<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------ -------------------
Commission File Number: O-19065
-------
Sandy Spring Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares of common stock outstanding as of July 24, 1998 is
9,639,402 shares.
<PAGE>
SANDY SPRING BANCORP, INC.
INDEX
Page
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 ................................. 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Six Month Periods Ended June 30, 1998 and 1997 .... 2
Consolidated Statements of Cash Flows for
the Six Month Periods Ended June 30, 1998 and 1997 .................. 3
Notes to Consolidated Financial Statements .......................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................. 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ....................................................10
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................11
SIGNATURES .................................................................12
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS (Dollars in
thousands, except per share data)
<TABLE>
<CAPTION>
June 30 December 31,
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 29,654 $ 37,644
Federal funds sold 11,279 11,036
Interest-bearing deposits with banks 1,635 387
Residential mortgage loans held for sale 14,983 6,670
Investments available-for-sale (at fair value) 384,045 344,258
Investments held-to-maturity -- fair value of $96,607
(1998) and $110,437 (1997) 95,371 108,991
Other equity securities 10,736 11,485
Total Loans (net of unearned income) 581,611 558,893
Less: Allowance for credit losses (7,534) (7,016)
----------- -----------
Net loans 574,077 551,877
Premises and equipment, net 28,425 28,468
Accrued interest receivable 10,412 9,908
Other real estate owned 639 296
Other assets 9,483 10,313
----------- -----------
TOTAL ASSETS $ 1,170,739 $ 1,121,333
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 166,517 $ 150,957
Interest-bearing deposits 723,060 702,054
----------- -----------
Total deposits 889,577 853,011
Short-term borrowings 144,330 144,426
Long-term borrowings 25,480 14,592
Accrued interest and other liabilities 3,950 4,629
----------- -----------
TOTAL LIABILITIES 1,063,337 1,016,658
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized
15,000,000; shares issued and outstanding 9,640,377 (1998)
and 4,862,574 (1997)
9,640 4,862
Surplus 24,495 31,695
Retained earnings 71,297 66,261
Accumulated other comprehensive income 1,970 1,857
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 107,402 104,675
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,170,739 $ 1,121,333
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Dollars in
thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
- -------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 12,916 $ 12,458 $ 25,767 $ 24,393
Interest on loans held for sale 220 62 354 116
Interest on deposits with banks 30 15 49 42
Interest and dividends on securities:
Taxable 5,952 5,005 11,658 9,476
Nontaxable 1,071 832 2,143 1,611
Interest on federal funds sold 309 321 538 647
-------------------- -------------------
TOTAL INTEREST INCOME 20,498 18,693 40,509 36,285
Interest Expense:
Interest on deposits 7,139 7,226 14,140 14,212
Interest on short-term borrowings 1,796 1,143 3,556 1,950
Interest on long-term borrowings 353 80 699 160
-------------------- -------------------
TOTAL INTEREST EXPENSE 9,288 8,449 18,395 16,322
-------------------- -------------------
NET INTEREST INCOME 11,210 10,244 22,114 19,963
Provision for Credit Losses 275 125 542 225
-------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 10,935 10,119 21,572 19,738
Noninterest Income:
Securities gains 161 112 409 132
Service charges on deposit accounts 994 789 1,928 1,578
Gains on mortgage sales 682 255 1,283 524
Trust income 341 260 696 519
Other income 807 598 1,537 1.090
-------------------- -------------------
TOTAL NONINTEREST INCOME 2,985 2,014 5,853 3,843
Noninterest Expenses:
Salaries and employee benefits 4,846 4,147 9,393 7,887
Occupancy expense of premises 696 568 1,376 1,085
Equipment expenses 664 532 1,319 1,051
Marketing 328 378 579 712
FDIC insurance expense 25 25 50 50
Outside data services 376 300 733 597
Other expenses 1,525 1,368 2,905 2,567
-------------------- -------------------
TOTAL NONINTEREST EXPENSES 8,460 7,318 16,355 13,949
-------------------- -------------------
Income Before Income Taxes 5,460 4,815 11,070 9,632
Income Tax Expense 1,585 1,695 3,335 3,309
-------------------- -------------------
NET INCOME 3,875 3,120 7,735 6,323
Other Comprehensive Income, net of tax:
Net unrealized gain on investments
available-for-sale, net of taxes (388) 1,169 113 658
==================== ===================
COMPREHENSIVE INCOME $ 3,487 $ 4,289 $ 7,848 $ 6,981
==================== ===================
Basic Net Income Per Share* $ 0.40 $ 0.32 $ 0.80 $ 0.65
Diluted Net Income Per Share* 0.40 0.32 0.80 0.65
Dividends Declared Per Share* 0.15 0.11 0.28 0.22
</TABLE>
*Per share data have been adjusted to give retroactive effect to a 2-for-1 stock
split declared on January 28, 1998. See Notes to Consolidated Financial
Statements.
