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, 1997
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. [ ]
The registrant's Common Stock is traded on the NASDAQ National Market under the
symbol SASR. The aggregate market value of the 9,305,962 shares of Common Stock
of the registrant issued and outstanding held by nonaffiliates on March 9, 1998,
was approximately $318.7 million based on the closing sales price of $34.25 per
share of the registrant's Common Stock on March 9, 1998. 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 9, 1998, 9,659,938 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, 1997 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual
Meeting of Shareholders to be held on April 15, 1998 (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 21 community offices located in
Montgomery, Howard, Prince George's 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, Prince George's 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. Residential
construction and mortgage loan products are offered by Sandy Spring Mortgage
Corporation, another 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 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.
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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 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.
Bank Regulation. As a national bank, the Bank is subject to the primary
supervision of the OCC under the National Bank Act. The prior approval of the
OCC is required for a national bank to establish or relocate an additional
branch office or to engage in any merger, consolidation, or significant purchase
or sale of assets.
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 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.
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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
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
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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. The Bank has been informed that it is in the lowest
assessment category for BIF and SAIF for the first assessment period of 1998.
New Laws. The operations of Bancorp and the Bank are affected by new
federal and state laws. The federal Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "1996 Act"), included provisions that affect banks,
bank holding companies, and savings associations. The 1996 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 1996 Act was not material in 1996 or 1997.
Among other things, the 1996 Act recapitalized the SAIF through a special
assessment on savings association deposits and bank deposits that had been
acquired from savings associations. The 1996 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 1996 Act also
provided that institutions with deposits insured by the BIF, as well as those
with SAIF insured deposits, are 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 have not had and are not expected to
have a material adverse effect on the Bank or Bancorp.
The 1996 Act also simplified the regulatory approval process for new
activities of banks and bank holding companies, and reduced a number of other
regulatory burdens. None of these changes has had or 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
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 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 23 - Contingencies" of
the Notes to the Consolidated Financial Statements on page 39 of the Annual
Report.
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Regulatory Capital Requirements. The Federal Reserve and the OCC have
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 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.
Federal banking regulations also require banks with significant trading
assets or liabilities to maintain supplemental risk-based capital based upon
their levels of market risk. The Bank did not have significant levels of
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trading assets or liabilities during 1997, and was not required to maintain such
supplemental capital.
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, 1997, 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 18
of the Annual Report and "Note 21 - Regulatory Matters" of the Notes to the
Consolidated Financial Statements on page 38 of the Annual Report.
SUPERVISION AND REGULATION OF MORTGAGE BANKING OPERATIONS
Bancorp's mortgage banking business is subject to the rules and
regulations of the U.S. Department of Housing and Urban Development ("HUD"), the
Federal Housing Administration ("FHA"), the Veterans' Administration ("VA"),
FMHA and FNMA with respect to originating, processing, selling and servicing
mortgage loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective borrowers,
and fix maximum loan amounts. Lenders such as Bancorp are required annually to
submit to FNMA, FHA and VA audited financial statements, and each regulatory
entity has its own financial requirements. Bancorp's affairs are also subject to
examination by the Federal Reserve, FNMA, FHA and VA at all times to assure
compliance with the applicable regulations, policies and procedures. Mortgage
origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit
Reporting Act, the National Flood Insurance Act and the Real Estate Settlement
Procedures Act and related regulations that prohibit discrimination and require
the disclosure of certain basic information to mortgagors concerning credit
terms and settlement costs. Bancorp's mortgage banking operations also are
affected by various state and local laws and regulations and the requirements of
various private mortgage investors.
COMPETITION
The Bank's principal competitors for deposits are other financial
institutions, including other banks, credit unions, and savings institutions.
Competition among these institutions is based primarily on interest rates and
other terms offered, service charges imposed on deposit accounts, the quality of
services rendered, and the convenience of banking facilities. Additional
competition for depositors' funds comes from U.S. Government securities, private
issuers of debt obligations and suppliers of other investment alternatives for
depositors, such as securities firms. Competition from credit unions has
intensified in recent years as historical federal limits on membership have been
relaxed. Because federal law subsidizes credit unions by giving them a general
exemption from federal income taxes, credit unions have a significant cost
advantage over banks and savings associations, which are fully subject to
federal income taxes. Credit unions may use this advantage to offer rates that
are highly competitive with those offered by banks and thrifts.
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
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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, credit unions 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 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 authorized 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 1996 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 23, 1998, Bancorp and the Bank employed 445 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.
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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)
- ---- ------- --------------------
<S> <C>
James R. Farmer 46 Senior Vice President of the Bank
James H. Langmead 48 Vice President and Treasurer of Bancorp and
Executive Vice President and Chief Financial
Officer of the Bank
Lawrence T. Lewis 49 Executive Vice President of the Bank
Stanley L. Merson 41 President, Sandy Spring Mortgage Corporation and
Senior Vice President of the Bank
Frank H. Small 51 Executive Vice President of the Bank
Sara E. Watkins 41 Senior Vice President of the Bank
</TABLE>
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(1) At March 25, 1998
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,
Senior Vice President and Chief Financial Officer of the Bank in 1995, and
Executive Vice President in 1997. 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, and became Executive Vice President in 1997. 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. He became President of Sandy Spring Mortgage Corporation
upon its formation in 1997. Mr. Merson has been employed by the Bank since 1982.
FRANK H. SMALL became a Senior Vice President of the Bank in 1994, and
Executive Vice President in 1997. 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.
SARA E. WATKINS became a Senior Vice President of the Bank in 1997.
Prior to that, Ms. Watkins was Vice President and Branch Administrator of the
Bank (from June 1994) and Vice President and Region Manager of the Bank (from
April 1992).
8
<PAGE>
TABULAR FINANCIAL INFORMATION
Loan Maturity Table. The following table sets forth information as of
December 31, 1997, regarding the loan maturities and interest rate sensitivity
for real estate-construction, commercial, and tax exempt loans (dollars in
thousands).
<TABLE>
<CAPTION>
Years
--------------------------------------------------------------
1 or Less Over 1-5 Over 5 Total
--------- -------- ------ -----
<S> <C> <C> <C> <C>
Real Estate Construction..................... $39,182 $ 3,232 $15,273 $ 57,687
Commercial................................... 46,309 24,538 1,664 72,511
Tax Exempt................................... 1 6 6 13
--------- --------- --------- ---------
Total............................... $85,492 $27,776 $16,943 $130,211
======= ======= ======= ========
Rate Terms:
Fixed...................................... $16,337 $23,550 $ 3,293 $ 43,180
Variable or adjustable..................... 69,155 4,226 13,650 87,031
------- ------- ------- --------
Total.................................... $85,492 $27,776 $16,943 $130,211
======= ======= ======= ========
</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>
-------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Loan Loan Loan
Amount Mix Amount Mix Amount Mix
--------- -------- ---------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Amount applicable to:
Real estate--mortgage $1,213 71% $ 425 72% $ 512 74%
Real estate--construction 224 10 745 9 10 8
Consumer 215 6 193 6 181 6
Commercial 774 13 1,015 13 907 12
Tax exempt 0 0 0 0 0 0
Unallocated 4,590 4,013 4,987
------ ------ ------
Total allowance for
for credit losses $7,016 $6,391 $6,597
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------
1994 1993
------------------ ------------------
Loan Loan
Amount Mix Amount Mix
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Amount applicable to:
Real estate--mortgage $1,581 76% $2,046 77%
Real estate--construction 41 7 34 6
Consumer 136 6 324 5
Commercial 832 11 1,998 12
Tax exempt 0 0 0 0
Unallocated 4,073 2,279
------ ------
Total allowance for
for credit losses $6,663 $6,681
====== ======
</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 18 and 19 and in Notes 1 and 6 of the Notes to the
Consolidated Financial Statements beginning on page 26 of the Annual Report.
(See also the discussion of loan portfolio composition and trends on pages 15
and 16 of the Annual Report.) The amount of unallocated allowance for credit
losses increased to 65.4% of the total allowance at December 31, 1997, from
62.8% a year earlier. The percentage was 75.6% at December 31, 1995. The size of
the unallocated reserve at December 31, 1997 reflects management's assessment of
actual loss residing in the loan portfolio which has not been specifically
attributed to any category of loans.
10
<PAGE>
The tabular financial information set forth on pages 10 through 21 of
the Annual Report is incorporated herein by reference.
ITEM 2. DESCRIPTION OF PROPERTY
Page 7 of the Annual Report (listing executive and community offices)
is hereby incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
Note 18 on page 35 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 1997, through solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The sections titled "Recent Stock Prices and Dividends" and "Quarterly
Stock Information" on page 9 of the Annual Report is hereby incorporated by
reference.
For information regarding regulatory restrictions on the Bank's and,
therefore, Bancorp's payment of dividends, see Note 11 -- "Stockholders' Equity"
on page 32 of the Annual Report, which is hereby incorporated by reference.
DESCRIPTION OF CAPITAL STOCK
The following discussion is not intended to be complete and is
qualified in its entirety by reference to Bancorp's Articles of Incorporation
and Bylaws and to the Maryland General Corporation Law.
CAPITAL STOCK
Authorized Capital. Bancorp's Articles of Incorporation authorize
15,000,000 shares of capital stock, par value $1.00 per share. All authorized
shares are initially classified as Common Stock. Of the 15,000,000 authorized
shares of capital stock, all unissued shares can be designated by the Board of
Directors as either Common Stock or Preferred Stock. The Articles of
Incorporation permit the Board of Directors to issue shares of serial preferred
stock (the "Preferred Stock") from time to time and in one or more series, to
specify the number of shares of such series and to determine the applicable
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions and dividends, redemption
privileges, and qualifications within the limits established by law from time to
time.
The flexibility to issue shares of any class or series could act as a
deterrent to takeover attempts, even if such attempts would be beneficial to
shareholders, by adversely affecting the ability of any given person or group to
remove incumbent officers and directors, to change Bancorp's corporate
structure, or otherwise to control Bancorp. The Board of Directors believes that
this authority is desirable and beneficial to Bancorp
11
<PAGE>
and its shareholders.
Redemption and Retirement. Under Maryland law, a corporation is
permitted to acquire shares of its own stock, unless the corporation would not
be able to pay its debt as it becomes due in the usual course of business or the
corporation's total assets would be less than the sum of the corporation's total
liabilities plus, unless the charter permits otherwise, the amount that would be
needed, if the corporation were to be dissolved at the time of such acquisition,
to satisfy the preferential rights upon dissolution of shareholders whose
preferential rights on dissolution are superior to those whose shares are
acquired.
Dividends. Maryland law permits the payment of dividends unless the
corporation would not be able to pay its debt as it becomes due in the usual
course of business or the corporation's total assets would be less than the sum
of the corporation's total liabilities plus, unless the charter permits
otherwise, the amount that would be needed, if the corporation were to be
dissolved at the time of such dividends, to satisfy the preferential rights upon
dissolution of shareholders whose preferential rights on dissolution are
superior to those receiving the dividends.
SHAREHOLDERS
Shareholders' Inspection Rights. Maryland law provides that the
shareholders' list may be inspected by one or more persons who together have
been shareholders of record for at least six months and who together hold at
least 5% of the outstanding stock of any class.
Special Meetings of Shareholders. A special meeting of the shareholders
of Bancorp may be called by the President, the Chairman of the Board, a majority
of the Board of Directors, or the Secretary upon the written request of
shareholders entitled to cast at least 25% of the votes at such meeting.
Shareholder Action Without a Meeting. The Bylaws provide that
shareholders may take action without a meeting if a unanimous written consent to
the action is signed by each shareholder entitled to vote on the matter, and a
written waiver of any rights to dissent is signed by each shareholder entitled
to notice but not entitled to vote. As a practical matter, it is not possible
for Shareholders of a public company to act without a meeting.
Nomination Procedures. The Bylaws provide that the Board of Directors
shall act as a nominating committee for selecting the management nominees for
election as directors. Except in the case of a nominee substituted as a result
of the death or other incapacity of a management nominee, the nominating
committee shall deliver written nominations to the Secretary at least 20 days
prior to the date of the annual meeting. The Bylaws require that shareholder
nominations for directors be made pursuant to timely notice in writing to the
Secretary of Bancorp. To be timely, notice must be delivered to the Secretary
not later than 90 days prior to the month and day one year subsequent to the
date that proxy materials regarding the last election of directors were mailed
to shareholders. A shareholder's notice of nomination must also set forth
certain information specified in the Bylaws concerning each person the
shareholder proposes to nominate for election. In accordance with the Bylaws,
shareholder nominations may be made by any shareholder eligible to vote at an
annual meeting.
New Business at Annual Meeting. The Bylaws provide that to be properly
brought before an annual meeting, shareholder proposals for new business must be
delivered to or mailed and received by Bancorp not less than 30 nor more than 90
days prior to the date of the meeting; provided, however, that if less than 45
days notice of the date of the meeting is given to shareholders, such notice by
a shareholder must be received not later than the 15th day following the day on
which notice of the date of the meeting was mailed to shareholders or two days
before the date of the meeting, whichever is earlier. Each such notice given by
a shareholder must set forth certain information specified in the Bylaws
concerning the shareholder and the
12
<PAGE>
business proposed to be brought before the meeting.
