to
change, the Bank seeks to control the risk that a net interest margin decline
would have a pronounced adverse impact on its revenues (net interest income).
While the Bank's senior management, through its Asset Liability Management
Committee (ALCO), has a preference for maintaining a moderate level of interest
rate risk as measured by the repricing GAP, the Company's interest rate risk
policies are guided by results of simulation analysis which takes into account
more factors than does simple GAP analysis. The ALCO analyzes balance sheet,
income statement, and margin trends monthly. A detailed quarterly interest rate
risk profile is performed for ALCO and is reviewed with the Board of Directors.
The Bank's Board of Directors has established a comprehensive interest rate
risk management policy, which is administered by ALCO. The policy establishes
limits of risk, which are quantitative measures of percentage change in net
interest income and equity capital resulting from a hypothetical plus or minus
200 basis point change in U.S. Treasury interest rates for maturities from one
month to thirty years. By employing simulation analysis through use of a
computer model, the Bank intends to effectively manage the potential adverse
impacts that changing interest rates can have on the institution's short term
earnings, long term value, and liquidity. Measured from December 31, 1996, the
simulation analysis indicates that the Bank's net interest income would decline
by 8.1% over a twelve month period given a decline in interest rates of 200
basis points, against a policy limit of 15%. In terms of equity capital on a
fair value basis, a 200 basis point decline in interest rates, is estimated to
reduce the fair value of capital (as computed) by 18.5% as compared to a policy
limit of 25%. The simulation model captures optionality factors such as call
features and interest rate caps and floors imbedded in investment and loan
portfolio contracts.
In addition to the potential adverse impact that changing interest rates
may have on the Bank's interest margin and operating results, potential adverse
impacts on liquidity can occur as a result of changes in the estimated cash
flows from investment, loan and deposit portfolios. The Bank manages this
inherent risk by maintaining a sizeable portfolio of available for sale
investments as well as a secondary source of liquidity from Federal Home Loan
Bank advances.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
The following schedule sets out the time frames from December 31, 1996 in
which the Bank's rate sensitive assets and liabilities are subject to repricing:
<TABLE>
<CAPTION>
-----------------------------------------------------------
0-90 91-365 Over 1-3 Over 3-5 Over 5
Days Days Years Years Years
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Loans $180,441 $ 92,100 $162,500 $ 47,186 $ 40,939
Taxable securities 72,898 78,826 105,662 18,349 15,555
Nontaxable securities 1,980 3,935 17,110 19,395 21,009
Other investments 42,023 0 0 0 0
-------- -------- -------- -------- --------
TOTAL 297,342 174,861 285,272 84,930 77,503
RATE SENSITIVE LIABILITIES:
Noninterest-bearing demand deposits 11,711 3,513 42,159 42,159 17,566
Interest-bearing demand deposits 5,936 17,808 47,487 27,701 0
Regular savings deposits 4,749 14,246 37,989 36,408 1,583
Money market savings deposits 13,974 41,922 111,794 0 0
Time deposits 107,022 146,882 67,733 16,235 28
Short-term borrowings and other rate
sensitive liabilities 55,930 12,002 1,000 0 3,920
-------- -------- -------- -------- --------
TOTAL................................. 199,322 236,373 308,162 122,503 23,097
-------- -------- -------- -------- --------
CUMULATIVE GAP........................ $ 98,020 $ 36,508 $ 13,618 $(23,955) $ 30,451
======== ======== ======== ======== ========
As a percent of total assets 10.02% 3.73% 1.39% (2.45)% 3.11%
CUMULATIVE RATE SENSITIVE ASSETS
TO RATE SENSITIVE LIABILITIES 1.49 1.08 1.02 0.97 1.03
</TABLE>
NOTE: This analysis is based upon a number of significant assumptions including
the following: Loans are repaid/rescheduled by contractual maturity and
repricings. 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.
SELECTED GLOSSARY AND ABBREVIATIONS
Basis Point: One hundredth of one percent. An increase in yield from 7.00% to
7.50% could be expressed as a change of 50 basis points.
Book Value Per Share: Total stockholders' equity divided by the number of shares
of common stock outstanding at year-end.
Capital Leverage Ratio: Year-end core capital (stockholders' equity less
intangibles and the net unrealized gain or loss on investments available-for-
sale) as a percentage of average total assets for the fourth quarter.
The Company: Sandy Spring Bancorp, Sandy Spring National Bank of Maryland and
Sandy Spring Insurance Corporation.
Internal Capital Generation Rate: The percent of return on average equity
multiplied by the percent of earnings retained (net earnings less dividends).
Net Interest Margin: Fully tax-equivalent net interest income as a percentage of
average earning assets.
Net Interest Spread: Fully tax-equivalent yield on earning assets less the
average rate paid on interest-bearing liabilities.
Net Overhead Ratio: A measure of cost management and productivity. Net overhead
(noninterest expenses less non-interest income) divided by fully tax-
equivalent net interest income.
Nonperforming Assets: The sum of loans which are nonaccrual, 90 days past due or
restructured and other real estate owned.
Return on Average Assets: Net income as a percentage of average total assets.
Return on Average Equity: Net income as a percentage of average total
stockholders' equity.
Total Risk-based Capital Ratio: Qualifying regulatory capital (stockholders'
equity less intangibles and the net unrealized gain or loss on investments
available-for-sale, plus a portion of the allowance for credit losses) as a
percentage of risk-adjusted total assets.
Tax-Equivalent Net Interest Income: Interest income, plus the addition of tax
savings from nontaxable loans and investments, less interest expense.
Tier 1 Risk-based Capital Ratio: Regulatory core capital (stockholders' equity
less intangibles and the net unrealized gain or loss on investments available-
for-sale) as a percentage of risk-adjusted total assets.