2
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 7,735 $ 6,323
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,258 1,037
Provision for credit losses 542 225
Deferred income taxes 70 (2)
Origination of loans held for sale (106,415) (29,500)
Proceeds from sales of loans held for sale 99,385 33,129
Gains on sales of loans held for sale (1,283) (524)
Purchases of trading securities (9,376) 0
Proceeds from sales of trading securities 9,388 0
Securities gains (409) (132)
Net change in:
Accrued interest receivable (504) (928)
Accrued income taxes (236) (55)
Other accrued expenses (443) (74)
Other -- net 658 (4,008)
--------- ---------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 370 5,491
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (1,248) (549)
Purchases of investments held-to-maturity (3,088) (6,155)
Purchases of other equity securities (2,574) (3,938)
Purchases of investments available-for-sale (268,706) (145,714)
Proceeds from sales of investments available-for-sale 14,981 46,245
Proceeds from maturities, calls and principal payments of
investments held-to-maturity 16,786 10,201
Proceeds from maturities, calls and principal payments of
investments available-for-sale 214,408 45,258
Redemption of Federal Home Loan Bank of Atlanta stock in
other equity securities 3,324 574
Proceeds from sales of other real estate owned 76 0
Net increase in loans receivable (23,111) (24,438)
Expenditures for premises and equipment (1,202) (4,642)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (50,354) (82,158)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 13,805 17,763
Net increase in time and other deposits 22,761 17,670
Net increase (decrease) in short-term borrowings (196) 43,900
Proceeds from long-term borrowings 11,000 0
Retirement of long-term borrowings (12) (16)
Common stock purchased and retired (3,753) (723)
Proceeds from issuance of common stock 1,331 970
Dividends paid (2,699) (2,160)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 42,237 77,404
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,747) 737
Cash and Cash Equivalents at Beginning of Period 48,680 56,177
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD* $ 40,933 $ 56,914
========= =========
</TABLE>
3
<PAGE>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Supplemental Disclosures:
Interest payments $18,227 $15,272
Income tax payments 3,606 4,140
Noncash Investing Activities:
Transfers from loans to other real estate owned 393 565
Reclassification of borrowings from long-term to short-term 100 100
</TABLE>
*Cash and cash equivalents include amounts of "Cash and due from banks" and
"Federal funds sold" on the Consolidated Balance Sheets.
See Notes to Consolidated Financial Statements.
4
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The foregoing financial statements are unaudited; however, in the opinion of
Management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the results of the interim periods have
been included. These statements should be read in conjunction with the financial
statements and accompanying notes included in Sandy Spring Bancorp's 1997 Annual
Report to Shareholders. The results shown in this interim report are not
necessarily indicative of results to be expected for the full year 1998.