Quorum Requirements. Under the Bylaws, except as provided in the
Articles of Incorporation, a majority of the outstanding shares entitled to vote
shall constitute a quorum for the transaction of business at a meeting of
shareholders. The Bylaws also provide that a meeting may be adjourned despite
the absence of a quorum by a majority of the shares represented. Pursuant to the
Articles of Incorporation, any meeting of shareholders, whether annual or
special, called to consider a vote in favor of a reverse stock split or merger
or consolidation of Bancorp with, or a sale, exchange or lease of substantially
all of the assets of Bancorp to, any person or entity, which is not recommended
by the Board of Directors of Bancorp by the required vote, shall require
attendance in person or by proxy by the holders of 80% of the outstanding shares
of voting stock of Bancorp in order for a quorum for the conduct of business to
exist. Furthermore, such a meeting may not be adjourned with notice if a quorum
is not present.
Preemptive Rights. The Articles of Incorporation provide that
shareholders do not have any preemptive right to subscribe for any newly-issued
stock or other securities of Bancorp.
Election of Directors. Under Maryland law, shareholders are permitted
to cumulate their votes for election of directors only when so provided by the
charter of the corporation. The Articles of Incorporation specifically provide
that there shall be no cumulative voting by shareholders of any class or series
in the election of directors of Bancorp.
Under Maryland law, unless the charter or bylaws of a corporation
provide otherwise, a plurality of all the votes cast at a meeting at which a
quorum is present is sufficient to elect a director.
Approval of Certain Transactions. The affirmative vote of the holders
of not less than 80% of the outstanding shares of voting stock is required to
authorize a merger or consolidation of Bancorp with, or a sale, exchange or
lease of all or substantially all of the assets of Bancorp to, any person or
entity unless approval of any such transaction is recommended by at least a
majority of the entire Board of Directors. For purposes of this provision,
"substantially all of the assets" is defined to mean assets having a fair market
value or book value, whichever is greater, of 25% or more of the total assets of
Bancorp. See "Anti-Takeover Provisions -- Special Voting Requirements for
Certain Business Combinations" and " -- Supermajority Votes," below.
Approval of Business Combinations with Controlling Parties. Approval by
vote of more than a simple majority of shares is required when a "Business
Combination" (defined generally to include a merger or consolidation of Bancorp,
a disposition of substantially all of the assets of Bancorp and a reverse stock
split) is with a Controlling Party. See "Anti-Takeover Provisions -- Special
Voting Requirements for Certain Business Combinations" and " -- Supermajority
Votes," below.
ANTI-TAKEOVER PROVISIONS
Restrictions on Acquisition and Voting of Securities. Under Maryland
law, the voting rights of "control shares" acquired in a "control share
acquisition" are eliminated unless such acquisition is exempt or is approved by
at least two-thirds of all of the votes (other than votes held by the person
making the "control share acquisition," an officer of the corporation and an
employee who is also a director of the corporation) entitled to be cast at a
meeting called in accordance with specified procedures. A "control share
acquisition" is the direct or indirect acquisition by any person of ownership or
control of "control shares," which are shares of stock that would, if aggregated
with all other voting stock owned by such person, entitle such person to
exercise at least 20% of the voting power of the corporation. Unless the charter
or bylaws provide otherwise, the corporation has the option to redeem any or all
"control shares" (except "control shares" for which voting rights have
previously been approved by the shareholders) at their fair value during a
certain time period.
Special Voting Requirements for Certain Business Combinations. Bancorp
is governed by special
13
<PAGE>
voting procedures that apply to certain business combinations between a
corporation and interested shareholders. The purpose of such provisions is to
protect Bancorp and its shareholders against hostile takeovers by requiring that
certain criteria are satisfied.
The Articles of Incorporation define a "Controlling Party" as the
holder of 20% or more of the outstanding shares of Common Stock of Bancorp or an
affiliate of such person. These special voting provisions are not applicable to
any Business Combination, (and such Business Combination shall require only such
affirmative vote as is required by any other provision of the Articles of
Incorporation, any provision of law, or any agreement with any regulatory agency
or national securities exchange), if (1) the Business Combination shall have
been approved by a majority of the "Continuing Directors" (defined generally in
the Articles of Incorporation as any member of the Board of Directors who is not
a Controlling Party or an affiliate thereof and was a member of the Board of
Directors prior to the time that the Controlling Party became a Controlling
Party) and (2) certain "fair price" and procedural requirements are met.
Maryland law provides that, unless exempted, a corporation may not
engage in any "business combination" (as defined therein) with any "interested
stockholder" (i.e., a person who owns beneficially, directly or indirectly, 10%
or more of the outstanding voting stock of a Maryland corporation) or any
affiliate or associate of an interested stockholder for a period of five years
following the most recent date on which the interested stockholder became an
interested stockholder. Maryland law further provides that, unless exempted, in
addition to any vote otherwise required by law or the charter of the
corporation, a business combination that is not so prohibited must be
recommended by the board of directors and approved by (1) at least 80% of the
outstanding shares of voting stock of the corporation and (2) at least
two-thirds of the outstanding shares of voting stock (other than voting stock
held by an interested stockholder or an affiliate or associate thereof), unless
certain value and other standards are met or an exemption is available. The
higher voting requirements do not apply at any time to a business combination
with an interested stockholder or its affiliates if approved by the board of
directors of the corporation prior to the time the interested stockholder first
became an interested stockholder. Additionally, if the business combination
involves the receipt of consideration by the stockholders in exchange for the
corporation's stock, the higher voting requirements do not apply if certain
"fair price" conditions are met.
Consideration of Certain Nonmonetary Factors in the Event of an Offer
by Another Party. The Articles of Incorporation direct the Board of Directors,
in evaluating a business combination or a tender or exchange offer, to consider
all factors it deems relevant. The Board of Directors shall evaluate whether the
proposal is in the best interests of Bancorp by considering the best interests
of the shareholders and other factors the directors determine to be relevant,
including the social, legal and economic effects on employees, customers,
depositors and communities served by Bancorp. The Board of Directors shall
evaluate the consideration being offered to the shareholders in relation to the
then current market value of Bancorp, the then current market value of Bancorp's
stock in a freely negotiated transaction, and the Board of Directors' estimate
of the future value of stock of Bancorp as an independent entity.
Supermajority Votes. The Articles of Incorporation provide that
specified provisions of the Articles of Incorporation and Bylaws may not be
repealed or amended except upon the affirmative vote of the holders of not less
than 80% of the outstanding shares of stock entitled to vote generally in the
election of directors (considered for that purpose as a single class). These
requirements exceed the required votes of the outstanding stock that would
otherwise be required by Maryland law for the repeal or amendment of a charter
provision. Some of the provisions to which this supermajority vote applies
include the following: (1) the authorization of issuance of stock, (2) the
number of directors and the classification of the Board of Directors, (3)
shareholder approval of certain transactions, (4) business combinations with
Controlling Parties, (5) evaluation of business combinations by the Board of
Directors, and (6) amendment of the Articles of Incorporation. The Bylaws may be
amended by a majority vote of the Board of Directors or by a vote of not less
than 80% of the outstanding shares of capital stock entitled to vote generally
in the election of directors (considered for this purpose as one
14
<PAGE>
class).
ITEM 6. SELECTED FINANCIAL DATA
The table titled "Historical Trends in Financial Data 1993 - 1997" on
page 11 of the Annual Report is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Pages 10 through 21 of the Annual Report are hereby incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section titled "Market Risk Management" on pages 19 and 20 of the
Annual Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 22 through 40 of the Annual Report are hereby incorporated by
reference. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of Bancorp
and compliance with Section 16(a) of the Securities Exchange Act of 1934 is
included under the captions titled "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 titled "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 "Corporate Governance and
Other Matters," "Executive Compensation," "Report of the Human Resources
Committee," and "Stock Performance Graph" on pages 5 through 14 of the Proxy
Statement, and is hereby incorporated by reference.
15
<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 pages 2 and 3 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, 1997,
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, 1996 and 1997
Consolidated Statements of Income for the years ended December
31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1995, 1996 and 1997
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.
16
<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)* Amended and Restated Sandy Spring Bancorp, Inc., Exhibit 10(a) to Form 10-Q for the Quarter
Cash and Deferred Profit Sharing Plan and Trust ended September 30, 1997, SEC File No.
0-19065.
10(b)* Sandy Spring Bancorp, Inc. 1982 Incentive Stock Exhibit 10(c) to Form 10-Q for the quarter
Option Plan ended June 30, 1990, SEC File No. 0-19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Option Plan Exhibit 10(i) to Form 10-K for the year ended
December 31, 1991, SEC File No. 0-19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Restated Exhibit 4 to Registration Statement on Form
Stock Option Plan for Employees of Annapolis S-8, Registration Statement No. 333-11-049.
Bancshares, Inc.
10(e)* Sandy Spring National Bank of Maryland Executive Exhibit 10(g) to Form 10-K for the year ended
Health Insurance Plan December 31, 1991, SEC File No. 0-19065.
10(f)* Sandy Spring National Bank of Maryland Executive Exhibit 10(k) to Form 10-K for the year ended
Health Expense Reimbursement Plan December 31, 1991, SEC File No. 0-19065.
10(g)* Form of Director Fee Deferral Agreement, August Exhibit 10(b) to Form 10-Q for the Quarter
26, 1997 ended September 30, 1997, SEC File No.
0-19065.
10(h)* Supplemental Executive Retirement Agreement by Exhibit 10(c) to Form 10-Q for the Quarter
and Between Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland and Hunter R. Hollar 0-19065.
10(i)* Form of Supplemental Executive Retirement Exhibit 10(d) to Form 10-Q for the Quarter
Agreement by and between Sandy Spring National ended September 30, 1997, SEC File No.
Bank of Maryland and each of James H. Langmead, 0-19065.
Lawrence T. Lewis, Stanley L. Merson, and Frank
H. Small
10(j)* Employment Agreement by and among Sandy Spring Exhibit 10(e) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Hunter H. Hollar 0-19065.
10(k)* Employment Agreement by and among Sandy Spring Exhibit 10(f) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and James H. Langmead 0-19065.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10(l)* Employment Agreement by and among Sandy Spring Exhibit 10(g) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Lawrence T. Lewis 0-19065.
10(m)* Employment Agreement by and among Sandy Spring Exhibit 10(h) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Stanley L. Merson 0-19065.
10(n)* Employment Agreement by and among Sandy Spring Exhibit 10(i) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Frank H. Small 0-19065.
13 1997 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, 1997.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) None.
18
<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 25, 1998.
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, 1997. This report has been signed below by such
attorney-in-fact as of March 25, 1998.
By: /s/ Marjorie S. Holsinger
-----------------------------
Marjorie S. Holsinger
Attorney-in-Fact for Majority of the
Directors of Bancorp
19
<PAGE>
INDEX TO EXHIBITS
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)* Amended and Restated Sandy Spring Bancorp, Inc., Exhibit 10(a) to Form 10-Q for the Quarter
Cash and Deferred Profit Sharing Plan and Trust ended September 30, 1997, SEC File No.
0-19065.
10(b)* Sandy Spring Bancorp, Inc. 1982 Incentive Stock Exhibit 10(c) to Form 10-Q for the quarter
Option Plan ended June 30, 1990, SEC File No. 0-19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Option Plan Exhibit 10(i) to Form 10-K for the year ended
December 31, 1991, SEC File No. 0-19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Restated Exhibit 4 to Registration Statement on Form
Stock Option Plan for Employees of Annapolis S-8, Registration Statement No. 333-11-049.
Bancshares, Inc.
10(e)* Sandy Spring National Bank of Maryland Executive Exhibit 10(g) to Form 10-K for the year ended
Health Insurance Plan December 31, 1991, SEC File No. 0-19065.
10(f)* Sandy Spring National Bank of Maryland Executive Exhibit 10(k)
to Form 10-K for the year ended Health Expense Reimbursement
Plan December 31, 1991, SEC File No. 0-19065.
10(g)* Form of Director Fee Deferral Agreement, August Exhibit 10(b) to Form 10-Q for the Quarter
26, 1997 ended September 30, 1997, SEC File No.
0-19065.
10(h)* Supplemental Executive Retirement Agreement by Exhibit 10(c) to Form 10-Q for the Quarter
and Between Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland and Hunter R. Hollar 0-19065.
10(i)* Form of Supplemental Executive Retirement Exhibit 10(d) to Form 10-Q for the Quarter
between Sandy Spring National Bank of Maryland Agreement by andended September 30, 1997,
and each of James H. Langmead, Lawrence T. Lewis, SEC File No. 0-19065.
Stanley L. Merson, and Frank H. Small
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description Incorporated by Reference to:
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
10(j)* Employment Agreement by and among Sandy Spring Exhibit 10(e) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Hunter H. Hollar 0-19065.
10(k)* Employment Agreement by and among Sandy Spring Exhibit 10(f) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and James H. Langmead 0-19065.
10(l)* Employment Agreement by and among Sandy Spring Exhibit 10(g) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Lawrence T. Lewis 0-19065.
10(m)* Employment Agreement by and among Sandy Spring Exhibit 10(h) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Stanley L. Merson 0-19065.
10(n)* Employment Agreement by and among Sandy Spring Exhibit 10(i) to Form 10-Q for the Quarter
Bancorp, Inc., Sandy Spring National Bank of ended September 30, 1997, SEC File No.
Maryland, and Frank H. Small 0-19065.
13 1997 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.
EXHIBIT 13
SANDY SPRING BANCORP
1997 ANNUAL REPORT
ANNUAL MEETING
The Annual Meeting of shareholders will be held at:
Indian Spring Country Club
13501 Layhill Road
Silver Spring, Maryland
on Wendsday, April 15, 1998 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.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street
New York, NY 10005
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.
