<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 September 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
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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 October 27, 1998 is
9,600,058 shares.
<PAGE>
SANDY SPRING BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
- -------------------------------------------------------------------------------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997................................ 1
Consolidated Statements of Income and Comprehensive Income
for the Three and Nine Month Periods Ended September 30, 1998
and 1997................................................................ 2
Consolidated Statements of Cash Flows for
the Nine Month Periods Ended September 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...................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................ 13
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 13
SIGNATURES................................................................. 14
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 30,684 $ 37,644
Federal funds sold 17,067 11,036
Interest-bearing deposits with banks 567 387
Residential mortgage loans held for sale 11,081 6,670
Investments available-for-sale (at fair value) 478,902 344,258
Investments held-to-maturity -- fair value of $42,579 (1998) and
$110,437 (1997) 41,701 108,991
Other equity securities 12,647 11,485
Total Loans (net of unearned income) 610,286 558,893
Less: Allowance for credit losses (7,447) (7,016)
---------- ----------
Net loans 602,839 551,877
Premises and equipment, net 27,983 28,468
Accrued interest receivable 12,005 9,908
Other real estate owned 256 296
Other assets 6,116 10,313
---------- ----------
TOTAL ASSETS $1,241,848 $1,121,333
========== ==========
LIABILITIES
Noninterest-bearing deposits $ 164,649 $ 150,957
Interest-bearing deposits 749,279 702,054
---------- ----------
Total deposits 913,928 853,011
Short-term borrowings 186,753 144,426
Long-term borrowings 25,373 14,592
Accrued interest and other liabilities 5,183 4,629
---------- ----------
TOTAL LIABILITIES 1,131,237 1,016,658
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares issued
and outstanding 9,615,978 (1998) and 4,862,574 (1997) 9,616 4,862
Surplus 23,732 31,695
Retained earnings 73,948 66,261
Accumulated other comprehensive income 3,315 1,857
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 110,611 104,675
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,241,848 $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 Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------ -----------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $13,312 $12,524 $39,079 $36,917
Interest on loans held for sale 149 90 503 206
Interest on deposits with banks 14 19 63 61
Interest and dividends on securities:
Taxable 7,030 5,696 18,688 15,172
Nontaxable 1,084 825 3,227 2,436
Interest on federal funds sold 293 257 831 904
---------------------- -----------------------
TOTAL INTEREST INCOME 21,882 19,411 62,391 55,696
Interest Expense:
Interest on deposits 7,589 7,297 21,729 21,509
Interest on short-term borrowings 2,218 1,702 5,774 3,652
Interest on long-term borrowings 354 84 1,053 244
---------------------- -----------------------
TOTAL INTEREST EXPENSE 10,161 9,083 28,556 25,405
---------------------- -----------------------
NET INTEREST INCOME 11,721 10,328 33,835 30,291
Provision for credit losses 0 300 542 525
---------------------- -----------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 11,721 10,028 33,293 29,766
Noninterest Income:
Securities gains 166 183 575 315
Service charges on deposit accounts 1,019 856 2,947 2,434
Gains on mortgage sales 593 319 1,876 843
Trust income 349 331 1,045 850
Other income 872 843 2,409 1,933
---------------------- -----------------------
TOTAL NONINTEREST INCOME 2,999 2,532 8,852 6,375
Noninterest Expenses:
Salaries and employee benefits 5,122 4,234 14,515 12,121
Occupancy expense of premises 705 598 2,081 1,683
Equipment expenses 843 550 2,162 1,601
Marketing 143 197 722 909
Outside data services 369 336 1,102 933
Other expenses 1,542 1,368 4,497 3,985
---------------------- -----------------------
TOTAL NONINTEREST EXPENSES 8,724 7,283 25,079 21,232
---------------------- -----------------------
Income Before Income Taxes 5,996 5,277 17,066 14,909
Income Tax Expense 1,707 1,763 5,042 5,072
---------------------- -----------------------
NET INCOME 4,289 3,514 12,024 9,837
Other Comprehensive Income, net of tax:
Net unrealized gain on investments available-for-sale, net of taxes 1,345 461 1,458 1,119
---------------------- -----------------------
COMPREHENSIVE INCOME $ 5,634 $ 3,975 $13,482 $10,956
====================== =======================
Basic Net Income Per Share* $0.45 $0.36 $1.25 $1.01
Diluted Net Income Per Share* 0.44 0.35 1.24 1.00
Dividends Declared Per Share* 0.17 0.12 0.45 0.34
</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>
Nine Months Ended
September 30,
---------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 12,024 $ 9,837
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,106 1,592
Provision for credit losses 542 525
Deferred income taxes 59 (4)
Origination of residential mortgage loans held for sale (145,939) (52,838)
Proceeds from sales of residential mortgage loans held for sale 143,404 53,402
Gains on sales of residential mortgage loans held for sale (1,876) (843)
Purchases of trading securities (9,376) 0
Proceeds from sales of trading securities 9,388 0
Securities gains (575) (315)
Net change in:
Accrued interest receivable (2,097) (1,467)
Accrued income taxes (1,072) 324
Other accrued expenses 1,625 757