The accounting and reporting policies of Sandy Spring Bancorp (the
"Company") conform to generally accepted accounting principles and to general
practice within the banking industry. Certain reclassifications have been made
to amounts previously reported to conform with current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
NOTE 2 - NEW ACCOUNTING STANDARD
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FASB 130) was issued and establishes standards for
reporting and displaying comprehensive income and its components. FASB 130
requires comprehensive income and its components, as recognized under the
accounting standards, to be displayed in the Statement of Income. The Company
adopted this disclosure standard, as required, in the first quarter of 1998,
including reclassification of the prior period.
NOTE 3 - PER SHARE DATA
Statement of Financial Accounting Standards No. 128, Earnings per Share" (FASB
128), became effective for the Company at the end of 1997. Under FASB 128,
primary and fully diluted earnings per share were replaced with basic and
diluted earnings per share. For purposes of comparability, prior period earnings
per share have been restated to reflect application of the provisions of this
Statement.
The calculations of net income per common share for the quarterly and
year-to-date periods ended June 30 were as follows. Data in the table has been
adjusted to give retroactive effect to a 2 for 1 stock split declared on January
28, 1998.
<TABLE>
<CAPTION>
(Dollars and amounts in thousands, except Three Months Ended Six Months Ended
per share data) June 30, June 30,
- ----------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Net income applicable to common stock $3,875 $3,120 $7,735 $6,323
Average common shares outstanding 9,644 9,831 9,656 9,822
Basic net income per share $0.40 $0.32 $0.80 $0.65
=========================================================
Diluted:
Net income applicable to common stock $3,875 $3,120 $7,735 $6,323
Average common shares outstanding 9,644 9,831 9,656 9,822
Stock option adjustment 53 20 51 18
Warrant stock adjustment 0 5 2 5
--------------------------------------------------------
Diluted average common shares outstanding 9,697 9,856 9,709 9,845
Diluted net income per share $0.40 $0.32 $0.80 $0.65
=========================================================
</TABLE>
5
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis contains 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.
In the following discussion, per share amounts have been adjusted to
reflect a 2 for 1 stock split declared on January 28, 1998 (see Note 3).
THE COMPANY
The Company is the registered bank holding company for Sandy Spring
National Bank of Maryland (the "Bank"), headquartered in Olney, Maryland. The
Bank operates twenty-two community offices in Montgomery, Howard, Prince
George's and Anne Arundel Counties in Maryland, together with a mortgage banking
company. The Company has established a strategy of independence, and intends to
establish or acquire additional offices or banking organizations as appropriate
opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $1,170,739,000,at June 30, 1998, compared
to $1,121,333,000 at December 31, 1997, increasing $49,406,000 or 4.4% during
the first six months of 1998. Earning assets increased $57,940,000 or 5.6% to
$1,099,660,000 at June 30, 1998, from $1,041,720,000 at December 31, 1997.
Total loans rose 4.1% or $22,718,000 during the first six months of 1998 to
$581,611,000. Of the major loan categories, commercial loans increased 18.5%,
consumer loans increased 9.7% due primarily to growth in student loans,
construction loans increased 8.1% due to growth in commercial construction
loans, and mortgage loans increased 0.3% including an 8.0% increase in
commercial mortgages. Also, residential mortgage loans held for sale increased
by $8,313,000 from December 31, 1997 to $14,983,000 at June 30, 1998.
The investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities, increased $25,418,000 or 5.5% from
December 31, 1997 to June 30, 1998. During this period, the increases in total
loans and residential mortgage loans held for sale required less funding than
the growth in total deposits and borrowings. For the first time, the Company had
trading securities in the second quarter of 1998, with purchases of $9,376,000,
proceeds from sales of $9,388,000 and gains on sales of $12,000 resulting in no
trading securities at June 30, 1998.
Total deposits were $889,577,000 at June 30, 1998, increasing $36,566,000
or 4.3% from $853,011,000 at December 31, 1997. Growth was achieved for
noninterest-bearing demand deposits, up $15,560,000 or 10.3%, attributable
primarily to increases in commercial and small business checking balances.