SANDY SPRING BANCORP
IS THE HOLDING COMPANY FOR SANDY SPRING NATIONAL BANK OF MARYLAND, THE OLDEST
BANKING BUSINESS NATIVE TO MONTGOMERY COUNTY. INDEPENDENT AND
COMMUNITY-ORIENTED, SANDY SPRING NATIONAL BANK TRACES ITS ORIGIN TO 1868 AND
CONDUCTS A FULL-SERVICE COMMERICAL BANKING BUSINESS THROUGH TWENTY-ONE COMMUNITY
OFFICES LOCATED IN MONTGOMERY, HOWARD, PRINCE GEORGE'S AND ANNE ARUNDEL COUNTIES
AND THROUGH ITS SUBSIDIARIES, SANDY SPRING MORTGAGE CORPORATION AND SANDY SPRING
INSURANCE CORPORATION.
CONTENTS
o Letter to Shareholders page 2
o Branch Sites page 6
o Board of Directors page 8
o Financial Section page 9
<PAGE>
I am pleased and proud to report the performance of Sandy Spring Bancorp for
1997. Our results provided a financial return that demonstrates management's
commitment to building long term value for shareholders and the communities we
serve.
FINANCIAL HIGHLIGHTS
Our return on average equity has steadily grown from 12.37% in 1995 to 12.81% in
1996 to 13.25% in 1997. This is the performance measure upon which we are most
focused, because it is the single best measure of the use of your investment.
Return on average assets has also shown steady improvement, from 1.18% to 1.27%
to 1.28% over the same period. Total net income for 1997 was $13.2 million
compared to $11.5 million in 1996, while diluted earnings per share increased
from $1.18 to $1.34, a 13.6% increase. This earnings performance and our capital
position allowed us to increase per share dividends from $0.39 in 1996 to $0.47
in 1997, a 20.5% increase. Dividend payments have increased 114% since 1992,
from $0.22 to $0.47 per share. All per share data in this report takes into
account the 2-for-1 stock split declared on January 28, 1998.
As often happens in industries that have become less regulated and more
competitive, our basic profit margin (net interest margin) has been under
extreme pressure. Net interest margin actually declined from 4.45% in 1996 to
4.42% in 1997. Offsetting this trend is our excellent performance in noninterest
income, including service charges and fees on deposit accounts, commissions on
the sales of annuities and mutual funds, fees for asset and trust management
services, and gains on sales of residential mortgage loans. Total noninterest
income increased by $2.6 million or 39.5% from 1996 to 1997.
Assets ended 1997 at $1.1 billion and while we are proud that our success
has allowed us to reach this milestone, we do not pursue asset size as our
primary goal. Some activities which produce income and, therefore, return to our
shareholders, do not require the high levels of assets traditionally associated
with banking. We believe that revenues and net income are much more important
than asset size. While we do seek to increase our loan portfolio, we will not do
so at the expense of loan quality. Total loans increased from $523.2 million at
year-end 1996 to $558.9 million at year-end 1997, a 6.8% increase. Total
deposits grew at the same time from $806.3 million to $853.0 million, a 5.8%
increase.
2
<PAGE>
We were particularly pleased that our emphasis on marketing checking
accounts helped us increase noninterest bearing deposits by 29.0% from year-end
1996 to year-end 1997. Total revenues (net interest income plus noninterest
income) grew from $42.9 million in 1996 to $50.2 million in 1997, a 17.0%
increase.
STOCK INFORMATION
In my letter to you last year, I reported that our stock price had declined
from $17.50 per share at year-end 1995 to $16.00 per share at year-end 1996. I
also noted that even though the return to the shareholder had been negative for
that one-year period, the return for the previous one-year period (year-end 1994
to year-end 1995) had been 45.5% considering dividends and the price increase.
Even this return was exceeded in 1997, when our stock price improved to $25.00
per share, producing a total annual return of 59.2%. The average total annual
rate of return over the last five years (1993-1997) is 26.2%.
In mid-April, we announced our intention to repurchase up to 5% of the
outstanding shares of our common stock. The shares repurchased are to be used in
connection with shares expected to be issued under the dividend reinvestment,
stock option, and employee benefit plans and for other corporate purposes. The
repurchase is also in keeping with our desire to effectively employ the capital
of your company such that we attain excellent returns on equity over time. At
year-end, we had repurchased, on a post-split basis, 184,600 shares of the
492,084 shares originally authorized. The repurchase program runs until March
31, 1999 unless terminated earlier by the board. We added an optional cash
purchase feature to our dividend reinvestment plan in 1997 whereby shareholders
who participate may purchase from $100 to $5,000 worth of Sandy Spring Bancorp
common stock each quarter through the plan. This feature has been popular among
our shareholders since it permits purchases at market price without paying any
fees or commissions.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 %Change
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROFITABILITY FOR THE YEAR:
Net Interest Income $ 41,079 $ 36,388 12.9%
Income before Taxes 19,783 17,283 14.5
Net Income 13,195 11,494 14.8
Return on Average Assets 1.28% 1.27%
Return on Average Equity 13.25% 12.81%
Net Interest Margin 4.42% 4.45%
PER SHARE DATA:
Basic Net Income Per Share $ 1.35 $ 1.18 14.4%
Diluted Net Income Per Share 1.34 1.18 13.6
Dividends Declared Per Share 0.47 0.39 20.5
Boook Value Per Share 10.77 9.85 9.3
AT YEAR END:
Assets $1,121,333 $ 978,595 14.6%
Deposits 853,011 806,341 5.8
Loans 558,893 523,166 6.8
Securities 464,734 361,806 28.4
Stockholders' Equity 104,675 96,581 8.4
CAPITAL AND CREDIT QUALITY RATIOS:
Average Equity to Average Assets 9.65% 9.90%
Total Risk-based Capital Ratio 17.07% 17.56%
Allowance for Credit Losses to Loans 1.26% 1.22%
Nonperforming Assets to Total Assets 0.26% 0.48%
Net Charge-Offs to Average Loans 0.07% 0.10%
</TABLE>
- ----------
* Adjusted, except with respect to dividends declared per share, to give
retroactive effect to the acquisition of Annapolis Bancshares, Inc. completed
on August 29, 1996. All per share data have been adjusted to gie retroactive
effect to a 2-for-1 stock split declared on January 28, 1998.
SERVING OUR MARKETS
In March, we relocated our West Diamond Avenue office to the Gaithersburg
Square Shopping Center on Rt. 355. This new office is conveniently located and
the interior design is a new concept emphasizing customer interaction and sales
opportunities. In August we opened an office on Rt. 1 near the Laurel Lakes
3
<PAGE>
Shopping Center. This is our first office positioned to serve the growing Laurel
and Prince George's County markets. In December we opened an office in the
Neelsville Village Center in Germantown. This too will position us in a new
market where residential growth is occurring. Also, we began work on a Jennifer
Road branch near the Annapolis Mall. This will be our 22nd office when it opens
in the second quarter of 1998. We expanded in a slightly different way when we
opened an ATM/Depository facility in December within Lakeforest Mall. This
facility permits all of the usual ATM transactions and permits mall merchants,
area businesses, and others to drop deposits into the unit. All of this
expansion is in keeping with our desire to provide convenient access in our new
and existing markets while recognizing that income growth must exceed expense
growth.
April of 1997 was the kickoff month for our latest BankXpress services, PC
and Internet Banking, which provides for bill paying, money transfers between
accounts and banks, and account research from the convenience of home. Already
about 10% of our deposits are held by clients who use BankXpress.
In April, we began operation of Sandy Spring Mortgage Corporation, bringing
focus to this fast-paced and competitive portion of our business. After doubling
our residential construction and permanent mortgage loan production to $95
million in 1996, we increased loan production in these categories to $166
million in 1997. Gains on selling mortgage loans, a major source of noninterest
income, have grown from $244 thousand in 1995 to $825 thousand in 1996 to $1.2
million in 1997. We believe meeting the needs of our clients and prospects with
competitive mortgage loans gives us the opportunity to expand our relationship
with them.
Our Asset and Trust Management Department grew in 1997 as we continued to
serve our mid- and upper-Montgomery County customers, while expanding our
presence into Bethesda and Annapolis. Assets under management increased from
$166.9 million at year-end 1996 to $187.3 million at year-end 1997. Trust fees
increased 26%, from $943 thousand in 1996 to $1.2 million in 1997.
We intensified our advertising efforts in 1997, placing numerous radio
commercials on highly-rated stations, as well as newspaper ads in community
newspapers and The Washington Post. The goal was to raise the awareness of Sandy
Spring Bank in our markets and to increase our noninterest bearing deposits. I
have already noted the 29.0% increase in those deposits. Market research
conducted during the year indicated a significant increase in the percentage of
people who have heard of Sandy Spring Bank, a necessary prerequisite to moving
their accounts to us!
BOARD CHANGES AND MANAGEMENT REORGANIZATION
At our shareholders meeting in April, we honored retiring Directors Willard
H. Derrick and Andrew N. Adams Jr., while welcoming David E. Rippeon, President
of Gaithersburg Ford Tractor to our Board. W. Drew Stabler, great great grandson
of the Bank's first President, Caleb Stabler, was elected Chairman. In December,
we were pleased to welcome our first Annapolis area Director when Gilbert L.
Hardesty was appointed to the Board. Gil had been in banking for over 25 years
before retiring as a bank executive in 1996.
Several internal organizational changes were made late in the year to
better prepare us for the future. James H. Langmead, Frank H. Small, and
Lawrence T. Lewis, III were elevated to the position of Executive Vice President
to head the three major business groups in the bank. Sara E. Watkins, who has
been with the bank over 24 years, was named Senior Vice President and an
executive officer to bring further leadership and emphasis to our strategic
planning and marketing efforts. Stanley L. Merson, another long-time Sandy
Spring Banker, moved full time to Sandy Spring Mortgage Corporation as its
President. We also completed our reconstruction project at the former Coles
Furniture building next door to our headquarters, the Willard H. Derrick
Building, in Olney. This new Administrative and Training Center permits us to
consolidate a number of departments from outlying locations and to greatly
improve our ability to conduct internal training--an important component of our
success.
THE VIEW FORWARD
Sandy Spring Bankers hold dear several beliefs which shape our view of the
future, making much of that view unchanged. We believe our success in the past
and in the future as an independent, locally-owned community bank depends on
providing excellent returns to our shareholders. Further, we believe that what
makes us unique is our excellent customer service. We must continue to provide
such service AND we must improve it constantly. We believe that we must also
become a sales organization, meaning that we help our customers in an
intentional and active manner. Quality must permeate everything we do. Our
facilities, our products, our employees, and our processes must work right so
that we do things right. We believe that acting out a set of basic values is
important: fairness, respect for individual employees and clients, and caring
for our local communities by making them better places to live. Over time this
view forward doesn't change.
4
<PAGE>
With this background, though, a few things are important to us in the
immediate future. We believe that our return on average equity needs to move
toward 17% over the next several years in order to provide excellent shareholder
value. To achieve this improvement, we must better understand and manage the
costs and profitability of internal business units and products. Much of our
effort in 1998 will be directed toward gaining such knowledge, which will permit
us to understand the components of mutually beneficial relationships with our
clients. Hiring and training employees has a "never changing" importance, but we
believe it is particularly worthy of our attention when the economy is good and
unemployment low. We will be concentrating in 1998 on hiring the people who can
provide outstanding service to our clients by thoroughly learning the Sandy
Spring style of doing business. In a time of rapid change, the support and
enthusiasm of our employees continues to make us Sandy Spring Bank. For that, I
am thankful.
The last several years have been ones of expansion and the development of
new products and services to take advantage of the opportunities created by
large bank merger activity. Our focus for 1998 will be to make sure we have not
"gotten ahead of ourselves" in terms of costs and operational requirements. We
will be concentrating on slowing our noninterest expense growth rates which have
been in double digits the last two years. In addition, we will be examining our
operational processes to insure that they continue to provide high quality and
accuracy.
At the same time, we recognize that Annapolis cannot be fully served by the
one office we acquired in 1996 and the additional office to be opened in 1998.
So, we will carefully evaluate other sites in Annapolis and Anne Arundel County
for future expansion.
We continue to believe that the lines between the traditional financial
service areas of insurance, securities, and banking will continue to blur.
Therefore, we will evaluate how we can profitably enter further into the
securities and insurance businesses while maintaining our service quality and
sales standards.
Marketing and innovation will be important elements in our immediate
future. We will look for ways to rapidly develop the information which will
permit us to market our products to highly targeted market segments in ways that
are friendly and beneficial to our clients.
Please continue to refer your friends, neighbors and business associates to
us and never hesitate to call me or our Executive Office staff. We are here to
answer your questions and be of assistance. Thank you for your support.