Other -- net 3,091 (5,573)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,305 5,397
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (180) (83)
Purchases of investments held-to-maturity (3,088) (9,074)
Purchases of other equity securities (4,486) (5,259)
Purchases of investments available-for-sale (445,110) (263,813)
Proceeds from sales of investments available-for-sale 14,981 58,393
Proceeds from maturities, calls and principal payments of investments held-to-maturity 18,951 24,709
Proceeds from maturities, calls and principal payments of investments available-for-sale 349,721 121,476
Redemption of Federal Home Loan Bank of Atlanta stock in other equity securities 3,324 574
Proceeds from dispositions of other real estate owned 479 359
Net increase in loans receivable (51,786) (29,755)
Expenditures for premises and equipment (1,519) (6,614)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (118,713) (109,087)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 12,067 57
Net increase in time and other deposits 48,850 11,784
Net increase in short-term borrowings 42,127 68,559
Proceeds from long-term borrowings 11,000 0
Retirement of long-term borrowings (19) (22)
Common stock purchased and retired (5,164) (1,948)
Proceeds from issuance of common stock 1,955 1,319
Dividends paid (4,337) (3,335)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 106,479 76,414
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (929) (27,276)
Cash and Cash Equivalents at Beginning of Period 48,680 56,177
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD* $ 47,751 $ 28,901
========= =========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Supplemental Disclosures:
Interest payments $28,072 $24,237
Income tax payments 6,534 5,111
Noncash Investing Activities:
Transfers from loans to other real estate owned 393 532
Reclassification of borrowings from long-term to short-term 200 200
Investment transfers from held-to-maturity to available-for-sale 51,515 0
</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 STANDARDS
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 with the same prominence as other
financial statements. The Company adopted this disclosure standard, as
required, in the first quarter of 1998, including reclassification of the prior
period.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FASB 131), also issued in June 1997,
establishes new standards for reporting information about operating segments in
annual and interim financial statements. The standard also requires descriptive
information about the way the operating segments are determined, the products
and services provided by the segments and the nature of differences between
reportable segment measurements and those used for the consolidated enterprise.
This standard is effective for years beginning after December 15, 1997.
Adoption in interim financial statements is not required until the year after
initial adoption, however comparative prior period information is required.
FASB 131 will be adopted, as required, beginning with year-end 1998. The
disclosure requirements will have no impact on the Company's financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). FASB 133 establishes new accounting and
reporting requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities in the balance sheet. Under certain conditions, a
derivative may be specifically designated as a hedge. Accounting for the
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. Adoption of the standard is required
for the corporation's December 31, 2000 financial statements with early adoption
allowed as of the beginning of any quarter after June 30, 1998. Management
elected to adopt the standard on July 1, 1998. Adoption did not result in a
material financial impact. The Company had no derivative instruments at
September 30, 1998.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
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
5
<PAGE>
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 September 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 Nine Months Ended
per share data) September 30, September 30,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Basic:
Net income applicable to common stock $4,289 $3,514 $12,024 $9,837
Average common shares outstanding 9,628 9,788 9,647 9,813
Basic net income per share $ 0.45 $ 0.36 $ 1.25 $ 1.01
==============================================================
Diluted:
Net income applicable to common stock $4,289 $3,514 $12,024 $9,837
Average common shares outstanding 9,628 9,788 9,647 9,813
Stock option adjustment 50 25 50 21
Warrant stock adjustment 0 5 1 5
--------------------------------------------------------------
Diluted average common shares outstanding 9,678 9,818 9,698 9,839
Diluted net income per share $ 0.44 $ 0.35 $ 1.24 $ 1.00
==============================================================
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements. This Management's Discussion and Analysis
contains forward-looking statements, such as: statements of the Company's
goals, intentions and expectations; estimates of risks and of future costs and
benefits; and statements of the Company's ability to achieve financial and other
goals. These forward looking statements are subject to significant
uncertainties because they are based upon: future interest rates and other
economic conditions, statements by suppliers of data processing equipment and
services, government agencies, and other third parties as to year 2000
compliance and costs; future laws and regulations; and a variety of other
matters. Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward-looking
statements. In addition, the Company's past results do not necessarily indicate
its future results.