Interest-bearing deposits increased $21,006,000 or 3.0%, due primarily to higher
time deposits under $100,000. Borrowings increased $10,792,000 or 6.8%,
attributable to higher repurchase agreements related primarily to cash
management services to commercial clients, and to long-term Federal Home Loan
Bank of Atlanta advances in connection with a leverage program funding
securities at a favorable interest rate spread.
Market Risk Management
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. The simulation model captures optionality factors such as
call features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. As of June 30, 1998, the Bank had the following estimated
sensitivity profile for net interest income over a twelve-month horizon and for
the fair value of equity:
<TABLE>
<CAPTION>
Immediate Change in Rates
-----------------------------------------------
+200 basis points -200 basis points Policy Limit
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% Change in Net Interest Earnings (6.75)% (3.50)% +/-15%
% Change in Fair Value of Equity 1.03% (19.79)% +/-25%
</TABLE>
6
<PAGE>
Liquidity
The Bank's liquidity position is measured monthly, looking forward ninety
days. Liquid assets, defined to include cash on hand, federal funds sold,
interest-bearing deposits with banks, loans held for sale, investments
held-to-maturity maturing within ninety days and investments available-for-sale
maturing within one year, net of projected loan growth over the following ninety
days, totaled $130,017,000 or 11.1% of total assets at June 30, 1998. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $45,438,000 or 3.9% of total assets, which exceeded
the minimum level established by management.
Capital Management
The Company recorded a total risk-based capital ratio of 16.43% at June 30,
1998, compared to 17.07% at December 31, 1997; a tier 1 risk-based capital ratio
of 15.33%, compared to 15.97%; and a capital leverage ratio of 9.15%, compared
to 9.46%. Capital adequacy, as measured by these ratios, was well above
regulatory requirements.
Stockholders' equity totaled $107,402,000 (including accumulated other
comprehensive income of $1,970,000) at June 30, 1998, up 2.6% from $104,675,000
(including accumulated other comprehensive income of $1,857,000) at December 31,
1997. Internal capital generation (net income less dividends) provided
$5,036,000 in additional equity during the first six months of 1998,
representing an annualized rate (when considered as a percentage of average
total stockholders' equity) of 9.6% versus 8.6% for the year ended December 31,
1997.
External capital formation from stock issuances under the dividend
reinvestment plan, including optional cash purchases, and to a lesser degree,
through the exercise of warrants and stock options, totaled $1,331,000 during
the first six months of 1998. However, share repurchases amounted to $3,753,000
through June 30, 1998, for a net decrease in stockholders' equity from external
sources of $2,422,000.
Dividends for the first six months were $0.28 per share in 1998, compared
to $0.22 per share in 1997, for dividend payout ratios of dividends declared per
share to diluted net income per share of 35.00% and 33.85%, respectively.
B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for the first six months of the year rose $1,412,000 or 22.3% in
1998, to $7,735,000 from $6,323,000. Diluted earnings per share for the first
six months were $0.80 in 1998 and $0.65 in 1997. The annualized return on
average assets for the first six months of the year was 1.38% in 1998, compared
to 1.28% in 1997. The annualized returns on average equity for the same
six-month periods were 14.83% and 13.03% in 1998 and 1997, respectively.
Net Interest Income
Net interest income for the first six months of the year was $22,114,000 in
1998, an increase of 10.8% over $19,963,000 in 1997, reflecting a higher volume
of average earning assets.
For the first six months, tax-equivalent interest income increased
$4,472,000 or 12.1% in 1998, compared to the same period in 1997. Average
earning assets rose 13.2% over the prior year period while the average yield
earned on those assets decreased slightly to 7.94% from 8.02%. Comparing the
first six months of 1998 versus 1997, average loans grew 7.1% to $574,790,000
(54.7% of average earning assets), while the average yield on loans decreased
slightly to 9.15% from 9.19%. Most major categories increased, with commercial
and residential mortgages (including those held for sale) and residential
construction loans accounting for a majority of the overall increase. Average
total securities increased 24.1% to $455,201,000 (43.3% of average earning
assets) and recorded a 5 basis point increase in average yield to 6.54% from
6.49%.