29
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 32,899 $ 30,215
Federal funds sold 23,278 30,220
Interest-bearing deposits with banks 861 848
Residential mortgage loans held for sale 7,985 4,725
Investments available-for-sale (at fair value) 234,423 165,953
Investments held-to-maturity - fair value of $123,067 (1996)
and $121,177 (1995) 122,272 119,886
Other equity securities 5,111 4,947
Total loans (net of unearned income) 523,166 492,540
Less: Allowance for credit losses (6,391) (6,597)
-------- --------
Net loans 516,775 485,943
Premises and equipment 20,211 19,897
Accrued interest receivable 7,917 6,494
Other real estate owned, net of allowance of $0 (1996) and $45 (1995) 0 47
Other assets 6,863 7,028
-------- --------
TOTAL ASSETS $978,595 $876,203
======== ========
LIABILITIES
Noninterest-bearing deposits $117,052 $ 95,975
Interest-bearing deposits 689,289 647,617
-------- --------
Total deposits 806,341 743,592
Short-term borrowings 68,127 34,804
Long-term borrowings 4,820 5,151
Accrued interest and other liabilities 2,726 5,715
-------- --------
TOTAL LIABILITIES 882,014 789,262
STOCKHOLDERS' EQUITY
Common stock - par value $1.00; shares authorized 15,000,000 (1996) and
6,000,000 (1995); shares issued and outstanding 4,902,113 (1996)
and 4,820,604 (1995) 4,902 4,821
Surplus 33,474 31,814
Retained earnings 57,669 49,893
Net unrealized gain on investments available-for-sale, net of taxes 536 413
-------- --------
TOTAL STOCKHOLDERS' EQUITY 96,581 86,941
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $978,595 $876,203
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
30
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENT OF INCOME
(Dollar in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $46,491 $43,926 $32,594
Interest on loans held for sale 196 55 57
Interest on deposits with banks 187 39 38
Interest and dividends on securities:
Taxable 15,062 13,769 14,299
Nontaxable 3,343 3,454 4,041
Interest on federal funds sold 1,342 872 549
------- ------- -------
TOTAL INTEREST INCOME 66,621 62,115 51,578
Interest expense:
Interest on deposits 27,889 26,705 20,032
Interest on short-term borrowings 2,021 2,284 1,175
Interest on long-term borrowings 323 353 289
------- ------- -------
TOTAL INTEREST EXPENSE 30,233 29,342 21,496
------- ------- -------
NET INTEREST INCOME 36,388 32,773 30,082
Provision for credit losses 308 180 212
------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 36,080 32,593 29,870
Noninterest income:
Securities gains (losses) 30 (279) (84)
Service charges on deposit accounts 2,964 2,569 2,348
Gains on mortgage sales 825 244 175
Trust income 943 760 629
Other income 1,785 1,184 1,121
------- ------- -------
TOTAL NONINTEREST INCOME 6,547 4,478 4,189
Noninterest expenses:
Salaries and employee benefits 14,447 12,726 11,959
Occupancy expense of premises 2,082 1,814 1,905
Equipment expenses 2,165 1,943 1,617
Marketing 1,145 585 503
FDIC insurance expense 4 818 1,510
Outside data services 1,109 787 630
Other expenses 4,392 3,751 3,338
------- ------- -------
TOTAL NONINTEREST EXPENSES 25,344 22,424 21,462
------- ------- -------
Income before income taxes 17,283 14,647 12,597
Income tax expense 5,789 4,653 3,694
------- ------- -------
NET INCOME $11,494 $ 9,994 $ 8,903
======= ======= =======
NET INCOME PER COMMON SHARE $ 2.36 $ 2.09 $ 1.90
</TABLE>
See Notes to Consolidated Financial Statements.
31
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,494 $ 9,994 $ 8,903
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,791 1,655 1,527
Provision for credit losses 308 180 212
Deferred income taxes 152 253 (178)
Origination of loans held for sale (59,717) (23,971) (8,497)
Proceeds from sales of loans held for sale 57,282 19,490 15,651
Gains on sales of loans held for sale (825) (244) (175)
Securities (gains) losses (30) 278 84
Net change in:
Accrued interest receivable (1,423) (300) (1,162)
Accrued income taxes 202 477 (187)
Other accrued expenses (1,457) 255 (246)
Other - net 978 (2,553) 390
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,755 5,514 16,322
Cash flows from investing activities:
Net (increase) decrease in interest-bearing deposits with banks (13) (588) 11,865
Purchases of investments held-to-maturity (36,941) (26,408) (56,828)
Purchases of other equity securities (304) 0 0
Purchases of investments available-for-sale (159,085) (38,030) (65,782)
Proceeds from sales of investments available-for-sale 19,392 13,140 33,879
Proceeds from maturities, calls and principal payments of
investments held-to-maturity 28,815 39,902 15,572
Proceeds from maturities, calls and principal payments of
investments available-for-sale 77,075 35,729 66,955
Proceeds from sales of loans 291 1,620 916
Proceeds from sales of other real estate owned 442 665 1,459
Net increase in loans receivable (31,127) (34,701) (72,700)
Purchases of loans 0 (2,826) (10,851)
Net funds received in branch purchase 17,181 0 0
Expenditures for premises and equipment (2,031) (5,281) (2,089)
--------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (86,305) (16,778) (77,604)
Cash flows from financing activities:
Net increase (decrease) in demand and savings accounts 25,484 (45,164) 1,259
Net increase (decrease) in time and other deposits 18,571 88,417 22,658
Net increase (decrease) in short-term borrowings 31,223 (13,439) 19,936
Proceeds from long-term borrowings 1,800 0 3,000
Retirement of long-term borrowings (31) (29) (26)
Net increase (decrease) in balance due to banks (1,733) 1,733 (248)
Proceeds from issuance of common stock 1,741 2,379 1,063
Dividends paid (3,763) (2,881) (2,369)
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,292 31,016 45,273
--------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,258) 19,752 (16,009)
Cash and cash equivalents at beginning of year 60,435 40,683 56,692
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR* $ 56,177 $ 60,435 $ 40,683
========= ======== ========
Supplemental disclosures:
Interest payments $ 31,157 $ 29,424 $ 20,536
Income tax payments 5,441 4,286 4,121
Noncash investing activities:
Transfers from loans to other real estate owned 210 419 323
Reclassification of borrowings from long-term to short-term 2,100 0 0
Investment transfers from available-for-sale 0 0 66,925
Investment transfers from held-to-maturity 0 43,630 0
Unrealized gain (loss) on investments available-for-sale net of
deferred tax effect of $77, $2,328 and $(3,929), respectively 123 3,700 (6,245)
</TABLE>
/*/ Cash and cash equivalents include those amounts under the captions "Cash and
due from banks" and "Federal funds sold" on the Consolidated Balance Sheets.
See Notes to Consolidated Financial Statements.
32
<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,
--------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $ 4,821 $ 2,484 $ 2,454
Increase in shares as a result of 2 for 1 stock split in the form of
a stock dividend 0 2,140 0
Increase in shares as a result of a 20% stock dividend by pooled
bank prior to acquisition 0 82 0
Employee stock purchases - shares issued 11,020 (1996),
8,592 (1995) and 4,950 (1994) 11 9 5
Exercise of stock options - shares issued 31,565 (1996),
9,404 (1995) and 8,356 (1994) 31 10 8
Dividend reinvestment plan stock purchases - shares
issued 35,273 (1996), 35,300 (1995) and 16,613 (1994) 35 35 17
Exercise of warrants - shares issued 3,755 (1996), 61,404 (1995)
and 63 (1994) 4 61 0
------- ------- -------
COMMON STOCK AT END OF YEAR 4,902 4,821 2,484
Surplus:
Balance at beginning of year 31,814 31,772 30,739
Transfer to common stock - for 2 for 1 stock split 0 (2,140) 0
Transfer to common stock - 20% stock dividend by pooled bank 0 (82) 0
Employee stock purchases 353 201 223
Exercise of stock options 67 80 42
Dividend reinvestment stock purchases 1,194 965 768
Exercise of warrants 46 1,018 0
------- ------- -------
SURPLUS AT END OF YEAR 33,474 31,814 31,772
Retained earnings:
Balance at beginning of year 49,893 42,797 36,269
Net income 11,494 9,994 8,903
Cash dividends - $0.78 (1996), $0.64 (1995) and $0.54 (1994) per share (3,620) (2,755) (2,273)
Cash dividends by pooled bank prior to acquisition (98) (143) (102)
------- ------- -------
RETAINED EARNINGS AT END OF YEAR 57,669 49,893 42,797
Net unrealized gain (loss) on investments available-for-sale, net of taxes:
Balance at beginning of year 413 (3,287) 2,958
Net change in unrealized gain (loss) on investments
available-for-sale, net of taxes 123 3,700 (6,245)
------- ------- -------
NET UNREALIZED GAIN (LOSS), NET OF TAXES, AT END OF YEAR 536 413 (3,287)
------- ------- -------
TOTAL STOCKHOLDERS' EQUITY $96,581 $86,941 $73,766
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
33
<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 1996.
The following is a summary of the more significant accounting policies:
Nature of Operations
Through its subsidiary, the Company conducts a full-service commercial banking
and trust business. Services to individuals and businesses include accepting
deposits; extending real estate, consumer and commercial loans and lines of
credit; safe deposit boxes; and personal trust services. The Company operates in
three Maryland counties, Montgomery, Howard and Anne Arundel, and continues to
show a concentration in loans secured by residential and commercial real estate.