Respectfully,
Hunter R. Hollar
President and Chief Executive Officer
5
<PAGE>
[MAP OF MARKER AREA]
EXPANDING -- IN KEEPING WITH OUR DESIRE TO PROVIDE CONVENIENT ACCESS IN OUR NEW
AND EXISTING MARKETS
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
AIRPARK* DAMASCUS* OLNEY*
7653 Lindbergh Drive 26250 Ridge Road 17801 Georgia Avenue
Gaithersburg, Maryland 20879 Damascus, Maryland 20872 Olney, Maryland 20832
(301) 774-8408 (301) 253-0133 (301) 774-8402
ANNAPOLIS* EAST GUDE DRIVE* ROCKVILLE
2024 West Street 1601 East Gude Drive 611 Rockville Pike
Annapolis, Maryland 214041 Rockville, Maryland 20850 Rockville, Maryland 20852
(410) 266-3000 (301) 570-8330 (301) 217-0555
ASHTON* GATHERSBURG SQUARE* SANDY SPRING
1 Ashton Road 596 A North Frederick Avenue 908 Olney-Sandy Spring Road
Ashton, Maryland 20861 Gaithersburg, Maryland 20877 Sandy Spring, Maryland 20860
(301) 774-8405 (301) 963-3600 (301) 774-8401
ASPENWOOD JENNIFER ROAD* ADDITIONAL AUTOMATED TELLER
14400 Homecrest Road 166 Jennifer Road MACHINE (ATM) SITES
Silver Spring, Maryland 20906 Annapolis, Maryland 21401 Bethesda-Chevy Chase Shell Station
(301) 774-8406 opening April 1998 8240 Wisconsin Avenue
Bethesda, Maryland 20814
BEDFORD COURT LAUREL LAKES*
3701 International Drive 14404 Baltimore Avenue Lakeforest Mall
Silver Spring, Maryland 20906 Laurel, Maryland 21401 701 Russell Avenue
(301) 774-8407 (301) 498-5050 Gaithersburg, Maryland 20877
BETHESDA* LAYHILL* Montgomery County Fairgrounds
7126 Wisconsin Avenue 14241 Layhill Road 16 Chestnut Street
Bethesda, Maryland 20814 Silver Spring, Maryland 20906 Gaithersburg, Maryland 20877
(301) 951-0800 (301) 774-8406
Montgomery General Hospital
BURTONSVILLE* LEISUREWORLD PLAZA* 18101 Prince Philip Drive
3535 Spencerville Road 3801 International Drive Olney, Maryland 20832
Burtonsville, Maryland 20866 Silver Spring, Maryland 20906
(301) 774-8404 (301) 774-8407 Woodmont Shell
1250 West Montgomery Avenue
CLARKSVILLE* LISBON* Rockville, Maryland 20850
12276 Clarksville Pike 710-N Lisbon Centre Drive
Clarksville, Maryland 21029 Woodbine, Maryland 21797 SANDY SPRING MORTGAGE CORPORATION
(410) 531-2650 (410) 442-1878 12501 Prosperity Drive, Suite 100
Silver Spring, Maryland 20906
COLESVILLE* MILESTONE CENTER* (301) 680-0200
13300 New Hampshire Avenue 20930 Frederick Avenue
Silver Spring, Maryland 20906 Germantown, Maryland 20876 2024 West Street
(301) 774-8403 (301) 601-0405 Annapolis, Maryland 214041
(301) 266-3000
MONTGOMERY VILLAGE*
9921 Stedwick Road 7126 Wisconsin Avenue
Montgomery Village, Maryland 20879 Bethesda, Maryland 20814
(301) 990-3800 (301) 951-0800
</TABLE>
7
<PAGE>
BOARD OF DIRECTORS
[GRAPHIC OMITTED]
<TABLE>
<CAPTION>
<S> <C> <C>
BOARD OF DIRECTORS FROM LEFT TO RIGHT DIRECTORS EMERITUS
Solomon Graham John Chirtea Willard H. Derrick, Chairman Emeritus
President and Chief Executive Officer Retired from LCOR, a national
of Quality Biological, Inc. real estate development company Daniel Ligon, Chairman Emeritus
David E. Rippeon Susan D. Goff Samuel Riggs, IV, hairman Emeritus
President of Gaithersburg Ford President of M.D.IPA, Inc.
Tractor Company Andrew N. Adams, Jr.
Charles F. Mess, M.D. Thomas A. Ladson
Hunter R. Hollar General Orthopaedic Practice
President and Chief Executive Officer Charles H. Ligon
of the Bank and Bancorp Joyce Riggs Hawkins
Real Estate Agent Louisa W. Riggs
Robert L. Orndorff, Jr.
President of RLO Contractors, Inc. Robert L. Mitchell Francis Snowden
President and Chief Executive Officer
W. Drew Stabler, Chairman of C-I/Mitchell & Best Company Stanley P. Stabler
Partner in Pleasant Valley Farm
Lewis R. Schumann Clyde W. Unglesbee
Thomas O. Keech Partner in the firm of
Retired Executive Vice President Miller, Miller and Canby, Chtd. Robert H. White
the Bank and Bancorp
[GRAPHIC OMITTED] Gilbert L. Hardesty
Retired Bank Executive
</TABLE>
8
<PAGE>
INDEX TO FINANCIAL SECTION
Recent Stock Prices and Dividends 9
Management's Discussion and Analysis of Operations and Financial Condition 10
Financial Statements:
At December 31, 1997 and 1996:
Consolidated Balance Sheets 22
For the Years Ended December 31, 1997, 1996 and 1995:
Consolidated Statements of Income 23
Consolidated Statements of Cash Flows 24
Consolidated Statements of Changes in Stockholders' Equity 25
Notes to the Consolidated Financial Statements 26
Management's Statement of Responsibility 40
Report of Independent Auditors 40
RECENT STOCK PRICES AND DIVIDENDS
(Dollars in thousands, except per share data)
Shareholders received quarterly cash dividends totaling $4,603 in 1997 and
$3,620 in 1996. Regular dividends have been declared for ninety-seven
consecutive years. The Company has increased its dividends per share each year
for the past seventeen years. Since 1992, dividends per share have risen at an
annual compound growth rate of 16.9%, with an increase of 20.5% in 1997.
The ratio of dividends per share to diluted net income per share was 35.1%
in 1997, compared to 33.1% for 1996, reflecting the Board of Directors' desire
to increase the percentage of earnings which is returned to shareholders,
particularly in light of the Company's capital position. The amount of dividends
is established by the Board in consideration of operating results, financial
condition, capital adequacy, regulatory requirements, shareholder returns and
other factors.
The Dividend Reinvestment Plan was renamed the Dividend Reinvestment and
Stock Purchase Plan in October 1997 to reflect a change permitting optional
quarterly cash purchases of stock by shareholder participants. Shares issued
under the plan totaled 43,327 in 1997 and 35,273 during 1996.
Also in 1997, the Company initiated a stock repurchase program permitting
repurchase of up to 5% of Bancorp's outstanding common stock. Repurchases are
made in connection with shares expected to be issued under the Company's
dividend reinvestment and stock purchase plan, incentive stock option plan,
employee benefit plans, and for other corporate purposes. During 1997, the
equivalent of 92,300 shares were repurchased. On a post-split basis*, 492,084
shares were authorized for repurchase under this program, and the equivalent of
184,600 shares were repurchased in 1997.
The number of common shareholders of record was approximately 2,400 as of
February 10, 1998 and 1997.
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 in the table 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.
QUARTERLY STOCK INFORMATION*
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
STOCK PRICE RANGE PER SHARE Stock Price Range Per Share
----------------- DIVIDEND ----------------- Dividend
Quarter LOW HIGH Low High
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st $ 15.13 $ 17.88 $ 0.10 $ 17.50 $ 19.38 $ 0.09
2nd 16.88 18.63 0.12 17.88 20.50 0.10
3rd 17.88 22.25 0.12 17.00 19.75 0.10
4th 22.00 25.07 0.13 15.63 17.38 0.10
- -----------------------------------------------------------------------------------------
Total $ 0.47 $ 0.39
====== ======
</TABLE>
*Adjusted to give retroactive effect to a 2-for-1 stock split declared on
January 28, 1998.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
(Dollars in thousands, except per share data)
OVERVIEW
Sandy Spring Bancorp, Inc. ("Sandy Spring" or the "Company") reached the
milestone of $1 billion in total assets during 1997. The Company's assets have
more than doubled since the beginning of the decade. Assets were employed to
achieve earnings of $13,195 for 1997, 14.8% higher than in 1996, with a return
on average assets of 1.28%.
Management believes that a significant number of people in our markets
prefer the style of banking Sandy Spring offers, blending state-of-the-art
computer technology and investment advisory services with the comfort and
personal style of traditional community banking.
The Company recorded increases in 1997 for total deposits, which were
$46,670 or 5.8% above 1996, and for total loans, which grew $35,727 or 6.8%.
Earnings increased to $13,195 for 1997, $11,494 for 1996, and $9,994 for
1995, which equate to diluted earnings per share of $1.34, $1.18 and $1.04,
respectively. Growth rates for earnings, compared to each prior year, were 14.8%
(1997), 15.0% (1996) and 12.3% (1995). The increase for 1997, compared to 1996,
included merger expenses of $558, net of related income taxes, which were
recognized in 1996 from the Annapolis Bancshares, Inc. acquisition. Excluding
this and other nonrecurring items, the rates of increase over the three-year
period were 9.9%, 10.0% and 9.0%, respectively.
Net interest income rose $4,691 or 12.9% during 1997, attributable to
earning asset growth.
Noninterest income increased $2,585 in 1997 representing an increase of
39.5%. Sandy Spring continued to diversify its sources of revenue during 1997,
placing more emphasis on mortgage banking, mutual funds and annuities, and
investment advisory services. Other expanding sources of fee income were debit
and credit cards along with ATMs, which produced more revenue due both to more
sites and to increased transaction volume.
During 1997, noninterest expenses were up $4,098 or 16.2%. While incurring
costs in order to pursue business opportunities, the Company aggressively
managed its operating expenses relative to revenue growth in order to preserve
profitability. As a result, the net overhead ratio, which relates noninterest
expense performance to revenues, improved in 1997, compared to 1996.
Asset quality remained acceptable at December 31, 1997. Levels of net loans
charged off and nonperforming assets were moderate for the year.
The Company continues to be well capitalized. During 1997, management
borrowed from the Federal Home Loan Bank of Atlanta, investing the funds at a
profit margin, to leverage the Company's strong capital position and achieve a
higher return on average equity.
The dividend payout ratio (dividends per share divided by diluted net
income per share) increased to 35% in 1997 from 33% in 1996 and 31% in 1995. The
decision to give a higher percentage of earnings back to the shareholders
resulted in an increase in per share dividends to $0.47 in 1997 from $0.39 in
1996 and $0.32 in 1995.
The Company's effectiveness in utilizing its capital was indicated by a
return on average equity of 13.25% in 1997, preceded by ratios of 12.81% in 1996
and 12.37% in 1995. The increase in 1997 was attributable to higher earnings due
in part to the leverage program discussed above, and also to the stock
repurchase plan implemented in 1997 which resulted in the buy-back and
retirement of 92,300 shares during the year.
CHANGES IN DILUTED NET INCOME PER COMMON SHARE*
<TABLE>
<CAPTION>
1996 to 1997 1995 to 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Prior Year Diluted Net Income Per Share $ 1.18 $ 1.04
Change attributed to:
Net interest income 0.31 0.25
Provision for credit losses (0.05) (0.01)
Noninterest income 0.18 0.14
Noninterest expenses (0.28) (0.20)
Income taxes 0.01 (0.02)
Increased shares outstanding (0.01) (0.02)
------ ------
Total 0.16 0.14
------ ------
DILUTED NET INCOME PER SHARE $ 1.34 $ 1.18
====== ======
</TABLE>
* Adjusted to give retroactive effect to a 2-for-1 stock split declared on
January 28, 1998.
10
<PAGE>
HISTORICAL TRENDS IN FINANCIAL DATA 1993-1997(1)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS (for the year):
Interest Income $ 75,565 $ 66,621 $ 62,115 $ 51,578 $ 46,189
Interest Expense 34,486 30,233 29,342 21,496 19,793
Net Interest Income 41,079 36,388 32,773 30,082 26,396
Provision for Credit Losses 986 308 180 212 1,056
Net Interest Income after Provision
for Credit Losses 40,093 36,080 32,593 29,870 25,340
Noninterest Income 9,132 6,547 4,478 4,189 4,870
Noninterest Expenses 29,442 25,344 22,424 21,462 18,340
Income before Taxes 19,783 17,283 14,647 12,597 11,870
Income Tax Expense 6,588 5,789 4,653 3,694 3,261
Net Income 13,195 11,494 9,994 8,903 8,609
PER SHARE DATA:
Basic Earnings Per Share $ 1.35 $ 1.18 $ 1.05 $ 0.95 $ 0.96
Diluted Earnings Per Share 1.34 1.18 1.04 0.94 0.95
Dividends Declared 0.47 0.39 0.32 0.27 0.25
Book Value 10.77 9.85 9.02 7.86 7.82
FINANCIAL CONDITION (at year-end):
Assets $1,121,333 $978,595 $876,203 $830,834 $784,274
Deposits 853,011 806,341 743,592 700,340 676,422
Loans 558,893 523,166 492,540 457,052 374,740
Securities 464,734 361,806 290,786 309,622 314,283
Stockholders' Equity 104,675 96,581 86,941 73,766 72,420
MEASUREMENTS (for the year):
Return on Average Assets 1.28% 1.27% 1.18% 1.14% 1.23%
Return on Average Equity 13.25 12.81 12.37 12.24 13.55
Average Equity to Average Assets 9.65 9.90 9.57 9.28 9.10
Dividends Declared Per Share to
Diluted Net Income Per Share 35.07 33.05 30.77 28.72 26.32
</TABLE>
(1) Adjusted to give retroactive effect to 2-for-1 stock splits declared on
March 29, 1995 and January 28, 1998, 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.