Interest expense for the first six months increased $2,073,000 or 12.7%,
due to the combined effects of 12.0% higher average interest-bearing liabilities
and a slight 2 basis point rise in the average rate paid on those funds to 4.22%
from 4.20%. Most of the increase in interest-bearing liabilities was generated
by growth in average borrowings, which primarily resulted from Federal Home Loan
Bank of Atlanta advances used to invest in securities.
7
<PAGE>
Credit Risk Management
During the first six months of the year, the provision for credit losses
was $542,000 in 1998, compared to $225,000 in 1997. Net charge-offs of $24,000
were recorded for the six month period ended June 30, 1998, while there were net
charge-offs of $185,000 for the same period a year earlier.
The Company regularly analyzes the sufficiency of its allowance for credit
losses based upon a number of factors, including lending risks associated with
growth and entry into new markets, loss allocations for specific problem
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. Management establishes
the allowance for credit losses in an amount that it determines, based upon
these factors, is sufficient to provide for losses inherent in the loan
portfolio. The allowance for credit losses was 1.30% of total loans at June 30,
1998 and 1.26% at December 31, 1997. Management believes the allowance for
credit losses at June 30, 1998 was adequate.
Nonperforming loans rose $332,000 to $3,004,000 and total nonperforming
assets rose $675,000 to $3,643,000 from December 31, 1997 to June 30, 1998.
Expressed as a percentage of total assets, nonperforming assets were 0.31% at
June 30, 1998 and 0.26% at December 31, 1997. The allowance for credit losses
represented 251% of nonperforming loans at June 30, 1998, compared to coverage
of 263% at December 31, 1997. 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. Other real estate owned totaled $639,000
at June 30, 1998, compared to $296,000 at December 31, 1997. The balance of
impaired loans was $1,058,000 at June 30, 1998, and $890,000 at December 31,
1997, and there were no reserves for those loans at either period end.
Noninterest Income and Expenses
Noninterest income increased 52.3% or $2,010,000 during the six months
ended June 30, 1998 versus 1997, primarily from increases in mortgage banking
revenues, transaction based service fees, securities gains and fees from trust
services. The Bank's mortgage banking subsidiary recorded substantially
increased mortgage loan origination volumes and related gains on sales of loans
due to the favorable low interest rate environment. The rise in service fees
primarily reflected higher return check charges due to volume increases and, to
a lesser extent, higher debit card and commercial account fees. Substantial
growth was achieved from the Bank's asset and trust management business due to
higher levels of assets under management resulting both from new clients and
from increases in asset values from favorable stock market performance.
For the six months ended June 30, 1998, noninterest expenses increased
17.2%, or $2,406,000, to $16,355,000, from $13,949,000 in 1997. The Company
incurs additional costs in order to enter new markets, provide new services, and
support the growth of the Company. Management manages its operating expenses,
however, with the goal of maximizing profitability over time. The growth in
noninterest expenses was due primarily to a 19.1%, or $1,506,000, increase in
salaries and employee benefits, mainly related to growth in staff, an expanded
branch network and higher incentive compensation and pension plan costs. Average
full-time equivalent employees reached 419 during the first six months of 1998
compared to 378 during the first six months of 1997. The ratio of net income per
average full-time-equivalent employee increased to $18,500 from $16,700.
Occupancy expenses increased 26.8% or $291,000 to $1,376,000 for the six month
period ended June 30, 1998 from $1,085,000 for the same period in 1997 due in
large part to rental expenses related to new branches. Over the same period,
equipment expenses also increased significantly, by 25.5% or $268,000, due
primarily to higher depreciation expenses. While marketing expense declined and
FDIC insurance expense was unchanged, other noninterest expense categories
increased due to overall growth in the Company.