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 $1,241,848,000 at September 30, 1998,
compared to $1,121,333,000 at December 31, 1997, increasing $120,515,000 or
10.7% during the first nine months of 1998. Earning assets increased
$130,531,000 or 12.5% to $1,172,251,000 at September 30, 1998, from
$1,041,720,000 at December 31, 1997.
Total loans rose 9.2% or $51,393,000 during the first nine months of 1998 to
$610,286,000. Of the major loan categories, construction loans increased 21.9%
or $12,627,000 due primarily to growth in commercial construction loans,
consumer loans increased 21.9% or $7,679,000 due primarily to growth in
installment and student loans, commercial loans increased 10.6% or $7,712,000,
and mortgage loans increased a net 4.8% or $18,935,000 including a 13.7% or
$25,046,000 increase in commercial mortgages. Also, residential mortgage loans
held for sale increased by 66.1% or $4,411,000 from December 31, 1997 to
$11,081,000 at September 30, 1998.
The investment portfolio, consisting of available-for-sale, held-to-maturity
and other equity securities, increased 14.7% or $68,516,000 from December 31,
1997 to September 30, 1998. Upon adoption of FASB 133 on July 1, 1998, as
permitted by the Statement, the Bank made a one-time transfer of $51,515,000 of
held-to-maturity securities into the available-for-sale category. A large part
of the growth in the investment portfolio during the first nine months of 1998
was funded by Federal Home Loan Bank of Atlanta advances under a leverage
program. In addition, repurchase agreements, which are short-term borrowings,
increased 33.2% or $19,307,000, providing additional funds for the purchase of
investments During this period, funds provided by the growth in total deposits
exceeded the amount needed to fund growth in total loans and residential
mortgage loans held for sale.
Total deposits were $913,928,000 at September 30, 1998, increasing
$60,917,000 or 7.1% from $853,011,000 at December 31, 1997. Growth was achieved
in noninterest-bearing demand deposits, up $13,692,000 or 9.1%, attributable
primarily to an increase in small business checking balances. Interest-bearing
deposits increased $47,225,000 or 6.7%, due primarily to higher time deposits
under $100,000 reflecting a special product offering of a 30-month time deposit
with special features and a premium rate. Borrowings increased $53,108,000 or
33.4%, attributable in large part to Federal Home Loan Bank of Atlanta advances
in connection with a leverage program funding securities at a favorable interest
rate spread and, to a lesser degree, to increased repurchase agreements related
primarily to cash management services for commercial clients.
7
<PAGE>
Market Risk Management
By employing simulation analysis through use of a computer model, the Bank
seeks 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 September 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 (2.87)% (3.92)% ++ 15%
% Change in Fair Value of Equity 6.92% (17.03)% ++ 25%
</TABLE>
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 $344,282,000 or 27.8% of total assets at September 30, 1998. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $275,090,000 or 22.3% of total assets, which
significantly exceeded the minimum level established by management. The
increase in liquidity position compared to prior periods primarily reflects the
increase in liquid available-for-sale securities which occurred during 1998's
third quarter.
Capital Management
The Company recorded a total risk-based capital ratio of 16.01% at September
30, 1998, compared to 17.07% at December 31, 1997; a tier 1 risk-based capital
ratio of 14.97%, compared to 15.97%; and a capital leverage ratio of 8.73%,
compared to 9.46%. Capital adequacy, as measured by these ratios, was well
above regulatory requirements.
Stockholders' equity totaled $110,611,000 (including accumulated other
comprehensive income of $3,315,000) at September 30, 1998, up 5.7% 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 $7,687,000 in additional equity during the first nine months of 1998,
representing an annualized rate (when considered as a percentage of average
total stockholders' equity) of 9.7% 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 $1,955,000 during
the first nine months of 1998. However, share repurchases amounted to $5,164,000
through September 30, 1998, for a net decrease in stockholders' equity from
external sources of $3,209,000.