The Company has a small presence, based on revenue, in the annuity business
through an insurance agency subsidiary.
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Residential Mortgage Loans Held for Sale
The Company engages in sales of residential mortgage loans originated by the
Bank. Loans held for sale are carried at the lower of aggregate cost or fair
value. Gains and losses on sales of these loans are recorded as a component of
noninterest income in the Consolidated Statements of Income.
When the Company retains the servicing rights to collect and remit
principal and interest payments, manage escrow account matters and handle
borrower relationships on mortgage loans sold, resulting service fee income is
included in noninterest income. The Company's current practices are to sell all
loans servicing released and, therefore, it has no intangible asset recorded for
the value of such servicing.
Investments Available-for-Sale
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 stockholders'
equity, net of deferred tax. Realized gains and losses, using the specific
identification method, are included as a separate component of noninterest
income. Related interest and dividends are included in interest income. Premiums
on covered call options are deferred and included in noninterest income upon
option expiration or included in the computation of realized gains upon option
exercise.
Investments Held-to-Maturity and Other Equity Securities
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.
34
<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
loans, on nonaccrual when any portion of the principal or interest is 90 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 nonaccrual, but are
charged off when they are five months past due.
Loans are considered impaired when, based on current information, it is
probable that the Company will not collect all principal and interest payments
according to contractual terms. Generally, loans are considered impaired once
principal or interest payments become 90 days or more past due and they are
placed on nonaccrual. Management also considers the financial condition of the
borrower, cash flows of the loan and the value of the related collateral.
Impaired loans do not include large groups of smaller balance homogeneous loans
such as residential real estate and consumer installment loans which are
evaluated collectively for impairment. Loans specifically reviewed for
impairment are not considered impaired during periods of "minimal delay" in
payment (90 days or less) provided eventual collection of all amounts due is
expected. The impairment of a loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if repayment is expected to be provided by the
collateral. Generally, the Company's impairment on such loans is measured by
reference to the fair value of the collateral. Interest income on impaired loans
is recognized on the cash basis.
Allowance for Credit Losses
The allowance for credit losses represents an amount which, in management's
judgment, will be adequate to absorb probable losses on existing loans and other
extensions of credit that may become uncollectible. The adequacy of the
allowance for credit losses is determined through careful and continuous review
and evaluation of the loan portfolio and involves the balancing of a number of
factors to establish a prudent level. Among the factors considered are lending
risks associated with growth and entry into new markets, loss allocations for
specific nonperforming credits, the level of the allowance to nonperforming
loans, historical loss experience, economic conditions, portfolio trends and
credit concentrations, and changes in the size and character of the loan
portfolio. Allowances for impaired loans are generally determined based on
collateral values. 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.
Management believes that the allowance for credit losses is adequate. While
management used available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, and independent consultants engaged by the Bank,
periodically review the Bank's loan portfolio and allowance for credit losses.
Such review may result in recognition of additions to the allowance based on
their judgments of information available to them at the time of their
examination.
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. 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 added to a valuation reserve. Gains and losses realized from the
sale of OREO, as well as valuation adjustments, are included in noninterest
income. Expenses of operation are included in noninterest expense.
Income Taxes
Income tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Under the liability method,
deferred income taxes are determined based on the differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
New Accounting Standards
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), establishes a fair value based method of accounting
for employee stock options and expands disclosure requirements, including a
35
<PAGE>
description of the plan. FASB 123 permits a company to continue to measure
compensation cost for its stock option plans using the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company adopted FASB 123 on
January 1, 1996 as presented in Note 12.
Two other newly issued accounting standards were adopted in the first
quarter of 1996 and together with FASB 123 did not have a material effect on the
financial position or results of operations of the Company.
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
(FASB 121), requires that certain long-lived assets be reviewed for impairment
when events or circumstances indicate that the carrying amounts of the assets
may not be recoverable. If such review indicates that the carrying amount of an
asset exceeds the sum of its expected future cash flows, the asset's carrying
value is written down to fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value less cost to sell.
Statement of Financial Accounting Standards No. 122, "Accounting for
Mortgage Servicing Rights" (FASB 122), requires the recognition of an asset at
the estimated present value of future servicing rights. Additionally, FASB 122
requires that capitalized rights to service mortgage loans be assessed for
impairment by individual risk stratum by comparing each stratum's carrying
amount with its fair value. To the extent that the carrying value of mortgage
servicing rights exceeds fair value by individual stratum, the resulting
impairment is recognized in earnings through a valuation allowance. As stated
above in the policy note, the Company's current practices are to sell
residential mortgage loans with servicing released.
NOTE 2 - ACQUISITIONS
On August 29, 1996, the Company and its wholly owned subsidiary, Sandy Spring
National Bank of Maryland, merged with Annapolis Bancshares, Inc. (ABI) and its
wholly owned subsidiary, Bank of Annapolis, Annapolis, Maryland, a state-
chartered commercial bank. The acquisition was accounted for as a pooling of
interests, and financial information for all prior periods presented has been
restated to include the results of operations and financial position of ABI.
Based on an exchange ratio of .62585 shares of the Company's common stock for
each outstanding share of ABI common stock, the Company issued 495,940 shares of
common stock. Pre-tax merger-related expenses of $724 are included in
noninterest expenses ($558 after tax effect). Total assets and the results of
operations of the separate entities prior to the combination are summarized as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
- --------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Total assets:
Company $835,292 $794,319
ABI 81,063 81,884
-------- --------
$916,355 $876,203
======== ========
<CAPTION>
Years Ended December 31,
Six Months Ended -----------------------------
June 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
Net interest income:
Company $ 15,529 $ 29,243 $ 27,085
ABI 2,103 3,530 2,997
-------- -------- --------
$ 17,632 $ 32,773 $ 30,082
======== ======== ========
Net income:
Company $ 5,038 $ 8,923 $ 8,020
ABI 740 1,071 883
-------- -------- --------
$ 5,778 $ 9,994 $ 8,903
======== ======== ========
</TABLE>
On December 13, 1996, the Company completed its acquisition of the
Bethesda, Maryland branch of Bank of Maryland, including approximately $19
million dollars of deposits and related overdraft protection accounts. The
transaction has been accounted for under the purchase method of accounting, in
accordance with Accounting Principles Board Opinion No. 16 (Accounting for
Business Combinations) and accordingly, the branch's results of operations are
included in the consolidated financial statements since December 13, 1996, only.
The deposits were purchased at a premium of 7.82%, resulting in recognition of a
deposit premium intangible of $1,008 to be amortized straight-line over four
years. Goodwill of $453 also resulted from the transaction and will be amortized
straight-line over ten years. The Company's intangible assets are included in
other assets.
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 1996 was $20,245 and in 1995 was $19,041.