11
<PAGE>
SANDY SPRING BANCORP AND SUBSIDIARIES
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES(1)
(Dollars in thousands and tax-equivalent)
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------
AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:(2)
Real estate(3) $ 440,980 $40,239 9.12% $417,161 $37,866 9.08% $400,176 $36,154 9.03%
Consumer 31,967 2,877 9.00 28,600 2,682 9.38 26,710 2,437 9.12
Commercial 71,191 6,854 9.63 62,999 6,125 9.72 54,677 5,320 9.73
Tax exempt 20 2 10.00 169 16 9.65 479 63 13.15
---------- ------ ------- ------ ---- ------- -------
Total loans 544,158 49,972 9.18 508,929 46,689 9.17 482,042 43,974 9.12
Securities:
Taxable 329,319 20,931 6.36 250,763 15,062 6.01 234,354 13,769 5.88
Nontaxable 68,198 5,053 7.41 65,847 5,005 7.60 65,696 5,177 7.88
---------- ------- -------- ------- ------- ------
Total securities 397,517 25,984 6.54 316,610 20,067 6.34 300,050 18,946 6.31
Interest-bearing
deposits with banks 1,398 74 5.29 3,585 187 5.22 740 39 5.27
Federal funds sold 22,938 1,196 5.21 25,319 1,342 5.30 15,252 872 5.72
---------- ------- -------- ------- ------- ------
TOTAL EARNING
ASSETS 966,011 77,226 7.99 854,443 68,285 7.99 798,084 63,831 8.00
Less: allowance for
credit losses (6,478) (6,668) (6,647)
Cash and due
from banks 28,602 25,923 24,188
Premises and
equipment, net 24,133 20,559 17,019
Other assets 19,277 12,305 11,174
---------- -------- --------
Total Assets $1,031,545 $906,562 $843,818
========== ======== ========
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Interest-bearing
demand deposits $ 103,474 $ 2,496 2.41% $ 96,940 $ 2,529 2.61% $ 86,688 $ 2,263 2.61%
Regular savings deposits 92,911 2,593 2.79 95,636 2,695 2.82 104,971 3,218 3.07
Money market
savings deposits 157,716 5,150 3.27 149,358 4,935 3.30 154,644 5,646 3.65
Time deposits 347,496 18,461 5.31 324,842 17,730 5.46 277,804 15,578 5.61
------- ------ ------- ------ ------- ------
Total interest-bearing
deposits 701,597 28,700 4.09 666,776 27,889 4.18 624,107 26,705 4.28
Short-term borrowings 105,544 5,438 5.15 41,963 2,021 4.83 40,605 2,284 5.62
Long-term borrowings 5,047 348 6.90 4,854 323 6.65 6,097 353 5.79
----- --- ----- --- ----- ---
TOTAL INTEREST-
BEARING
LIABILITIES 812,188 34,486 4.25 713,593 30,233 4.24 670,809 29,342 4.37
------ ---- ------ ---- ------
Net Interest Income
and Spread $ 42,740 3.74% $ 38,052 3.75% $34,489 3.63%
======== ==== ======== ==== ======= ====
Noninterest-bearing
demand deposits 117,148 100,127 90,260
Other liabilities 2,628 3,132 1,987
Stockholders' equity 99,581 89,710 80,762
------ ------ ------
Total liabilities
and stockholders'
equity $1,031,545 $906,562 $843,818
========== ======== ========
Interest income/
earning assets 7.99% 7.99% 8.00%
Interest expense/
earning assets 3.57 3.54 3.68
---- ---- ----
Net Interest Margin 4.42% 4.45% 4.32%
==== ==== ====
</TABLE>
(1) Income and yields are presented on a tax-equivalent basis using the
applicable federal income tax rate.
(2) Non-accrual loans are included in the average balances.
(3) Includes residential mortgage loans held for sale.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALSIS
(Dollars in thousands)
NET INTEREST INCOME
Net interest income for 1997 was $41,079, representing an increase of $4,691 or
12.9% from 1996. An 11.0% rise was achieved in 1996, compared to 1995, resulting
in net interest income of $36,388. On a tax-equivalent basis, net interest
income amounted to $42,740 in 1997, representing a 12.3% annual rise, and
$38,052 in 1996, representing a 10.3% annual rise, preceded by $34,489 in 1995.
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 1997 net interest margin of 4.42%, which
represents a modest decline of 3 basis points, compared to 1996. The net
interest margin for 1996 of 4.45% was 13 basis points above the 4.32% recorded
for 1995. The table entitled "Effect of Volume and Rate Changes on Net Interest
Income" shows that the increases in net interest income during 1997 and 1996,
compared to each prior year, were primarily driven by increases in the volumes
of earning assets.
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
(Tax-equivalent basis)
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
-----------------------------------------------------------------
Increase Due to Change Increase Due to Change
or in Average:(1)(2) or in Average:(1)(2)
------------------ --------------------
(Decrease) Volume Rate (Decrease) Volume Rate
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income from earning assets:
Loans $3,283 $3,236 $ 47 $2,715 $2,464 $ 251
Taxable securities 5,860 4,947 913 1,293 981 312
Nontaxable securities 58 176 (118) (172) 12 (184)
Other investments (260) (238) (22) 618 687 (69)
---- ---- --- --- --- ---
Total Interest Income 8,941 8,922 19 4,454 4,503 (49)
Interest expense on funding of earning assets:
Interest-bearing demand deposits (33) 164 (197) 266 268 (2)
Regular savings deposits (102) (76) (26) (523) (274) (249)
Money market savings deposits 215 274 (59) (711) (188) (523)
Time deposits 731 1,211 (480) 2,152 2,578 (426)
Borrowings 3,442 3,332 110 (293) 1 (294)
----- ----- --- ---- ----- ----
Total interest expense 4,253 4,189 64 891 1,829 (938)
----- ----- -- --- ----- ----
Net interest income $4,688 $4,733 $ (45) $3,563 $2,674 $ 889
====== ====== ===== ====== ====== =====
</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 13.1% or $8,941 in
1997, compared to 1996, as a result of a 13.1% or $111,568 increase in average
earning assets accompanied by an unchanged yield earned on those funds. During
1997, average loans, yielding 9.18%, rose 6.9% to $544,158 (56.3% of average
earning assets). Average mortgage loans were responsible for most of the rise in
total loans. Average total securities, yielding 6.54%, increased 25.6% to
$397,517 (41.2% of average earning assets). Interest income on the investment
portfolio accounted for 28.7% of total Company revenue during 1997, versus 25.2%
in 1996.
Tax-equivalent interest income increased by 7.0% or $4,454 in 1996,
compared to 1995, due to higher average earning assets.
<PAGE>
INTEREST EXPENSE
Interest expense increased 14.1% or $4,253 in 1997, compared to 1996,
attributable to 13.8% or $98,595 greater average interest-bearing liabilities
while approximately the same average rate was paid for those funds. Most of the
rise in interest-bearing funds was generated by growth in average short-term
borrowings, which amounted to $63,581. A leverage program, in which the Company
borrows from the Federal Home Loan Bank of Atlanta and invests the advances in
available-for-sale securities at a higher rate of return, was the primary driver
behind the increase in short-term borrowings. Average repurchase agreements,
which are short-term borrowings associated primarily with cash management
services to business clients, also increased significantly. Total
interest-bearing deposits rose $34,821 or 5.2%. Modest increases were achieved
for all major categories of interest-bearing deposits except regular savings,
which declined slightly.
In the prior year comparison of 1996 against 1995, growth in interest
expense of 3.0% (up $891) was below the percentage rise in tax-equivalent
interest income. While average earning assets and average interest-bearing
liabilities increased by similar percentages during 1996, compared to 1995, the
average rate paid on interest-bearing liabilities declined 13 basis points
versus a single basis point decline in the average yield on earning assets.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
INTEREST RATE PERFORMANCE
Over the three-year period from 1995 through 1997, Sandy Spring has achieved
fairly consistent interest rate performance. The net interest spread, the
average yield on earning assets and the average rate on interest-bearing
liabilities were essentially unchanged from 1996 to 1997. The net interest
margin declined from 4.45% to 4.42%, reflecting a decline in the percentage of
average earning assets funded by noninterest-bearing liabilities. During 1996,
compared to 1995, the spread and margin both increased slightly.
NONINTEREST INCOME
Total noninterest income was $9,132 in 1997, a 39.5% increase from 1996,
primarily reflecting higher securities gains, stronger gains on mortgage sales,
and increases in return check charges, trust revenue and electronic transaction
fees. An increase of 46.2% or $2,069 was posted for 1996 versus 1995.
Securities gains were $637 in 1997, an increase of $607 from the 1996
amount. Securities losses of $279 were recorded in 1995. All securities sales
were from the available-for-sale portfolio. During 1997, the sale of
available-for-sale debt securities generated net losses of $408, while net gains
of $836 were realized on sales of available-for-sale equity securities and net
gains of $209 from securities calls, maturities and paydowns. Sales of
available-for-sale debt securities generated $66 in net losses for 1996,
compared with $89 in net gains on sales of available-for-sale equity securities
and $7 in net gains from securities calls, maturities and paydowns.
Service charges on deposit accounts increased 14.8% in 1997 and 15.4% in
1996. The majority of the change in both years was attributable to increases in
return check charges from higher transaction volume and a larger customer base
while the fee charged remained the same.
Gains on mortgage sales increased $421 or 51.0% for 1997, when compared to
1996, largely reflecting higher gains on a greater volume of origination/sales
activities. A new mortgage banking subsidiary began operations in April of 1997,
achieving gains of $1,246 for the year from sales of $80,233. These results
compare to gains of $825 achieved on sales of $57,282 for 1996, and gains of
$244 from sales of $19,490 for 1995.
Trust income amounted to $1,188 for 1997, an increase of $245 or 26.0% over
1996. Revenues of $943 for 1996 represented an increase of $183 or 24.1% over
1995. These results primarily reflect higher fees attributable to growth in
assets under management.
Other income increased $873 or 48.9% to $2,658 for 1997, compared to $1,785
for 1996. Debit card fees increased $234, while fees for mutual funds sold rose
$174. During 1997, ATM surcharge fees were initiated in line with industry-wide
practice, resulting in revenues of $141 for the year. Other income for 1997
included revenues of $181 from investments associated with funding the Company's
supplemental executive retirement plans. The rise in other income was $601 or
50.8% in 1996, compared to 1995, attributable primarily to higher fees from
sales of mutual funds and tax-deferred annuity products along with nonrecurring
gains on sales of other real estate owned during 1996.
NONINTEREST EXPENSES
Noninterest expenses increased $4,098 or 16.2% in 1997 over 1996 and $2,920 or
13.0% in 1996 over 1995. However, nonrecurring expenses significantly affected
these changes. Excluding nonrecurring merger related costs associated with the
acquisition of Annapolis Bancshares, Inc., which increased noninterest expenses
in 1996 by $724, the increase in noninterest expenses amounted to $4,807 or
19.5% in 1997 versus 1996. Items of nonrecurring expenses affecting the
comparison of 1996 to 1995 included the merger costs and an industry-wide FDIC
insurance premium reduction which reduced noninterest expenses by $814 in 1996,
along with costs of conversion to a new data processing center and early
retirement benefits in 1995. Without these nonrecurring items, the increase in
noninterest expenses was $3,670 or 17.5% in 1996, compared to 1995.
Salaries and employee benefits increased $2,377 or 16.5% in 1997 and $1,721
or 13.5% in 1996. Increases in both years reflected growth in staff, an expanded
branch network and higher incentive compensation costs. Two new branches opened
in 1997 and two in 1996. Average full-time equivalent employees reached 395 in
1997, representing an increase of 14.2% from 346 in 1996, which was 8.8% above
318 recorded for 1995. Despite the increase in staff, the ratio of net income
per average full-time-equivalent employee was maintained at $33 for 1997 and
1996, representing an improvement from $31 in 1995.
In 1997, occupancy expense rose 13.1% or $273, primarily reflecting an
increase in leased premises, while equipment expenses remained relatively
unchanged. The rate of increase for occupancy expense was 14.8% in 1996 due
largely to facilities maintenance, and equipment expenses rose 11.4%, driven by
higher depreciation charges and expenses for furnishings and equipment.
Marketing, after nearly doubling in 1996 as the Bank entered two new
markets, moderated in 1997, recording a 9.5% or $109 increase. During 1997, the
Company's advertising focused on campaigns to attract new customers and increase
marketplace awareness of the Bank's style and capabilities. Management believes
that the bank's name recognition in its markets has increased significantly over
the past two years through image advertising which promoted its excellent
reputation for service and community banking heritage and philosophy.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
FDIC insurance costs rose $98 in 1997, due to imposition of an
industry-wide deminimus assessment. In 1996, premiums declined significantly
from 1995 due to an industry-wide reduction in premiums.
Outside data services costs rose $164 or 14.8% in 1997, reflecting growth
in the Company's accounts and increased analysis. Costs increased 40.9% or $322
in 1996, due to growth and conversion to a new provider with expanded
capabilities late in 1995.
Other expenses of $5,426 were $1,034 or 23.5% above 1996, with the majority
of the increase attributable to higher communications costs and professional
fees and to increased amortization of intangibles relating to an acquisition of
deposits late in 1996. The rise in other expenses was 17.1% for 1996, due in
significant part to higher professional and consulting fees.