Dividends for the first nine months were $0.45 per share in 1998, compared
to $0.34 per share in 1997, for dividend payout ratios of dividends declared per
share to diluted net income per share of 36.29% and 34.00%, respectively.
B. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for the first nine months of the year rose $2,187,000 or 22.2% in
1998, to $12,024,000 from $9,837,000. Diluted earnings per share for the first
nine months were $1.24 in 1998 and $1.00 in 1997. The annualized return on
average assets for the first nine months of the year was 1.38% in 1998, compared
to 1.29% in 1997. The annualized returns on average equity for the same nine
month periods were 15.14% and 13.31% in 1998 and 1997, respectively.
Net Interest Income
Net interest income for the first nine months of the year was $33,835,000 in
1998, an increase of 11.7% over $30,291,000 in 1997, primarily reflecting a
higher volume of average earning assets.
8
<PAGE>
For the first nine months, tax-equivalent interest income increased
$8,404,000 or 14.8% in 1998, compared to the same period in 1997. Average
earning assets rose 13.6% over the prior year period while the average yield
earned on those assets increased to 8.07% from 7.99%. Comparing the first nine
months of 1998 versus 1997, average loans grew 6.9% to $577,923,000 (53.5% of
average earning assets), while the average yield on loans decreased to 9.15%
from 9.17%. Most major categories increased, with commercial mortgages and
residential construction loans accounting for a majority of the overall
increase. Average total securities increased 24.4% to $480,851 (44.5% of
average earning assets) and recorded a 39 basis point increase in average yield
to 6.89% from 6.50%.
Interest expense for the first nine months increased $3,151,000 or 12.4%,
due to an increase in average interest-bearing liabilities, while the average
rate paid on those funds remained essentially level. 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.
Credit Risk Management
During the first nine months of the year, the provision for credit losses
was $542,000 in 1998, compared to $525,000 in 1997. Net charge-offs of $111,000
were recorded for the nine month period ended September 30, 1998, while there
were net charge-offs of $282,000 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, the
year 2000 issue, 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 1.22% of
total loans at September 30, 1998 and 1.26% at December 31, 1997. Management
believes the allowance for credit losses at September 30, 1998 was adequate.
Nonperforming loans rose $906,000 to $3,578,000 and total nonperforming
assets rose $866,000 to $3,834,000 from December 31, 1997 to September 30, 1998.
Expressed as a percentage of total assets, nonperforming assets were 0.31% at
September 30, 1998 and 0.26% at December 31, 1997. The allowance for credit
losses represented 208% of nonperforming loans at September 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
$256,000 at September 30, 1998, compared to $296,000 at December 31, 1997. The
balance of impaired loans was $1,404,000 with a reserve of $214,000 at September
30, 1998, versus $890,000 with no reserve deemed necessary at December 31, 1997.
Noninterest Income and Expenses
Noninterest income increased 38.9% or $2,477,000 during the nine months
ended September 30, 1998 versus 1997, primarily from increases in gains on
mortgage sales, which rose 122.5% or $1,033,000, return check charges, up 32.1%
or $432,000, securities gains, up 82.5% or $260,000, and fees from trust
services, up 22.9% or $195,000. 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
higher return check charges was due to volume increases. Substantial growth was
achieved from the Bank's asset and trust management business due to higher
levels of assets under management. Investment income associated with funding
the Company's supplemental executive retirement plans and debit card fees also
increased significantly.
(Management's Discussion and Analysis of Noninterest Income and Expenses
continues on page 11)
9
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
9 Months Ended 12 Months Ended
September 30, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $7,016 $6,391
Provision for credit losses 542 986
Loan charge-offs:
Real estate-mortgage (40) (60)
Real estate-construction 0 (79)
Consumer (116) (167)
Commercial (63) (235)
-------- -------
Total charge-offs (219) (541)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 31 39
Commercial 77 141
-------- -------
Total recoveries 108 180
-------- -------
Net charge-offs (111) (361)
-------- -------
BALANCE, PERIOD END $7,447 $7,016
======== =======
Net charge-offs to average loans
(annual basis) 0.03% 0.07%
Allowance to total loans 1.22% 1.26%
</TABLE>
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $1,446 $ 890
Loans 90 days past due 2,132 1,764
Restructured loans 0 18
-------- -------
Total Nonperforming Loans* 3,578 2,672
Other real estate owned 256 296
-------- -------
TOTAL NONPERFORMING ASSETS $3,834 $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 $5,674,000 at September 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.