36
<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>
1996 1995
--------------------------------------------------- -------------------------------------------------
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 $ 26,953 $ 42 $ (55) $ 26,940 $ 15,972 $ 49 $ (30) $ 15,991
U.S. Agency 145,517 186 (428) 145,275 70,096 300 (290) 70,106
State and municipal 26,277 382 (31) 26,628 34,686 692 (48) 35,330
Corporate debt obligations 1,500 0 (17) 1,483 2,499 9 (50) 2,458
Mortgage-backed securities 32,195 149 (468) 31,876 40,558 159 (435) 40,282
-------- ------ ----- -------- -------- ------ ----- --------
Total debt securities 232,442 759 (999) 232,202 163,811 1,209 (853) 164,167
Marketable equity
securities 470 1,751 0 2,221 470 1,316 0 1,786
-------- ------ ----- -------- -------- ------ ----- --------
Total investments
available-for-sale $232,912 $2,510 $(999) $234,423 $164,281 $2,525 $(853) $165,953
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
The amortized cost and estimated fair values of investments available-for-
sale at December 31, 1996 and 1995 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>
1996 1995
---------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 29,429 $ 29,481 $ 31,754 $ 31,871
Due after one through five years 182,169 182,142 113,055 113,425
Due after five years through ten years 17,997 17,731 13,935 13,848
Due after ten years 2,847 2,848 5,067 5,023
-------- -------- -------- --------
Total debt securities $232,442 $232,202 $163,811 $165,953
======== ======== ======== ========
</TABLE>
Sales of investments available-for-sale during 1996, 1995 and 1994 resulted
in the following:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds $19,392 $13,140 $33,879
Gross gains 97 4 139
Gross losses 73 345 284
</TABLE>
At December 31, 1996 and 1995, investments available-for-sale with a
carrying value of $60,654 and $48,709, 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, except for U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1996 and 1995.
At December 31, 1996, the Bank had outstanding Covered Call Option
contracts for 2,000 shares of Sallie Mae common stock, with expiration dates of
January 18, 1997 (1,000 shares) and April 19, 1997 (1,000 shares). Premiums
received on these options amounted to $5. The contracts have an average option
price of $97.50 per share and the underlying securities have a quoted market
price of $93.13 per share. These options are incident to an established plan to
enhance the yield on the Bank's equity securities in the available-for-sale
portfolio. Excluding option premiums, these Sallie Mae holdings had an
unrealized gain at December 31, 1996 of $1,385 ($92.83 per share). Generally,
the option contracts have a term of approximately one to four months. During
1996, the Bank received total option premiums of $11. The amount of option
premiums recorded as noninterest income (upon option expiration) was $2, and the
amount of option premiums that were included in realized gains (where options
were exercised) was $4. These covered call options are subject to disclosure as
derivative financial instruments in accordance with Statement of Financial
Accounting Standards No. 119. The option contracts do not exhibit any credit
risk since the Bank is holder of the premiums paid. Market risk is mitigated by
the fact that the option price is stated in the contract and that the underlying
securities held have a significant unrealized gain position.
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>
1996 1995
--------------------------------------------------- ---------------------------------------------------
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 $ 0 $ 0 $ 0 $ 0 $ 500 $ 0 $ (2) $ 498
U.S. Agency 42,932 103 (208) 42,827 40,185 90 (361) 39,914
State and municipal 37,152 697 (167) 37,682 30,522 855 (38) 31,339
Mortgage-backed securities 42,188 449 (79) 42,558 48,579 807 (60) 49,326
Certificates of deposit 0 0 0 0 100 0 0 100
-------- ------ ----- -------- -------- ------ ----- --------
Total investments
held-to-maturity $122,272 $1,249 $(454) $123,067 $119,886 $1,752 $(461) $121,177
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
37
<PAGE>
In accordance with a Financial Accounting Standards Board pronouncement in
late 1995, permitting a one time transfer from investments held-to-maturity into
investments available-for-sale, the Company transferred $43,630 from its held-
to-maturity portfolio into the available-for-sale category with net unrealized
gains of $279, net of taxes.
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>
1996 1995
--------------------- ---------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 12,926 $ 12,944 $ 5,687 $ 5,699
Due after one through five years 67,465 68,221 82,393 83,130
Due after five years through ten years 27,759 27,794 28,206 28,751
Due after ten years 14,122 14,108 3,600 3,597
-------- -------- -------- --------
Total investments held-to-maturity $122,272 $123,067 $119,886 $121,177
======== ======== ======== ========
</TABLE>
At December 31, 1996 and 1995, investments held-to-maturity with a book
value of $21,726 and $24,987 for 1995, 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, except for U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1996 or 1995.
Other equity securities at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Federal Reserve Bank stock $1,340 $1,036
Federal Home Loan Bank stock 3,771 3,911
------ ------
$5,111 $4,947
====== ======
</TABLE>
NOTE 6 - LOANS
Book values for the two most recent years are presented below for the major loan
categories at December 31:
<TABLE>
<CAPTION>
1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Real estate-mortgage $376,205 $363,927
Real estate-construction 47,654 41,725
Consumer 30,813 28,762
Commercial 68,467 57,718
Tax exempt 27 408
-------- --------
Total loans 523,166 492,540
Less: Allowance for credit losses (6,391) (6,597)
-------- --------
NET LOANS $516,775 $485,943
======== ========
</TABLE>
Loan fees amounting to $254 (1996), $270 (1995) and $247 (1994) were
included in interest and fees on loans. The servicing portfolio of mortgage
loans sold totalled $91,249 at December 31, 1996 and $108,324 at December 31,
1995. Escrow balances relating to the servicing portfolio amounted to $730 and
$861 at December 31, 1996 and 1995, respectively.
Activity in the allowance for credit losses for the preceding three years
ended December 31 is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $6,597 $6,663 $6,681
Provision for credit losses 308 180 211
Loan charge-offs (615) (749) (509)
Loan recoveries 101 503 280
------ ------ ------
Net recoveries (charge-offs) (514) (246) (229)
------ ------ ------
BALANCE AT END OF YEAR $6,391 $6,597 $6,663
====== ====== ======
</TABLE>
Information with respect to impaired loans at December 31, 1996 and for the
year ended is as follows:
<TABLE>
<S> <C>
Impaired loans with a valuation allowance $ 127
Impaired loans without a valuation allowance 1,153
------
Total impaired loans $1,280
======
Allowance for credit losses related to impaired loans $ 127
Allowance for credit losses related to other than impaired loans 6,264
------
Total allowance for credit losses $6,391
======
Average impaired loans for the year $1,327
======
Interest income on impaired loans recognized on the cash basis $ 0
======
</TABLE>
There were no impaired loans at December 31, 1995. Although $590 of loans
were classified as being in nonaccrual status at December 31, 1995, the
insignificant delay of payments caused the loans not to be classified as
impaired.
38
<PAGE>
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 6,652 $ 7,354
Buildings and leasehold improvements 13,226 11,778
Equipment 11,154 10,865
-------- --------
31,032 29,997
Less: Accumulated depreciation and amortization (10,821) (10,100)
-------- --------
NET PREMISES AND EQUIPMENT $ 20,211 $ 19,897
======== ========
</TABLE>
Depreciation and amortization expense amounted to $1,726 for 1996, $1,572
for 1995 and $1,445 for 1994.
Total rental expenses (net of rental income) for premises and equipment for
the three years ended December 31 were $303 (1996), $447 (1995) and $601 (1994).
Lease commitments bear initial terms varying from 3 to 10 years and are
associated with premises. Future minimum payments as of December 31, 1995, for
all noncancelable operating leases are:
<TABLE>
<CAPTION>
Year Ending Premises and
December 31, Equipment
- ------------------------------------------------------------------------------
<S> <C>
1997 $ 949
1998 781
1999 727
2000 624
2001 638
Thereafter 4,155
------
TOTAL $7,874
======
</TABLE>
NOTE 8 - DEPOSITS
Deposits outstanding at December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Noninterest-bearing demand $117,052 $ 95,975
Interest-bearing:
Demand 98,932 90,686
Money market savings 157,484 149,442
Regular savings 94,974 99,173
Time deposits 280,725 257,029
Time deposits - $100,000 or more 57,174 51,287
-------- --------
Total Interest-bearing 689,289 647,617
-------- --------
TOTAL DEPOSITS $806,341 $743,592
======== ========
</TABLE>
Interest expense on time deposits of $100,000 or more amounted to $2,640,
$2,576 and $1,531 for 1996, 1995 and 1994, respectively.