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 1997, the Company's net overhead ratio was 47.5%, compared to
ratios of 49.4% achieved in 1996 and 52.0% in 1995. Ratios less than 50% are
considered desirable.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $6,588 in 1997, compared with $5,789 in 1996 and
$4,653 in 1995. The Company's effective tax rate for 1997 was 33.3%, compared
with 33.5% in 1996 and 31.8% in 1995. During 1997 and 1996, the Company's net
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 $61 for 1997 and $24 for 1996 on taxable earnings in excess of
$10,000.
BALANCE SHEET ANALYSIS
The Company's size, as measured by total assets, reached $1,121,333 at December
31, 1997 from $978,595 at December 31, 1996, for an increase of 14.6% or
$142,738. By comparison, the growth rate for 1996 was 11.7%, based upon an
increase of $102,392.
Earning assets showed a 13.6% rate of increase in 1997, to $1,041,720 at
December 31, 1997 from $917,096 at the prior year-end, for a rise of $124,624.
LOANS
Real estate mortgage loans rose 4.6% to $393,661 in 1997. Included in this
category are commercial mortgages, which increased 2.2% during 1997 and totaled
$182,560 at December 31, 1997. The Bank's commercial mortgages consist in large
part of owner occupied properties where an established banking relationship
exists. In addition, there were significant commercial mortgages at December 31,
1997 on investment properties for warehouse, retail and office space. These
credits generally involved established properties with a history of occupancy
and cash flow. Home equity lines and home equity loans, types of real estate
mortgages that permit homeowners to access their equity to make purchases and
possibly receive an income tax deduction on the interest, increased 3.2% during
1997 to $67,543 at year-end. One to four family residential loans, up 9.8% in
1997, represented $127,840 of the real estate mortgage portfolio at December 31,
1997. Other real estate mortgages, including primarily residential lot loans,
collectively totaled $15,718 at December 31, 1997, which was essentially
unchanged from the prior year-end.
Real estate construction loans increased 21.1% to $57,687 from 1996,
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 Sandy Spring Mortgage Corporation, a new Bank subsidiary which began
operations in 1997, was formed to conduct a mortgage banking operation,
originating and selling residential real estate mortgage loans and originating
and servicing residential construction loans. The Bank, in order to build its
own portfolio, is a significant investor in loans originated by its mortgage
banking subsidiary.
The consumer loan portfolio rose 13.7% to $35,021 at December 31, 1997,
with increases shown for virtually all loan types. Consumer lending continues to
be important to the full service community banking business conducted by the
Company.
Commercial loans increased 5.9% to $72,511 during 1997. For the most part,
these are loans to a diverse cross-section of small- to mid-size local
businesses, many of which 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 desires to grow this
sector of its loan portfolio.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
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,
-----------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate--mortgage(1) $393,661 $376,205 $363,927 $345,547 $286,542
Real estate--construction(2) 57,687 47,654 41,725 31,853 21,770
Consumer 35,021 30,813 28,762 28,892 19,352
Commercial 72,511 68,467 57,718 50,224 46,405
Tax exempt 13 27 408 536 671
------- -------- -------- -------- --------
TOTAL LOANS $558,893 $523,166 $492,540 $457,052 $374,740
======== ======== ======== ======== ========
</TABLE>
- -------------------
(1) Consists of fixed and adjustable rate first and second home mortgage loans,
residential lot loans, home equity lines of credit and commercial mortgage
loans.
(2) Includes both residential and commercial properties.
SECURITIES
Securities rose 28.4% or $102,928 to $464,734 at December 31, 1997 from $361,806
at December 31, 1996. Investments are managed to generate interest revenue,
provide liquidity and achieve asset/liability management goals. Securities
totaling $94,379 at December 31, 1997, compared to $17,981 at December 31, 1996,
were funded by Federal Home Loan Bank of Atlanta advances under a leverage
program, taking profitable advantage of the Company's capital position. The
increase in these investments accounted for approximately three-fourths of the
growth in available-for-sale and total securities during 1997.
ANALYSIS OF SECURITIES
The composition of Securities at December 31 for each of the latest three fiscal
years was:
<TABLE>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
AVAILABLE-FOR-SALE:(1)
U.S. Treasury $ 3,003 $ 26,940 $ 15,991
U.S. Agency 288,901 145,275 70,106
State and municipal 31,818 26,628 35,330
Corporate debt obligations 1,496 1,483 2,458
Mortgage-backed securities(2) 14,315 31,876 40,282
Marketable equity securities 4,725 2,221 1,786
-------- -------- --------
Total 344,258 234,423 165,953
HELD-TO-MATURITY AND OTHER EQUITY:
U.S. Treasury 0 0 500
U.S. Agency 32,294 42,932 40,185
State and municipal 49,371 37,152 30,522
Mortgage-backed securities(2) 27,326 42,188 48,579
Certificates of deposit 0 0 100
Other equity securities 11,485 5,111 4,947
-------- -------- --------
Total 120,476 127,383 124,833
-------- -------- --------
TOTAL SECURITIES(3) $464,734 $361,806 $290,786
======== ======== ========
</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 U.S. Government and
U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1997, 1996 or 1995.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
Maturities and weighted average yields for debt securities
available-for-sale and held-to-maturity at December 31, 1997, are shown below:
<TABLE>
<CAPTION>
Years to Maturity
--------------------------------------------------------------
Within Over 1 Over 5 Over
1 through 5 through 10 10
---------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield TOTAL YIELD
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments
Available-For-Sale:(1)
U.S. Treasury $ 2,992 6.04% $ 0 0% $ 0 0% $ 0 0% $ 2,992 6.04%
U.S. Agency 31,478 5.65 156,581 6.34 87,484 6.80 12,730 7.10 288,273 6.43
State and municipal(2) 7,477 7.30 9,990 7.80 5,251 6.96 8,523 7.45 31,241 7.45
Corporate debt
obligations 500 5.95 0 0 1,000 5.93 0 0 1,500 5.94
Mortgage-backed
securities 790 6.16 6,209 6.34 6,339 6.36 931 7.61 14,269 6.43
------ ------- ------- ------- --------
Total Debt
Securities $43,237 5.97% $172,780 6.43% $100,074 6.77% $22,184 7.26% 338,275 6.52%
======= ======== ======== =======
Marketable equity
securities 2,593
------
TOTAL INVEST-
MENTS AVAILABLE-
FOR-SALE $340,868
========
INVESTMENTS
HELD-TO-MATURITY:
U.S. Agency $ 4,990 5.66% $ 10,764 5.89% $ 4,417 6.83% $12,123 7.32% $ 32,294 6.51%
State and municipal(2) 0 0 23,674 7.46 13,780 6.96 11,917 7.24 49,371 7.27
Mortgage-backed
securities 9,257 6.72 18,069 7.01 0 0 0 0 27,326 6.91
------ ------- ------- ------- --------
TOTAL INVEST-
MENTS HELD-
TO-MATURITY $14,247 6.35% $ 52,507 6.98% $ 18,197 6.93% $24,040 7.28% $108,991 6.97%
======= ======== ======== ======= ========
</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 decreased 16.5% or $1,315 in 1997.
Originations and sales of these loans, and the resulting gains on sales,
increased substantially during 1997 under the new mortgage banking subsidiary.
The aggregate of federal funds sold and interest-bearing deposits with
banks decreased 52.7% or $12,716 in 1997.
PREMISES, EQUIPMENT AND OTHER ASSETS
Significant increases were recorded for net premises and equipment (up 40.9% or
$8,257), primarily reflecting costs of an administration and training facility
opened in 1997 along with new branch offices, and other assets (up 50.3% or
$3,450), attributable largely to investments in single premium life insurance
policies to fund the Company's supplemental executive retirement plan.
<PAGE>
DEPOSITS AND SHORT-TERM BORROWINGS
Total deposits increased 5.8% or $46,670 during 1997 to $853,011 at December 31,
1997, from $806,341 at December 31, 1996. Interest-bearing deposits rose 1.9%,
while noninterest-bearing deposits increased 29.0% or $33,905, attributable
primarily to growth in commercial and small business checking balances.
Short-term borrowings increased $77,658 in 1997 to $144,426 at December 31,
1997, from $66,768 at the prior year-end, while long-term borrowings grew by
$9,772 to $14,592 from $4,820. Federal Home Loan Bank of Atlanta advances in
connection with a leverage program (previously mentioned in the discussion on
securities) were responsible for the rise in long-term borrowings and for most
of the rise in short-term borrowings. Repurchase agreements, primarily
associated with cash management services to commercial clients, were the other
category of short-term borrowings which increased in 1997, by 31.7% or $14,003.
CAPITAL MANAGEMENT
During 1997, stockholders' equity increased 8.4% or $8,094 to $104,675 at
December 31, 1997, from $96,581 at December 31, 1996. The increase for 1997 was
due to internal capital generation, which is net earnings less dividends. As a
percent of average equity, the internal capital generation rate was 8.6% for
1997, which was essentially
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
unchanged from 1996 and 1995. Internal capital generation contributed $8,592 to
stockholders' equity in 1997, preceded by $7,776 and $7,096 in 1996 and 1995,
respectively.
External capital formation from stock purchases under the dividend
reinvestment plan, newly expanded in 1997 to include optional cash purchases,
and to a lesser degree, under the profit sharing plan, totaled $2,038 in 1997.
However, share repurchases begun in 1997 have resulted in the retirement of the
equivalent of 92,300 shares at an aggregate purchase price of $3,857 through
December 31, 1997, for a net decrease in stockholders' equity from external
sources of $(1,819) during 1997. By comparison, external capital formation,
resulting from dividend reinvestment, the exercise of warrants, and employee
stock purchases under the Company's stock option and profit sharing plans,
provided equity growth amounting to $1,741 in 1996 and $2,379 in 1995.
The ratio of average equity to average assets was 9.65% for 1997, compared
with 9.90% for 1996 and 9.57% for 1995.
REGULATORY CAPITAL REQUIREMENTS
The Company achieved a total risk-based capital ratio of 17.07% at December 31,
1997, compared to 17.56% at December 31, 1996, a Tier 1 risk-based capital ratio
of 15.97% compared to 16.44%, and a capital leverage ratio of 9.46% compared to
10.38%. A discussion of these quantitative measures of capitalization and
regulatory capital requirements, along with a presentation of the Company's and
the Bank's capital and ratios compared to the various regulatory standards,
appears in Note 21 of the Notes to the Consolidated Financial Statements. At
December 31, 1997, the Company and the bank 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.
Nonperforming loans decreased by $1,983 to $2,672 and total nonperforming
assets decreased by $1,687 to $2,968 from December 31, 1996 to December 31,
1997. Expressed as a percentage of total assets, nonperforming assets were 0.26%
at December 31, 1997, representing a level more in line with the Bank's
historical performance, compared to 0.48% at December 31, 1996, reflecting the
merger with Annapolis Bancshares, Inc. during 1996. As can be seen in the table
below, all categories of nonperforming loans declined during 1997. The allowance
for credit losses represented 263% of nonperforming loans at December 31, 1997,
compared to coverage of 137% a year earlier, with the change largely
attributable to the decrease in 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. Other real
estate owned totaled $296 at December 31, 1997, compared to no other real estate
owned properties at December 31, 1996. The balance of impaired loans was $890 at
December 31, 1997, and there was no reserve on those loans, compared to $1,280
with a reserve of $127 at December 31, 1996.
The major concentrations of credit risk for the Company arise by customer
location, because it operates only in four counties in the State of Maryland,
and by loan portfolio composition. Real estate secured credits represented 80.8%
of total loans at December 31, 1997, and 81.0% at December 31, 1996. 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 $986 in 1997,
compared with $308 in 1996, an increase of $678. The provision was $180 in 1995.
Net charge-offs of $361, $514, and $246 were recorded in 1997, 1996, and 1995,
respectively. The ratio of net charge-offs to average loans was 0.07% in 1997,
compared to 0.10% in 1996 and 0.05% in 1995. Although the provision exceeded net
charge-offs in 1997, unlike 1996, the ratio of the allowance for credit losses
to year-end loans remained essentially unchanged over the period (1.26% versus
1.22%). The allowance was $7,016 at December 31, 1997 versus $6,391 at December
31, 1996.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
ANALYSIS OF CREDIT RISK
Activity in the allowance for credit losses for the five years ended December 31
is shown below:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1 $6,391 $6,597 $6,663 $6,681 $4,213
Provision for credit losses 986 308 180 211 1,057
Allowance from merger transaction 0 0 0 0 1,158
Loan charge-offs:
Real estate--mortgage (60) (3) (33) (135) 0
Real estate--construction (79) 0 0 0 0
Consumer (167) (143) (209) (32) (104)
Commercial (235) (469) (507) (342) (29)
---- ---- ---- ---- ----
Total charge-offs (541) (615) (749) (509) (133)
Loan recoveries:
Real estate--mortgage 0 0 153 16 54
Real estate--construction 0 0 0 0 0
Consumer 39 37 30 40 79
Commercial 141 64 320 224 253
---- ---- ---- ---- ----
Total recoveries 180 101 503 280 386
---- ---- ---- ---- ----
Net (charge-offs) recoveries (361) (514) (246) (229) 253
---- ---- ---- ---- ----
BALANCE, DECEMBER 31 $7,016 $6,391 $6,597 $6,663 $6,681
====== ====== ====== ====== ======
Net charge-offs to average loans 0.07% 0.10% 0.05% 0.06% *
Allowance to total loans 1.26% 1.22% 1.34% 1.46% 1.78%
</TABLE>
- ---------------
*The Company had net recoveries in 1993.