10
<PAGE>
Management's Discussion and Analysis of Noninterest Income and Expenses
continued from page 9
For the nine months ended September 30, 1998, noninterest expenses
increased 18.1%, or $3,847,000, to $25,079,000, from $21,232,000 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 included a 19.8%, or $2,394,000,
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 totaled 417 during the first nine
months of 1998 compared to 388 during the first nine months of 1997. The ratio
of net income per average full-time-equivalent employee increased to $28,800
from $25,400. Occupancy expenses increased 23.6% or $398,000 to $2,081,000 for
the nine month period ended September 30, 1998 from $1,683,000 for the same
period in 1997 due primarily to higher rental and depreciation expenses related
to new facilities. Over the same period, equipment expenses also increased
significantly, by 35.0% or $561,000, due in large part to higher depreciation
expenses, including accelerated depreciation related to obsolescence of
equipment that is not year 2000 compliant. While marketing expense declined and
FDIC insurance expense was unchanged, other noninterest expense categories,
especially consulting and outside data services, increased due to overall growth
in the Company.
Income Taxes
The effective tax rate for the first nine months of the year was 29.5% in
1998, compared to 34.0% in 1997, reflecting a significant increase in the
percentage of nontaxable income.
C. RESULTS OF OPERATIONS - THIRD QUARTER 1998 AND 1997
Third quarter net income of $4,289,000 ($0.44 per share-diluted) in 1998 was
$775,000 or 22.1% above net income of $3,514,000 ($0.35 per share-diluted) shown
for the same quarter of 1997.
Tax-equivalent net interest income rose 18.6% during the third quarter of
1998 compared to the like three month period of 1997, showing the combined
effects of a 14.5% increase in the average earning asset base and a 13 basis
point rise in net interest spread.
There was no provision for credit losses for the quarter ended September 30,
1998, versus $300,000 for 1997's third quarter. Net charge-offs of $87,000 were
recorded for the third quarter of 1998, compared to net charge-offs of $97,000
for the third quarter of 1997.
Noninterest income for the third quarter increased $467,000 or 18.4% in
1998, compared to 1997, with the largest contributors being increases in
mortgage banking revenues and return check charges.
Noninterest expenses rose 19.8%, attributable largely to the same factors as
discussed above for the nine month periods.
The third quarter effective tax rate was 28.5% in 1998 versus 33.4% shown in
1997, as in the year-to-date comparison reflecting a significant increase in the
percentage of nontaxable income.
YEAR 2000 ISSUE
Many computer programs now in use have not been designed to properly
recognize years after 1999. If not corrected, these programs could fail or
create erroneous results. This year 2000 ("Y2K") issue affects the entire
banking industry because of its reliance on computers and other equipment that
use computer chips, and may have significant adverse effects on banking
customers, bank regulators, and the general economy.
In 1997, management of the Company created a task force and established a
Y2K Plan to prevent or mitigate adverse effects of the Y2K issue on the Company
and its customers. Goals of the Y2K Plan include
11
<PAGE>
identifying risks, testing data processing and other systems and equipment used
by the Company, informing
customers of Y2K issues and risks, establishing a contingency plan for operating
if Y2K issues cause important systems or equipment to fail, implementing changes
necessary to achieve Y2K compliance, and verifying that these changes are
effective. The Board of Directors reviews progress under the plan each quarter.
Management designed the Y2K Plan to comply with the requirements for Y2K
efforts established by the Comptroller of the Currency, the primary federal
regulator of the Bank. The Comptroller of the Currency also has performed Y2K
examinations of the Bank's Y2K Plan and the Bank's progress in implementing the
plan. Federal regulations prevent banks from disclosing the results of Y2K
examinations by banking regulators. The examinations do not represent approval
or certification of a bank or bank holding company's Y2K plans or efforts.
The Company continues to implement the Y2K Plan. The Company has met its
Y2K goals to date and believes that it will continue to meet the goals of the
Y2K Plan. By September 30, 1998, the Company had performed risk assessments,
had assessed the Y2K preparedness of suppliers of data processing services to
the Company and of large customers, had implemented its customer awareness
program, had begun developing its Y2K contingency plan, and was in the process
of testing and implementing necessary changes in hardware and software.