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).
The Company has a line of credit arrangement with the FHLB under which it
may borrow up to $145,000 at interest rates based upon current market
conditions. Short-term advances outstanding were $20,200 at December 31, 1996
and $3,000 at December 31, 1995.
Information relating to short-term borrowings is as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ----------------
Amount Rate Amount Rate Amount Rate
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At year end:
Repurchase agreements $44,193 4.65% $30,554 5.03% $20,824 4.70%
Other short-term borrowings 23,934 5.61 4,250 5.69 26,419 6.15
------- ------- -------
Total $68,127 4.99% $34,804 5.11% $47,243 5.51%
======= ======= =======
Average for the year:
Repurchase agreements $34,125 4.66% $23,843 5.15% $15,067 3.62%
Other short-term borrowings 7,739 5.58 16,762 6.31 13,906 4.61
Maximum month-end balance:
Repurchase agreements $44,193 $32,415 $20,824
Other short-term borrowings 23,934 42,359 35,730
</TABLE>
39
<PAGE>
NOTE 10 - LONG-TERM BORROWINGS
The Company had outstanding mortgages with balances due of $100 at December 31,
1996 and $131 at December 31, 1995. 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 $4,720 at December 31, 1996 and $5,020 at December 31, 1995
(see line of credit described in Note 9). Interest rates at December 31, 1995
range up to 8.21% and the maximum maturity is March 2006.
NOTE 11 - STOCKHOLDERS' EQUITY
As of December 31, 1996, Bancorp's Articles of Incorporation authorize
15,000,000 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.
Sandy Spring Bancorp has a Dividend Reinvestment Plan which 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 200,000 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. At December 31, 1996, the Bank could have paid dividends to its parent
company amounting to $18,719. There were no loans outstanding between the Bank
and Bancorp at December 31, 1996 and 1995.
On March 29, 1995, the Board of Directors approved a 2 for 1 stock split in
the form of a stock dividend payable to shareholders of record at the close of
business on April 12, 1995.
Stock warrants were issued by the pooled bank prior to merger. The
following share and price information related to those warrants was computed by
applying the exchange ratio used in the merger. Nontransferrable warrants to
acquire 3,755 shares of common stock at $13.31 per share, outstanding at
December 31, 1995, were exercised in 1996. Transferrable warrants to acquire
61,404 shares at $17.58 per share were exercised in 1995. There were no warrants
outstanding at December 31, 1996.
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. Share amounts and prices which follow have been
adjusted to give retroactive effect to the 2-for-1 stock split declared March
29, 1995. The 1992 Plan authorizes the issuance of up to 270,000 shares of
common stock, has a term of ten years, and is administered by the Human
Resources Committee of the Board. Options are granted at market value at date of
grant and must be exercised within ten years. Options granted prior to December,
1996, were immediately exercisable. Options granted in December, 1996 become
exercisable over a period of three years.
A total of 103,900 shares of common stock were granted under the 1982 Plan,
of which 6,000 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>
1996 1995
--------------------------------------------------------------------
Number Weighted Number Weighted
of Average of Average
Shares Exercise Price Shares Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, beginning of year 76,936 $ 17.89 82,192 $ 15.63
Granted 6,000 33.66 5,250 37.00
Exercised (46,935) 14.19 (10,506) 9.75
------ ------
BALANCE, END OF YEAR 36,001 $ 25.34 76,936 $ 17.89
====== ======
Weighted average fair value of
options granted during the year $ 7.68 $ 10.11
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------
Weighted Average Options Exercisable
Remaining -------------------------------
Range of Contractual Life Weighted Average Weighted Average
Exercise Prices Number (in years) Exercise Price Number Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$13.98 - $23.00 15,751 5.9 $ 18.76 15,751 $18.76
$24.50 - $37.00 20,250 8.8 30.45 16,750 29.87
------ ------
36,001 $ 25.34 32,501 $24.49
====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Extended Binomial option-pricing model with the following weighted-average
assumptions used for grants in the years ended December 31, 1996 and 1995:
dividend yield of 2.67%; expected volatility of 25%; risk-free interest rate of
5.58%; and expected lives of 10 years.
40
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), and is continuing to apply Accounting Principles Board
Opinion No. 25 (APB 25) and related interpretations in accounting for its stock
option plan. Under APB 25, no compensation expense related to the plans was
recorded during the two years ended December 31, 1996. If the Company had
elected to recognize compensation cost based on the fair value at the grant
dates for awards under the plan consistent with the method prescribed by FASB
123, net income and earnings per share would have been changed to the pro forma
amounts as follows for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Net income $11,475 $9,961
Earnings per share $ 2.36 $ 2.09
</TABLE>
The pro forma amounts are not representative of the effects on reported
net income for future years.
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. The Plan invests primarily in a diverse portfolio
of managed fixed income and equity funds. 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>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned $ 377 $ 333 $ 316
Interest cost on projected benefit obligation 351 301 307
Actual (return) loss on plan assets (362) (721) 5
Net amortization and deferral (45) 479 (370)
Early retirement window options 0 274 271
----- ----- -----
PENSION EXPENSE FOR THE YEAR $ 321 $ 666 $ 529
===== ===== =====
</TABLE>
For 1996, 1995 and 1994, the weighted average discount rate and rate of
increase in future compensation levels used in determining the actuarial present
value of the projected benefit obligation were 7.50% and 5.50%, respectively,
while the expected long-term rate of return on assets was 8.50%.
<TABLE>
<CAPTION>
The Plan's funded status as of December 31 is:
1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$2,871 in 1996 and $3,169 in 1995 $3,205 $3,460
Additional liability based upon projected compensation 1,385 1,268
------ ------
Projected benefit obligation for service rendered to date (PBO) 4,590 4,728
Plan assets at fair value 4,903 4,787
------ ------
Plan assets greater than PBO 313 59
Unrecognized net gain 962 915
Prior service cost not yet recognized in net periodic pension expense 9 10
Unrecognized net asset, net of amortization (9) (11)
------ ------
PREPAID PENSION COST INCLUDED IN OTHER ASSETS $1,275 $ 973
====== ======
</TABLE>
The Company has a qualified, noncontributory profit sharing plan that
covers all employees after 90 days of service. The Plan permits 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 $468 in 1996,
$400 in 1995, and $346 in 1994. The Company utilizes a performance based
compensation model which provides additional incentives to employees based on
the Company's financial performance as measured against key performance
indicator goals set by management. Payments are made quarterly and total expense
under the plan amounted to $479 in 1996.
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 1996, 1995 and 1994 were $25, $99, and $55, 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 under the plan, covering insurance premium and
out-of-pocket expense reimbursement benefits, totalled $7 in 1996, $18 in 1995
and $17 in 1994.