The following table presents nonperforming assets at year-end for the last five
years:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans(1) $ 890 $1,291 $590 $ 866 $2,969
Loans 90 days past due 1,764 3,337 272 832 517
Restructured loans 18 27 36 44 394
------ ------ ---- ----- ------
Total Nonperforming Loans(2)(3) 2,672 4,655 898 1,742 3,880
Other real estate owned, net 296 0 47 277 1,387
------ ------ ---- ------ ------
TOTAL NONPERFORMING ASSETS $2,968 $4,655 $734 $2,019 $5,267
====== ====== ==== ====== ======
NONPERFORMING ASSETS TO TOTAL ASSETS 0.26% 0.48% 0.11% 0.24% 0.67%
</TABLE>
(1) Gross interest income that would have been recorded in 1997 if non-accrual
loans had been current and in accordance with their original terms was
$122, while interest actually recorded on such loans was $61.
(2) Those performing loans considered potential problem loans, as defined and
identified by management, amounted to $7,890 at December 31, 1997. 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 future 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, 1997 and 1996.
<PAGE>
MARKET RISK MANAGEMENT
The Company's net income is largely dependent on the Bank's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income. Interest income is also affected by changes in the portion of
interest-earning assets that are funded by interest-bearing liabilities rather
than by other sources of funds, such as noninterest-bearing deposits and
stockholders' equity.
The Bank's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 1997, is presented in
the following table. As indicated in the note to the table, the data was 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 approximately 52% of its rate sensitive assets versus
approximately 54% of its rate sensitive liabilities subject to maturity or
repricing within a one year period from December 31, 1997 (termed GAP analysis).
By managing to approximately match the dollar amount of assets and liabilities
whose interest rates
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
are subject to change, the Bank seeks to control the risk of a pronounced
adverse impact on its revenues (net interest income) occurring due to a decline
in the net interest margin. 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 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 following GAP analysis schedule sets out the time frames from December
31, 1997, in which the Bank's 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 $168,647 $106,918 $179,383 $ 50,080 $ 53,865
Taxable securities 110,897 113,041 105,184 17,758 19,777
Nontaxable securities 2,275 5,185 17,925 15,975 39,252
Other investments 32,736 0 0 0 0
------- ------- ------- -------- --------
TOTAL 314,555 225,144 302,492 83,813 112,894
RATE SENSITIVE LIABILITIES:
Noninterest-bearing demand deposits 30,202 0 48,323 46,309 26,175
Interest-bearing demand deposits 6,924 20,770 55,388 32,310 0
Regular savings deposits 4,593 13,778 36,741 35,210 1,531
Money market savings deposits 13,058 39,173 104,462 0 0
Time deposits 105,571 155,440 67,687 15,648 0
Short-term borrowings and other
rate sensitive liabilities 96,903 59,573 1,000 0 2,020
-------- -------- -------- -------- --------
TOTAL 257,251 288,734 313,601 129,477 29,726
-------- -------- -------- -------- --------
CUMULATIVE GAP $ 57,304 $ (6,286) $(17,395) $(63,059) $ 20,109
======== ======== ======== ======== ========
As a Percent of Total Assets 5.11% (0.56)% (1.55)% 5.62% 1.79%
CUMULATIVE RATE SENSITIVE
ASSETS TO RATE SENSITIVE LIABILITIES 1.22 0.99 0.98 0.94 1.02
</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.
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 the 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. 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 December 31, 1997,
the Bank had the following estimated sensitivity profile for net interest income
and the fair value of capital:
<TABLE>
<CAPTION>
Immediate Change in Rates
------------------------------------
+200 basis points -200 basis points Policy Limit
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
% Change in Net Interest Earnings (7.57)% 0.75% +/-15%
% Change in Fair Value of Capital 7.03% (14.24)% +/-25%
</TABLE>
As with any method of gauging interest rate risk, there are certain
shortcomings inherent in the interest rate modelling methodology used by the
Company. When interest rates change, actual movements in different categories of
interest-earning assets and interest-bearing liabilities, loan prepayments, and
withdrawals of time and other deposits, may deviate significantly from
assumptions used in the model. Finally, the methodology does not measure or
reflect the impact that higher rates may have on adjustable-rate loan customers'
ability to service their debts, or the impact of changed rates on demand for
loan or deposit products. All of these factors are considered in monitoring the
Bank's exposure to interest rate risk.
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 the 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.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollars in thousands)
LIQUIDITY
The Company's liquidity position, considering both internal and external sources
available, exceeded anticipated short- and long-term needs at December 31, 1997.
Core deposits, considered to be stable funds sources and defined to include all
deposits except time deposits of $100 or more, equaled 75.8% of total earning
assets at December 31, 1997. 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.
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, totalled $219,613 or 19.6% of total assets at December 31, 1997. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $128,587 or 11.50% of total assets, which exceeded
management's target range.
The primary external source of liquidity available is a line of credit for
$200,000 with the Federal Home Loan Bank of Atlanta, of which $98,720 was
outstanding at December 31, 1997. Core deposits increased by $40,877 during
1997, while loans grew by $35,727, so that borrowed funds were not required to
support loan growth. As disclosed previously in the discussion of securities,
Federal Home Loan Bank advances increased in 1997 due to management's desire to
leverage the balance sheet at favorable interest spreads to enhance the return
on stockholders' equity.
The Company's time deposits of $100 or more represented 7.4% of total
deposits at December 31, 1997 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 or more $20,848 $12,399 $14,802 $14,918 $62,967
</TABLE>
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 issue affects the entire banking industry
because of its reliance on computers and other equipment that use computer
chips, and may have significant effects on banking customers and regulators. In
recognition of the potential adverse effects of the year 2000 issue, management
of the Company created a task force and established a plan to prevent or
mitigate adverse effects of the year 2000 issue on the Company and its
customers. The Board of Directors reviews progress under the plan each quarter.
The Company's primary supplier of data processing services also has adopted a
year 2000 plan and timetable. Management believes that the cost of resolving
year 2000 issues relating 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's year 2000 plan requires an assessment of
year 2000 effects on its commercial lending and other customers. The effects on
individual, corporate and governmental customers of the Company and on
governmental authorities that regulate the Company and its subsidiaries, and any
resulting consequences to the Company, cannot yet be determined. The Company has
committed significant management resources to identification and timely
resolution of all significant year 2000 issues.
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 37,644 $32,899
Federal funds sold 11,036 23,278
Interest-bearing deposits with banks 387 861
Residential mortgage loans held for sale 6,670 7,985
Investments available-for-sale (at fair value) 344,258 234,423
Investments held-to-maturity fair value of
$110,437 (1997) and $123,067 (1996) 108,991 122,272
Other equity securities 11,485 5,111
Total loans (net of unearned income) 558,893 523,166
Less: Allowance for credit losses (7,016) (6,391)
-------- -------
Net loans 551,877 516,775
Premises and equipment, net 28,468 20,211
Accrued interest receivable 9,908 7,917
Other real estate owned 296 0
Other assets 10,313 6,863
---------- ---------
TOTAL ASSETS $1,121,333 $978,595
========== ========
LIABILITIES
Noninterest-bearing deposits $ 150,957 $117,052
Interest-bearing deposits 702,054 689,289
Total deposits 853,011 806,341
Short-term borrowings 144,426 66,768
Long-term borrowings 14,592 4,820
Accrued interest and other liabilities 4,629 4,085
---------- ---------
TOTAL LIABILITIES 1,016,658 882,014
STOCKHOLDERS EQUITY
Common stock par value $1.00; shares authorized
15,000,000; shares issued and outstanding
4,862,574 (1997) and 4,902,113 (1996) 4,862 4,902
Surplus 31,695 33,474
Retained earnings 66,261 57,669
Net unrealized gain on investments
available-for-sale, net of taxes 1,857 536
---------- ---------
TOTAL STOCKHOLDERS EQUITY 104,675 96,581
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $1,121,333 $978,595
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $49,658 $46,491 $43,926
Interest on loans held for sale 320 196 55
Interest on deposits with banks 74 187 39
Interest and dividends on securities:
Taxable 20,931 15,062 13,769
Nontaxable 3,386 3,343 3,454
Interest on federal funds sold 1,196 1,342 872
------- ------- -------
TOTAL INTEREST INCOME 75,565 66,621 62,115
Interest expense:
Interest on deposits 28,70 27,889 26,705
Interest on short-term borrowings 5,438 2,021 2,284
Interest on long-term borrowings 348 323 353
------- ------- -------
TOTAL INTEREST EXPENSE 34,486 30,233 29,342
------- ------- -------
NET INTEREST INCOME 41,079 36,388 32,773
Provision for Credit Losses 986 308 180
NET INTEREST INCOME AFTER PROVISION ------- ------- -------
FOR CREDIT LOSSES 40,093 36,080 32,593
Noninterest Income:
Securities gains (losses) 637 30 (279)
Service charges on deposit accounts 3,403 2,964 2,569
Gains on mortgage sales 1,246 825 244
Trust income 1,188 943 760
Other income 2,658 1,785 1,184
------- ------- -------
TOTAL NONINTEREST INCOME 9,132 6,547 4,478
Noninterest Expenses:
Salaries and employee benefits 16,824 14,447 12,726
Occupancy expense of premises 2,355 2,082 1,814
Equipment expenses 2,208 2,165 1,943
Marketing 1,254 1,145 585
FDIC insurance expense 102 4 818
Outside data services 1,273 1,109 787
Other expenses 5,426 4,392 3,751
------ ------- ------
TOTAL NONINTEREST EXPENSES 29,442 25,344 22,424
------ ------- ------
Income before income taxes 19,783 17,283 14,647
Income tax expense 6,588 5,789 4,653
------ ------- ------
NET INCOME $13,195 $11,494 $9,994
======= ======= ======
BASIC NET INCOME PER COMMON SHARE* $1.35 $1.18 $1.05
DILUTED NET INCOME PER COMMON SHARE* $1.34 $1.18 $1.04
</TABLE>
*Per share data have been adjusted to give retroactive effect to 2-for-1 stock
splits declared on March 29, 1995 and January 28, 1998. See Notes to
Consolidated Financial Statements.
23
<PAGE>
(Dollars in thousands, except per share data)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Income $ 13,195 $ 11,494 $ 9,994
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,197 1,791 1,655
Provision for credit losses 986 308 180
Deferred income taxes 105 152 272
Origination of loans held for sale (77,672) (59,717) (23,971)
Proceeds from sales of loans held for sale 80,233 57,282 19,490
Gains on sales of loans held for sale (1,246) (825) (244)
Securities (gains) losses (637) (30) 278
Net change in:
Accrued interest receivable (1,991) (1,423) (300)
Accrued income taxes (469) 202 477
Other accrued expenses 1,012 (1,457) 255
Other assets (3,927) (72) (191)
Other - net (515) 2,409 (2,381)
------- ------ -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,271 10,114 5,514
Cash Flows from Investing Activities:
Net decrease (increase) in interest-bearing deposits with banks 474 (13) (588)
Purchases of investments held-to-maturity (22,897) (36,941) (26,408)
Purchases of other equity securities (6,374) (304) 0
Purchases of investments available-for-sale (456,306) (159,085) (38,030)
Proceeds from sales of investments available-for-sale 86,005 19,392 13,140
Proceeds from maturities, calls and principal payments of
investments held-to-maturity 36,380 28,815 39,902
Proceeds from maturities, calls and principal payments of
investments available-for-sale 262,918 77,075 35,729
Proceeds from sales of loans 0 291 1,620
Proceeds from sales of other real estate owned 500 442 665
Net increase in loans receivable (36,457) (31,127) (34,701)
Purchases of loans 0 0 (2,826)
Net funds received in branch purchase 0 17,181 0
Expenditures for premises and equipment (10,689) (2,031) (5,281)
------- ------ ------
NET CASH USED BY INVESTING ACTIVITIES (146,446) (86,305) (16,778)
Cash Flows from Financing Activities:
Net increase (decrease) in demand and savings accounts 40,224 25,484 (45,164)
Net increase (decrease) in time and other deposits 6,446 18,571 88,417
Net increase (decrease) in short-term borrowings 77,458 29,864 (13,439)
Proceeds from long-term borrowings 10,000 1,800 0
Retirement of long-term borrowings (28) (31) (29)
Net (decrease) increase in balance due to banks 0 (1,733) 1,733
Common stock purchased and retired (3,857) 0 0
Proceeds from issuance of common stock 2,038 1,741 2,379
Dividends paid (4,603) (3,763) (2,881)
------- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 127,678 71,933 31,016
------- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH EQUICALENTS (7,497) (4,258) 19,752
Cash and Cash Equivalents at Beginning of Year 56,177 60,435 40,683
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR* $ 48,680 $ 56,177 $ 60,435
========= ========= ========
Supplemental Disclosures:
Interest payments $ 33,421 $ 31,157 $ 29,424
Income tax payments 7,491 5,441 4,286
Noncash Investing Activities:
Transfers from loans to other real estate owned 730 210 419
Reclassification of borrowings from long-term to short-term 200 2,100 0
Investment transfers from held-to maturity 0 0 443,630
</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.