Significant additional steps must be taken to achieve Y2K compliance, including
some steps that may not yet be identified. Elements of the Y2K Plan, such as
risk assessments, customer communications, and testing of systems and equipment,
are processes that will continue into the year 2000. The Y2K contingency plan
calls for the Company to manually process bank transactions and to use other
data processing methods, in the event that Y2K efforts of the Company and its
data services providers are not successful. Delays in processing banking
transactions would result if the Company were required to use manual processing
or other methods instead of its normal computer processes. These delays could
disrupt the normal business activities of the Company and its customers. The
Company must assure that the computer systems it uses to process transactions
are Y2K ready in order to avoid these disruptions.
The Company's primary supplier of data processing services also has adopted
a Y2K plan and timetable to make the changes necessary for it to provide
services in the year 2000, and has provided written assurances to the Company of
its progress. That supplier has been examined for Y2K readiness by federal bank
examiners. The supplier and the Company are in the process of testing the
software changes that have been made to date. The Company is also monitoring the
progress of its other suppliers of data processing services.
Management believes that the cost of resolving Y2K issues related to the
Company's computer programs and those used by its suppliers of significant data
processing services will not be material to the Company's business, operations,
liquidity, capital resources, or financial condition, based on information
developed to date and communications from data processing suppliers. The
Company expects that its total cash outlay for Y2K compliance in 1998 and future
years will be less than $1.1 million. This amount includes approximately
$675,000 in costs of software and equipment upgrades or replacements and
$400,000 in consulting, legal and temporary staffing costs. Approximately
$140,000 of these costs were incurred in the first nine months of 1998. The
Company expects that the total effect on net income, after tax deductions, of
these Y2K expenditures and the accelerated write-off of replaced software and
equipment will be less that $800,000, and that the effect on net income through
September 30, 1998 of these costs was approximately $185,000 or 1.5%. These
amounts do not include allocations of the salary and other costs of the Bank's
regular personnel. The Company is funding its Y2K expenditures through
continuing operations.
Although the Company has completed an assessment of Y2K effects on its
current commercial lending and other customers, the actual effects on
individual, corporate and
12
<PAGE>
governmental customers of the Company and on governmental authorities that
regulate the Company and its subsidiaries, and any resulting consequences to the
Company, cannot be determined with any assurance. The Company's belief that it
and its primary suppliers of data processing services will achieve Y2K
compliance are based on a number of assumptions and on statements made by third
parties, and are subject to uncertainty. The Company also is not able to predict
the effects, if any, on the Company, financial markets or society in general of
the public's reaction to Y2K. Because of this uncertainty and reliance upon
assumptions and statements of third parties, the Company cannot be assured that
the results of its Y2K Plan will be achieved. Management believes, however, that
the Company will be able to accomplish its Y2K goals and that the Company will
be able to continue providing financial services to its customers into the next
Century.
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.
PART II - OTHER INFORMATION
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.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /s/ HUNTER R. HOLLAR
---------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: November 6, 1998
By: /s/ JAMES H. LANGMEAD
---------------------------------------
James H. Langmead
Vice President and Treasurer
Date: November 6, 1998
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SANDY
SPRING BANCORP, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 30,684
<INT-BEARING-DEPOSITS> 567
<FED-FUNDS-SOLD> 17,067
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 478,902
<INVESTMENTS-CARRYING> 41,701
<INVESTMENTS-MARKET> 42,579
<LOANS> 621,367
<ALLOWANCE> 7,447
<TOTAL-ASSETS> 1,241,848
<DEPOSITS> 913,928
<SHORT-TERM> 186,753
<LIABILITIES-OTHER> 5,183
<LONG-TERM> 25,373
0
0
<COMMON> 9,616
<OTHER-SE> 100,995
<TOTAL-LIABILITIES-AND-EQUITY> 1,241,848
<INTEREST-LOAN> 39,582
<INTEREST-INVEST> 21,915
<INTEREST-OTHER> 894
<INTEREST-TOTAL> 62,391
<INTEREST-DEPOSIT> 21,729
<INTEREST-EXPENSE> 28,556
<INTEREST-INCOME-NET> 33,835
<LOAN-LOSSES> 542
<SECURITIES-GAINS> 575
<EXPENSE-OTHER> 25,079
<INCOME-PRETAX> 8,789
<INCOME-PRE-EXTRAORDINARY> 17,066
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,024
<EPS-PRIMARY> 1.25
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 4.54
<LOANS-NON> 1,446
<LOANS-PAST> 2,132
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,674
<ALLOWANCE-OPEN> 7,016
<CHARGE-OFFS> 219
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 7,447
<ALLOWANCE-DOMESTIC> 1,935
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