41
<PAGE>
NOTE 14 - INCOME TAXES
Income tax expense for the years ended December 31 consists of:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------
Current income taxes:
<S> <C> <C> <C>
Federal $4,692 $3,398 $2,943
State 1,249 983 929
------ ------ ------
TOTAL CURRENT 5,941 4,381 3,872
Deferred income taxes:
Federal (122) 223 (146)
State (30) 49 (32)
------ ------ ------
TOTAL DEFERRED (152) 272 (178)
------ ------ ------
TOTAL INCOME TAX EXPENSE $5,789 $4,653 $3,694
====== ====== ======
</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>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses $ 2,021 $ 2,069
Deferred loan fees and costs 464 298
Net operating loss carry forward 434 473
Other 164 297
------- -------
Gross deferred tax assets 3,083 3,137
Deferred tax liabilities:
Depreciation (841) (907)
Pension plan costs (424) (660)
Unrealized gains on investments available-for-sale (337) (156)
Other (331) (207)
------- -------
Gross deferred tax liabilities (1,933) (1,930)
------- -------
NET DEFERRED TAX ASSET $ 1,150 $ 1,207
======= =======
</TABLE>
No valuation allowance exists with respect to deferred tax items. Net
deferred tax assets are included in other assets.
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>
1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FEDERAL INCOME TAX RATE 35.0% 34.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt interest income (5.8) (7.1) (10.9)
State income taxes, net of federal income tax benefits 4.6 4.6 4.7
Other (0.3) 0.3 1.5
-------- -------- --------
EFFECTIVE TAX RATE 33.5% 31.8% 29.3%
</TABLE>
NOTE 15 - NET INCOME PER COMMON SHARE
Income per common share is based on weighted average number of shares
outstanding of 4,868,206 in 1996, 4,771,867 in 1995 and 4,686,431 in 1994. All
per share data have been adjusted to give retroactive effect to a 2 for 1 stock
split in the form of a stock dividend declared on March 29, 1995. The
potentially 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 Company.
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 1996.
- --------------------------------------------------------------------------------
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Balance at January 1, 1996 $ 7,223
Additions 4,859
Repayments (4,681)
-------
BALANCE AT DECEMBER 31, 1996 $ 7,401
=======
</TABLE>
42
<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 $101,126 at December 31, 1996 and $84,944 at December
31, 1995. These commitments are contingent upon continuing customer compliance
with the terms of the agreement.
Unused portions of equity lines at year end amounted to $59,859 in 1996 and
$51,937 in 1995. The Company's home equity line accounts, which are secured by
the borrower's residence, are reviewed annually.
Irrevocable letters of credit, totalling $4,082 at December 31, 1996 and
$5,269 at December 31, 1995, 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.
NOTE 18 - LITIGATION
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, and other activities of the Company.
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, operating results or liquidity.
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 97.4% of the Company's assets and 99.8%
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 the fair values of the
individual financial assets and liabilities and should not be considered an
indication of the fair value of the Company.
The estimated fair values of the Company's financial instruments at
December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
Book Estimated Book Estimated
Value Fair Value Value Fair Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and temporary investments/(1)/ $ 65,023 $ 65,050 $ 66,008 $ 66,068
Investments available-for-sale 234,423 234,423 165,953 165,953
Investments held-to-maturity and
other equity securities 127,383 128,178 124,833 126,124
Loans, net of allowance 516,775 522,945 485,943 491,195
Accrued interest receivable and other assets/(2)/ 9,404 9,404 9,954 9,954
FINANCIAL LIABILITIES
Deposits $806,341 $806,602 $743,592 $744,538
Short-term borrowings 68,127 68,320 34,804 34,804
Long-term borrowings 4,820 4,886 5,151 5,158
Accrued interest payable and other liabilities/(2)/ 695 695 3,386 3,386
<CAPTION>
Estimated Estimated
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OFF-BALANCE SHEET FINANCIAL ASSETS
Commitments to extend credit/(3)/ $160,985 $ (684) $136,881 $ (314)
Irrevocable letters of credit 4,082 (20) 5,269 (25)
Servicing rights on mortgages sold 91,249 940 108,324 986
</TABLE>
/(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.
43
<PAGE>
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:
Cash and due from banks and federal funds sold. Carrying amount
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
estimated 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. Carrying amount approximated the fair value of
accrued interest, considering the short-term nature of the receivable and its
expected collection.
Other assets. Carrying amount 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 time deposits was based upon the discounted value of
contractual cash flows at current rates for deposits of similar remaining
maturity.
Short-term borrowings. Carrying amount 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. Carrying amount 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, escrow
balances, prepayment risks, and current market supply and demand factors.
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 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $10,264 $ 8,881
Investments available-for-sale (at fair value) 831 735
Investment in subsidiary 85,136 77,043
Other assets 261 308
------- -------
Total assets $96,492 $86,967
======= =======
LIABILITIES
Other liabilities $ 223 $ 273
------- -------
Total liabilities 223 273
STOCKHOLDERS' EQUITY
Common stock 4,902 4,821
Surplus 33,474 31,814
Retained earnings 57,669 49,893
Unrealized gain on investments available-for-sale, net of taxes 224 166
------- -------
Total stockholders' equity 96,269 86,694
------- -------
Total liabilities and stockholders' equity $96,492 $86,967
======= =======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
STATEMENTS OF INCOME 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary $ 3,620 $ 2,826 $ 1,806
Interest income 366 358 250
------- ------- -------
Total income 3,986 3,184 2,056
Interest and other expenses 647 337 261
------- ------- -------
Income before income taxes and equity in undistributed income of subsidiary 3,339 2,847 1,795
Income tax expense (benefit) (14) 8 (4)
------- ------- -------
Income before equity in undistributed income of subsidiary 3,353 2,839 1,799
Equity in undistributed income of subsidiary 8,141 7,155 7,104
------- ------- -------
NET INCOME $11,494 $ 9,994 $ 8,903
======= ======= =======
<CAPTION>
Years Ended December 31,
--------------------------------
STATEMENTS OF CASH FLOWS 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $11,494 $ 9,994 $ 8,903
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income - subsidiary (8,141) (7,155) (7,104)
Other - net 73 (11) (6)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,426 2,828 1,793
Cash flows from investing activities:
Purchase of investments available-for-sale 0 (465) 0
Capital contributed to subsidiary 0 (1,070) 0
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES 0 (1,535) 0
Cash flows from financing activities:
Retirement of long-term debt (21) (17) (17)
Proceeds from issuance of common stock 1,741 2,379 1,063
Dividends paid (3,763) (2,881) (2,369)
------- ------- -------
NET CASH USED BY FINANCING ACTIVITIES (2,043) (519) (1,323)
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,383 774 470
Cash and cash equivalents at beginning of year 8,881 8,107 7,637
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $10,264 $ 8,881 $ 8,107
======= ======= =======
</TABLE>
NOTE 21 - PROSPECTIVE ACCOUNTING CHANGES
On January 1, 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Management does not believe
that adoption of this pronouncement will have a material impact on the financial
position and results of operations of the Company.
NOTE 22 - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain amounts and ratios (set forth in
the table on page 46) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). As of December 31, 1996, the capital
levels of the Company and the Bank substantially exceed all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Company's or the Bank's category.