Income Taxes
The effective tax rate for the first six months of the year was 30.1% in
1998, compared to 34.4% in 1997, reflecting an increase in the percentage of
nontaxable income.
8
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
6 Months Ended 12 Months Ended
June 30, 1998 December 31, 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, January 1 $ 7,016 $ 6,391
Provision for credit losses 542 986
Loan charge-offs:
Real estate-mortgage (20) (60)
Real estate-construction 0 (79)
Consumer (79) (167)
Commercial (15) (235)
------- -------
Total charge-offs (114) (541)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 16 39
Commercial 74 141
------- -------
Total recoveries 90 180
------- -------
Net charge-offs (24) (361)
------- -------
BALANCE, PERIOD END $ 7,534 $ 7,016
======= =======
Net charge-offs to average loans
(annual basis) 0.01% 0.07%
Allowance to total loans 1.30% 1.26%
</TABLE>
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $1,088 $ 890
Loans 90 days past due 1,916 1,764
Restructured loans 0 18
------ ------
Total Nonperforming Loans* 3,004 2,672
Other real estate owned 639 296
------ ------
TOTAL NONPERFORMING ASSETS $3,643 $2,968
------ ------
Nonperforming assets to total assets 0.31% 0.26%
- -----------------------------------------------------------------------------------
</TABLE>
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $7,510,000 at June 30, 1998,
compared to $7,890,000 at December 31, 1997. Although these are loans where
known information about the borrowers' possible credit problems causes
management to have doubts as to their ability to comply with the present loan
repayment terms, most are well collateralized and are not believed to present
significant risk of loss.
9
<PAGE>
C. RESULTS OF OPERATIONS - SECOND QUARTER 1998 AND 1997
Second quarter net income of $3,875,000 ($0.40 per share-diluted) in 1998
was $755,000 or 24.2% above net income of $3,120,000 ($0.32 per share-diluted)
shown for the same quarter of 1997.
Tax-equivalent net interest income rose 10.3% during the second quarter of
1998 compared to the like three month period of 1997, showing the net effects of
a 12.1% increase in the average earning asset base and a 14 basis point decline
in net interest spread.
The provision for credit losses was $275,000 for the quarter ended June 30,
1998, versus $125,000 for 1997's second quarter. Net recoveries of $29,000 were
recorded for the second quarter of 1998, compared to net charge-offs of $81,000
for the second quarter of 1997.
Noninterest income for the second quarter increased $971,000 or 48.2% in
1998, compared to 1997, with the largest contributors being, in order of
importance, increases in mortgage banking revenues, transaction based service
fees, especially return check charges, and fees from trust services.
Noninterest expenses rose 15.6%, attributable largely to the same factors
as discussed above for the six-month periods.
The second quarter effective tax rate was 29.0% in 1998 versus 35.2% shown
in 1997, as in the year-to-date comparison reflecting an increase in the
percentage of nontaxable income.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Condition - Market Risk Management" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, above.
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
1997.
10
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting held on April 15, 1998, the
shareholders of the Company elected Solomon Graham, Gilbert L. Hardesty, Charles
F. Mess, Lewis R. Schumann and W. Drew Stabler as directors for three year
terms. There were no solicitations in opposition to management's nominees and
all such nominees were elected. All of these nominees were incumbent directors
except Gilbert L. Hardesty. Other directors continuing in office are John
Chirtea, Joyce R. Hawkins, Hunter R. Hollar, Thomas O. Keech, Susan D. Goff,
Robert L. Mitchell, Robert L. Orndorff, Jr. and David E. Rippeon.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following is a list of Exhibits filed as part of this
Quarterly Report on Form 10-Q:
No. Exhibit
---- -------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: HUNTER R. HOLLAR
---------------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: August 7, 1998
By: JAMES H. LANGMEAD
---------------------------------------------
James H. Langmead
Vice President and Treasurer
Date: August 4, 1998
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SANDY SPRING
BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUN 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-START> JAN-01-1998
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