45
<PAGE>
<TABLE>
<CAPTION>
The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital (to risk weighted assets):
Company $100,520 17.56% $45,794 8.00% $57,242 10.00%
Sandy Spring National Bank of Maryland 89,611 15.68 45,718 8.00 57,147 10.00
Tier 1 capital (to risk weighted assets):
Company 94,129 16.44 22,897 4.00 34,345 6.00
Sandy Spring National Bank of Maryland 83,220 14.56 22,859 4.00 34,288 6.00
Tier 1 capital (to average assets):
Company 94,129 10.38 36,257 4.00 45,321 5.00
Sandy Spring National Bank of Maryland 83,220 9.19 36,227 4.00 45,284 5.00
As of December 31, 1995:
Total capital (to risk weighted assets):
Company 92,555 17.67 41,894 8.00 52,367 10.00
Sandy Spring National Bank of Maryland 83,059 15.89 41,820 8.00 52,276 10.00
Tier 1 capital (to risk weighted assets):
Company 86,008 16.42 20,947 4.00 31,420 6.00
Sandy Spring National Bank of Maryland 76,524 14.64 20,910 4.00 31,366 6.00
Tier 1 capital (to average assets):
Company 86,008 10.09 34,109 4.00 42,637 5.00
Sandy Spring National Bank of Maryland 76,524 8.98 34,080 4.00 42,600 5.00
</TABLE>
NOTE 23 - QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected consolidated quarterly financial data for the year ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands, except per share data)
Interest income $ 16,163 $16,379 $16,773 $17,306
Net interest income 8,704 8,929 9,193 9,562
Provisions for loan losses 183 25 0 100
Income before income taxes 4,274 4,332 3,845 4,832
Net income $ 2,876 $ 2,903 $ 2,473 $ 3,242
Net income per share $ 0.60 $ 0.60 $ 0.51 $ 0.65
</TABLE>
Amounts shown above for the first and second quarters of 1996 have been
retroactively restated to reflect the acquisition of ABI on August 29, 1996,
and, accordingly, differ from amounts originally reported as shown below:
<TABLE>
<CAPTION>
First Quarter Second Quarter
------------------------------------------------------------------------------
Originally Effect As Originally Effect As
Reported of Pooling Restated Reported of Pooling Restated
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income $14,217 $1,946 $16,163 $14,397 $1,982 $16,379
Net interest income 7,664 1,040 8,704 7,865 1,064 8,929
Provision for loan losses 150 33 183 0 25 25
Income before income taxes 3,687 587 4,274 3,711 621 4,332
Net income $ 2,516 $ 360 $ 2,876 $ 2,522 $ 381 $ 2,903
Net income per share $ 0.58 $ 0.02 $ 0.60 $ 0.58 $ 0.02 $ 0.60
</TABLE>
NOTE 24--CONTINGENCIES
In the fourth quarter of 1996, the Bank learned that it had not fully complied
with certain requirements of the federal Bank Secrecy Act and related
regulations, including obligations to monitor and file reports of certain types
of currency transactions. Financial institutions that fail to comply with the
requirements of the Bank Secrecy Act may be subject to penalties, including
civil money penalties. It is not now known whether such penalties or any other
action will be sought against the Bank in connection with its noncompliance, or,
if they are, the amount or nature of such penalties.
46
<PAGE>
Sandy Spring Bancorp and Subsidiaries
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Management acknowledges its responsibility for financial reporting (both audited
and unaudited) which provides a fair representation of the Company's operations
and is reliable and relevant to a meaningful appraisal of the Company.
Management has prepared the financial statements in accordance with
generally accepted accounting principles, making appropriate use of estimates
and judgment, and considering materiality. Except for tax equivalency
adjustments made to enhance comparative analysis, all financial information is
consistent with the audited financial statements.
Oversight of the financial reporting process is provided by the Audit
Committee of the Board of Directors, which consists of outside directors. This
committee meets on a regular basis, in private, with the internal auditor to
approve the audit schedule and scope, discuss the adequacy of the internal
control system and the quality of financial reporting, review audit reports and
address problems. The committee also reviews the Company's annual report to
shareholders and the annual report to the Securities and Exchange Commission on
form 10-K. The Audit Committee meets at least annually with the external
auditors, and has direct and private access to them at any time.
The independent public accounting firm of Stegman & Company has examined
the Company's financial records. The resulting opinion statement which follows
is based upon knowledge of the Company's accounting systems, as well as on tests
and other audit procedures performed in accordance with generally accepted
auditing standards.
/s/ Hunter R. Hollar /s/ James H. Langmead
Hunter R. Hollar James H. Langmead
President and Chief Executive Officer Vice President and Treasurer
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, 1996 and 1995, 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, 1996. 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. The consolidated financial statements
give retroactive effect to the merger of Sandy Spring Bancorp and Annapolis
Bancshares, Inc., which has been accounted for using the pooling of interests
accounting method as described in Note 2 to the consolidated financial
statements. We did not audit the 1995 and 1994 consolidated financial statements
of Annapolis Bancshares, Inc., which statements reflect total assets
constituting 9.3% for 1995 and net income constituting 10.7% for 1995 and 9.9%
for 1994 of the related consolidated financial statement totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Annapolis
Bancshares, Inc., is based solely on the report of the other auditors.
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, based on our audits, and for 1995 and 1994 the report of
other auditors, 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, 1996 and 1995, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
/s/ Stegman & Company
Towson, Maryland
January 31, 1997
47
<PAGE>
Sandy Spring Bancorp and Sandy Spring National Bank of Maryland
OFFICERS
(as of March 1, 1997)
Sandy Spring Bancorp
OFFICERS
Executive Officers
Hunter R. Hollar
President and
Chief Executive Officer
James H. Langmead
Vice President and Treasurer
CORPORATE SECRETARY
Marjorie S. Holsinger
AUDITOR
Mark G. Shullenbarger
Sandy Spring National Bank of Maryland
OFFICERS
Executive Officers
Hunter R. Hollar
President and
Chief Executive Officer
James H. Langmead
Senior Vice President and
Chief Financial Officer
James R. Farmer
Senior Vice President
Lawrence T. Lewis, III
Senior Vice President
Stanley L. Merson
Senior Vice President
Frank H. Small
Senior Vice President
CORPORATE SECRETARY
Marjorie S. Holsinger
AUDITOR
Mark G. Shullenbarger
VICE PRESIDENTS
Steven E. Anderson
Frank L. Bentz
James A. Berkey
Janice L. Biennas
Patricia M. Green
Roy J. Green
Susan N. Haybyrne
Steven B. Haynes
Peter L. Hickling
Brian J. Hiley
Marjorie S. Holsinger
Richard G. Knapp, Jr.
Thomas H. McDowell
David S. Miller
James P. Morison, Jr.
Dennis P. Neville
Richard M. Owens
Michael R. Penyak
Kathleen E. Pieper
Pamela M. Roberts
Daniel J. Schrider
William M. Slade
Russell R. Till
William A. Walker, II
Sara E. Watkins
William C. Watkins
Jeffrey A. Wood
ASSISTANT VICE
PRESIDENTS
Richard A. Adamson
Harriet B. Argentiere
C. Louise Basore
Joseph F. Brown
Mary Jo Clark
Shirley A. Connelly
Carole A. Corrigan
Dominick A. Del Grosso
Donald S. Emel
Lynn M. Gallagher
Victoria L. Gillespie
Chrystina M. Giorgio
Edward W. Kinsella
Donna L. Lampe
Susan D. Lemmon
A. Elizabeth Lipscomb
Debra L.C. Liverpool
Marsha E. Maloney
Nahid E. Moghadam
Richard S. Prin
Roberto D. Ramos
Marsha K. Ritter
Eric J. Schrider
Sally A. Shelton
Thomas E. Spilman
Carla S. Taylor
Janet M. Van Albert
Debra A. Whelan
S. Lynne White
OTHER OFFICERS
Frederick T. Billig
Lee E. Briggs
Barbara R. Brown
Sheila L. Butler
M. Denise Canard
Wendy J. Collins
Julie A. Hayne
Eileen F. Heiss
Christine L. Hill
Joyce C. Howes
Laura E. C. Johnson
Brita M. Jones
Mark A. Kruhm
Kenneth G. Kubu
Walter J. Laderer
Ronda M. Long
Mary C. Matthews
Yvonne D. Minor
Nicol M. Morris
Douglas A. Parker
Sharon L. Rhodes
Cheryl A. Spell
Sandra B. Stocksdale
Melanie N. Stranix
Lois D. Tringali
Daniel R. West
Kenneth V. Wilhelm
Marilyn P. Wyscarver
Sandra S. Wright
Gretchen F. Ziegler
Cathryn D. Zinkgraf
48
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
The Annual Meeting of shareholders
will be held at:
Indian Spring Country Club
13501 Layhill Road
Silver Spring, Maryland
on Wednesday, April 16, 1997 at 3 p.m.
FORM 10-K
The Company's Form 10-K may be obtained
free of charge by writing:
Marjorie S. Holsinger
Corporate Secretary
Sandy Spring Bancorp
17801 Georgia Avenue
Olney, Maryland 20832
Member Federal Deposit Insurance Corporation
Member Federal Reserve System
Equal Housing Lender
Affirmative Action/Equal Opportunity Employer
STOCK LISTING
Shares of Sandy Spring Bancorp are traded
on the National Association of Security
Dealers (NASDAQ) National Market under
the symbol SASR.
<PAGE>
Airpark
7653 Lindbergh Drive
Gaithersburg, Maryland 20879
(301) 774-8408
Annapolis
2024 West Street
Annapolis, Maryland 21401
(410) 266-3000
Ashton
1 Ashton Road
Ashton, Maryland 20861
(301) 774-8405
Aspenwood
(Aspenwood Residents
and Employees Only)
14400 Homecrest Road
Silver Spring, Maryland 20906
(301) 774-8406
Bedford Court
(Bedford Court Residents
and Employees Only)
3701 International Drive
Silver Spring, Maryland 20906
(301) 774-8407
Bethesda
7126 Wisconsin Avenue
Bethesda, Maryland 20814
(301) 951-0800
Executive Offices
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-6400
Burtonsville
3535 Spencerville Road
Burtonsville, Maryland 20866
(301) 774-8404
Clarksville
12276 Clarksville Pike
Clarksville, Maryland 21029
(410) 531-2650
Colesville
13300 New Hampshire Avenue
Silver Spring, Maryland 20904
(301) 774-8403
Damascus
26250 Ridge Road
Damascus, Maryland 20872
(301) 253-0133
East Gude Drive
1601 East Gude Drive
Rockville, Maryland 20850
(301) 570-8330
Gaithersburg Square
596 A North Frederick Avenue
Gaithersburg, Maryland 20877
(301) 963-3600
Layhill
14241 Layhill Road
Silver Spring, Maryland 20906
(301) 774-8406
Leisureworld Plaza
3801 International Drive
Silver Spring, Maryland 20906
(301) 774-8407
Lisbon
710-N Lisbon Centre Drive
Woodbine, Maryland 21797
(410) 442-1878
Montgomery Village
9921 Stedwick Road
Montgomery Village, Maryland 20879
(301) 990-3800
Olney
17801 Georgia Avenue
Olney, Maryland 20832
(301) 774-8402
Rockville
611 Rockville Pike
Rockville, Maryland 20852
(301) 217-0555
Sandy Spring
908 Olney-Sandy Spring Road
Sandy Spring, Maryland 20860
(301) 774-8401
Customer Service Center
(301) 774-8477
(800) 399-5919
Internet Address
http://www.ssnb.com
[LOGO OF SANDY SPRING BANCORP APPEARS HERE]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State
Subsidiaries Owned of Incorporation
- ------------ ----------- ----------------
<S> <C> <C>
Sandy Spring National Bank of Maryland 100% United States
Sandy Spring Insurance Corporation (1) 100% Maryland
Sandy Spring Mortgage Corporation (1) 100% Maryland
</TABLE>
- ----------------
(1) 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) 823-8000
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, 33-48453 (including
Registration Statement on Form S-8 and Post Effective Amendment No. 2 to Form S-
8 with respect to Registration Statements No. 33-29316 and 33-48453 ),33-35319,
33-56692, 333-11049, each on Form S-8, and Registration Statement No. 33-57182
on Form S-3, and in the Annual Report on Form 10-K of Sandy Spring Bancorp, Inc.
for the year ended December 31, 1996, of our report dated January 31, 1997,
relating to the consolidated financial statements of Sandy Spring Bancorp, Inc.
and Subsidiaries.
/s/ Stegman & Company
Stegman & Company
Towson, Maryland
March 21, 1997
<PAGE>
EXHIBIT 24
<PAGE>
POWER OF ATTORNEY
We, the undersigned directors of the Registrant, hereby severally constitute and
appoint Marjorie S. Holsinger 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, 1996, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Andrew N. Adams, Jr. Director February 26, 1997
- -----------------------------------
Andrew N. Adams, Jr.
/s/ John Chirtea Director February 26, 1997
- -----------------------------------
John Chirtea
/s/ Willard H. Derrick Chairman of the Board and Director February 26, 1997
- -----------------------------------
Willard H. Derrick
/s/ Susan D. Goff Director February 26, 1997
- -----------------------------------
Susan D. Goff
/s/ Solomon Graham Director February 26, 1997
- -----------------------------------
Solomon Graham
/s/ Joyce R. Hawkins Director February 26, 1997
- -----------------------------------
Joyce R. Hawkins
/s/ Thomas O. Keech Director February 26, 1997
- -----------------------------------
Thomas O. Keech
/s/ Charles F. Mess Director February 26, 1997
- -----------------------------------
Charles F. Mess
- ----------------------------------- Director
Robert L. Mitchell
/s/ Robert L. Orndorff, Jr. Director February 26, 1997
- -----------------------------------
Robert L. Orndorff, Jr.
/s/ Lewis R. Schumann Director February 26, 1997
- -----------------------------------
Lewis R. Schumann
/s/ W. Drew Stabler Director February 26, 1997
- -----------------------------------
W. Drew Stabler
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 32,899
<INT-BEARING-DEPOSITS> 861
<FED-FUNDS-SOLD> 23,278
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 234,423
<INVESTMENTS-CARRYING> 122,272
<INVESTMENTS-MARKET> 123,067
<LOANS> 524,760
<ALLOWANCE> (6,391)
<TOTAL-ASSETS> 978,595
<DEPOSITS> 806,341
<SHORT-TERM> 68,127
<LIABILITIES-OTHER> 2,726
<LONG-TERM> 4,820
0
0
<COMMON> 4,902
<OTHER-SE> 91,679
<TOTAL-LIABILITIES-AND-EQUITY> 978,595
<INTEREST-LOAN> 46,491
<INTEREST-INVEST> 18,405
<INTEREST-OTHER> 1,725
<INTEREST-TOTAL> 66,621
<INTEREST-DEPOSIT> 27,889
<INTEREST-EXPENSE> 30,233
<INTEREST-INCOME-NET> 36,388
<LOAN-LOSSES> 308
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 25,344
<INCOME-PRETAX> 17,283
<INCOME-PRE-EXTRAORDINARY> 17,283
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,494
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.36
<YIELD-ACTUAL> 3.75
<LOANS-NON> 1,291
<LOANS-PAST> 3,337
<LOANS-TROUBLED> 27
<LOANS-PROBLEM> 3,440
<ALLOWANCE-OPEN> 6,597
<CHARGE-OFFS> (615)
<RECOVERIES> 101
<ALLOWANCE-CLOSE> 6,391
<ALLOWANCE-DOMESTIC> 2,378
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,013
</TABLE>