24
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year $4,902 $4,821 $2,484
Increase in shares as a result of 2-for-1 stock
split in the form of a stock dividend 0 0 2,140
Increase in shares as a result of a 20% stock dividend
by pooled bank prior to acquisition 0 0 82
Employee stock purchases in profit sharing plan shares issued
9,358 (1997), 11,020 (1996) and 8,592 (1995) 9 11 9
Exercise of stock options shares issued 0 (1997),
31,565 (1996) and 9,404 (1995) 0 31 10
Stock purchases under dividend reinvestment and stock purchase
plan shares issued 43,327 (1997), 35,273 (1996) and 35,300
(1995) 43 35 35
Stock repurchases shares retired 92,300 (1997) (92) 0 0
Exercise of warrants of pooled bank prior to merger
shares issued 0 (1997), 3,755 (1996) and 61,404 (1995) 0 4 61
------ ------ ------
COMMON STOCK AT END OF YEAR 4,862 4,902 4,821
Surplus:
Balance at beginning of year 33,474 31,814 31,772
Transfer to common stock for 2-for-1 stock split 0 0 (2,140)
Transfer to common stock 20% stock dividend by pooled bank 0 0 (82)
Employee stock purchases in profit sharing plan 283 353 201
Exercise of stock options 0 67 80
Stock purchases in dividend reinvestment and stock
purchase plan 1,703 1,194 965
Stock repurchases (3,765) 0 0
Exercise of warrants of pooled bank prior to merger 0 46 1,018
------ ------ ------
SURPLUS AT END OF YEAR 31,695 33,474 31,814
Retained earnings:
Balance at beginning of year 57,669 49,893 42,797
Net income 13,195 11,494 9,994
Cash dividends* $0.47 (1997), $0.39 (1996)
and $0.32 (1995) per share (4,603) (3,620) (2,755)
Cash dividends by pooled bank prior to acquisition 0 (98) (143)
------ ------ ------
RETAINED EARNINGS AT END OF YEAR 66,261 57,669 49,893
Net unrealized gain on investments available-for-sale,
net of taxes:
Balance at beginning of year 536 413 (3,287)
Net change in unrealized gain on investments
available-for-sale, net of taxes 1,321 123 3,700
------ ------ ------
NET UNREALIZED GAIN, NET OF TAXES, AT END OF YEAR 1,857 536 413
----- --- ---
TOTAL STOCKHOLDERS EQUITY $104,675 $96,581 $86,941
======== ======= =======
</TABLE>
* Per share data have been adjusted to give retroactive effect to 2-for-1 stock
splits declared on March 29, 1995 and January 28, 1998. See Notes to
Consolidated Financial Statements.
25
<PAGE>
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 its subsidiaries, Sandy Spring Insurance Corporation and
Sandy Spring Mortgage Corporation, 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 1997. 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,
mortgage 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 four Maryland counties, Montgomery, Howard, Prince Georges
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 its
investment in 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. Those loans are
originated and sold by Sandy Spring Mortgage Corporation. 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 Companys 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 Companys 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
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.
26
<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 ninety
days past due and collateral is insufficient to discharge the debt in full.
Interest accrual may also be discontinued earlier if, in managements 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 loans effective interest rate, or
the fair value of the collateral if repayment is expected to be provided by the
collateral. Generally, the Companys 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 managements
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, among other factors, considered along with managements judgment.
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 Banks 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.
27
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities (FASB 125), which
provides new accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets and extinguishments of
liabilities. FASB 125 is effective for transactions occurring after December 31,
1996, except for the provisions relating to repurchase agreements, securities
lending and other similar transactions and pledged collateral, which have been
delayed until after December 31, 1997 by FASB 127, Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125, an amendment of FASB 125.
Adoption of FASB 125 was not material; FASB 127 will be adopted as required in
1998 and is not expected to have a material impact on the Companys financial
condition or results of operations.
In February 1997, Statement of Financial Accounting Standards No. 128,
Earnings per Share (FASB 128), was issued and establishes new standards for
computing and presenting earnings per share. FASB 128 is effective for the
Companys December 31, 1997 financial statements, including restatement of
interim periods; earlier application was not permitted. The effect of the new
standard did not have an impact on previously reported earnings per share.
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 a financial statement with the same
prominence as other financial statements. The Company plans to adopt the
standard, as required, beginning in 1998; adoption of this disclosure
requirement will not have a material impact on the Company.
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. The Company is evaluating the standard and plans adoption as required
in 1998; adoption of this disclosure requirement will not have a material impact
on the Company.
NOTE 2-ACQUISITION
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 Companys 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 were included in
noninterest expenses for 1996.
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 1997 was $19,739 and in 1996 was $20,245.
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>
1997 1996
---------------------------------------------- ------------------------------------------------
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 $ 2,992 $ 11 $ 0 $ 3,003 $ 26,953 $ 42 $ (55) $ 26,940
U.S. Agency 288,273 802 (174) 288,901 145,517 186 (428) 145,275
State and municipal 31,241 577 0 31,818 26,277 382 (31) 26,628
Corporate debt obligations 1,500 0 (4) 1,496 1,500 0 (17) 1,483
Mortgage-backed securities 14,269 191 (145) 14,315 32,195 149 (468) 31,876
-------- ------- ------- -------- -------- ------ ------- --------
Total Debt Securities 338,275 1,581 (323) 339,533 232,442 759 (999) 232,202
Marketable equity securities 2,593 2,132 0 4,725 470 1,751 0 2,221
-------- ------- ------- -------- -------- ------ ------- --------
Total Investments is
Available-for-Sale $340,868 $3,713 $(323) $344,258 $232,912 $2,510 $(999) $234,423
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
28
<PAGE>
The amortized cost and estimated fair values of debt securities
available-for-sale at December 31, 1997 and 1996 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>
1997 1996
----------------------------------------------------
ESTIMATED Estimated
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $43,237 $43,294 $29,429 $29,481
Due after one through five years 172,780 173,305 182,169 182,142
Due after five years through ten years 100,074 100,449 17,997 17,731
Due after ten years 22,184 22,485 2,847 2,848
-------- -------- -------- --------
Total Debt Securities $338,275 $339,533 $232,442 $232,202
======== ======== ======== ========
Sale of investments available-for-sale during 1997, 1996 and 1995 resulted in the following:
1997 1996 1995
- ----------------------------------------------------------------------------------------------
Proceeds $86,005 $19,392 $13,140
Gross gains 998 97 4
Gross losses 570 73 345
</TABLE>
At December 31, 1997 and 1996, investments available-for-sale with a
carrying value of $84,962 and $60,654, 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, 1997 and 1996.
The Company has covered call options that are subject to disclosure as
derivative financial instruments in accordance with Statement of Financial
Accounting Standards No. 119. These options are incident to an established plan
to enhance the yield on the Banks equity securities in the available-for-sale
portfolio. The options contracts do not exhibit 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.
At December 31, 1997, the Bank had outstanding covered call option
contracts for 3,000 shares of Sallie Mae common stock, with expiration dates of
January 17, 1998 (1,000 shares), and April 18, 1998 (2,000 shares). Premiums
received on these options amounted to $35. The contracts have an average option
price of $156.67 per share and the underlying securities have a quoted market
price of $139.13 per share. Excluding option premiums, these Sallie Mae holdings
had an unrealized gain at December 31, 1997 of $1,004 ($138.83 per share).
Generally, the option contracts have a term of approximately one to four months.
During 1997, the Bank received total option premiums of $70.
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. 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.
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>
1997 1996
---------------------------------------------- ------------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency $32,294 $ 235 $(54) $32,475 $42,932 $ 103 $(208) $42,827
State and municipal 49,371 1,032 (40) 50,363 37,152 697 (167) 37,682
Mortgage-backed securities 27,326 304 (31) 27,599 42,188 449 (79) 42,558
------- ----- ---- ------- ------- ----- ----- -------
Total Investments
Held-to-Maturity $108,991 $1,571 $(125) $110,437 $122,272 $1,249 $(454) $123,067
======== ====== ===== ======== ======== ====== ===== ========
</TABLE>
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.
29
<PAGE>
The amortized cost and estimated fair values of debt securities
held-to-maturity at December 31, 1997 and 1996 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>
1997 1996
----------------------------------------------------
ESTIMATED Estimated
AMORTIZED FAIR Amortized Fair
COST VALUE Cost Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $14,247 $14,267 $12,926 $12,944
Due after one through five years 52,507 53,327 67,465 68,221
Due after five years through ten years 18,197 18,454 27,759 27,794
Due after ten years 24,040 24,389 14,122 14,108
------- ------- ------- -------
Total Investments Held-to-Maturity $108,991 $110,437 $122,272 $123,067
======== ======== ======== ========
</TABLE>
At December 31, 1997 and 1996, investments held-to-maturity with a book value of
$10,132 and $21,726, 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, 1997 or 1996. Other equity securities at December 31, are as
follows:
1997 1996
- --------------------------------------------------------------------------------
Federal Reserve Bank stock $1,826 $1,340
Federal Home Loan Bank stock 9,659 3,771
------- ------
Total Other Equity Securities $11,485 $5,111
======= ======
NOTE 6-LOANS
Book values for the two most recent years are presented below for the major loan
categories at December 31:
1997 1996
- --------------------------------------------------------------------------------
Real estate mortgage $393,661 $376,205
Real estateconstruction 57,687 47,654
Consumer 35,021 30,813
Commercial 72,511 68,467
Tax exempt 13 27
------- --------
Total Loans 558,893 523,166
Less: Allowance for credit losses (7,016) (6,391)
------- --------
NET LOANS $551,877 $516,775
======== ========
Loan fees amounting to $316 (1997), $254 (1996) and $270 (1995) were
included in interest and fees on loans. The servicing portfolio of mortgage
loans sold totalled $78,344 at December 31, 1997 and $91,249 at December 31,
1996. Escrow balances relating to the servicing portfolio amounted to $663 and
$730 at December 31, 1997 and 1996, respectively.
Activity in the allowance for credit losses for the preceding three years
ended December 31 is shown below:
1997 1996 1995
- --------------------------------------------------------------------------------
Balance at beginning of year $6,391 $6,597 $6,663
Provision for credit losses 986 308 180
Loan charge-offs (541) (615) (749)
Loan recoveries 180 101 503
------ ------ ------
Net charge-offs (361) (514) (246)
------ ------ ------
BALANCE AT END OF YEAR $7,016 $6,391 $6,597
====== ====== ======
Information with respect to impaired loans at December 31, 1997 and 1996,
and for the respective years ended is as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with a valuation allowance $ 0 $ 127
Impaired loans without a valuation allowance 890 1,153
------ ------
Total impaired loans $ 890 $1,280
------ ------
Allowance for credit losses related to impaired loans $ 0 $ 127
Allowance for credit losses related to other than impaired loans 7,016 6,264
------ ------
Total allowance for credit losses $7,016 $6,391
====== ======
Average impaired loans for the year $1,101 $1,327
====== ======
Interest income on impaired loans recognized on the cash basis $ 0 $ 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.
30
<PAGE>
NOTE 7-PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
1997 1996
- --------------------------------------------------------------------------------
Land $ 8,875 $ 6,652
Buildings and leasehold improvements 18,228 13,226
Equipment 13,233 11,154
-------- --------
40,336 31,032
Less: Accumulated depreciation and amortization (11,868) (10,821)
-------- --------
NET PREMISES AND EQUIPMENT $ 28,468 $ 20,211
======== ========
Depreciation and amortization expense for premises and equipment amounted
to $1,825 for 1997, $1,726 for 1996 and $1,572 for 1995.
Total rental expenses (net of rental income) for premises and equipment for
the three years ended December 31 were $513 (1997), $303 (1996) and $447 (1995).
Lease commitments bear initial terms varying from 3 to 10 years, or they are
20-year ground leases, and are associated with premises. Future minimum payments
as of December 31, 1997 for all noncancelable operating leases are:
Year Ending Premises and
December 31, Equipment
- --------------------------------------------------------------------------------
1998 $ 887
1999 865
2000 850
2001 896
2002 903
Thereafter 6,404
TOTAL --------
$10,805
========
NOTE 8-DEPOSITS
Deposits outstanding at December 31 consist of:
1997 1996
- --------------------------------------------------------------------------------
Noninterest-bearing Deposits $150,957 $117,052
Interest-bearing Deposits:
Demand 115,391 98,932
Money market savings 150,465 157,484
Regular savings 91,853 94,974
Time deposits 281,378 280,725
Time deposits - $100 or more 62,967 57,174
-------- --------
Total Interest-bearing Deposits 702,054 689,289
-------- --------
TOTAL DEPOSITS $853,011 $806,341
======== ========
Interest expense on time deposits of $100 or more amounted to $3,256,
$2,640 and $2,576 for 1997, 1996 and 1995, respectively.
NOTE 9-SHORT-TERM BORROWINGS
Information relating to short-term borrowings is as follows for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At year-end:
Federal Home Loan Bank advances $ 84,200 5.27% $20,200 5.58% $ 3,000 5.55%
Repurchase agreements 58,196 4.80 44,193 4.65 30,554 5.03
Other short-term borrowings 2,030 6.44 2,375 6.19 1,250 6.00
-------- ------- -------
Total $144,426 5.09% $66,768 4.99% $34,804 5.11%
======== ======= =======
Average for the year:
Federal Home Loan Bank advances $53,965 5.27% $ 7,316 5.59% $ 1,811 5.89%
Repurchase agreements 49,836 4.78 34,125 4.66 23,843 5.15
Other short-term borrowings 1,743 4.50 523 4.43 14,951 6.36
Maximum month-end balance:
Federal Home Loan Bank advances $84,200 $20,200 $36,800
Repurchase agreements 59,868 44,193 32,415
Other short-term borrowings 3,575 2,375 7,280
</TABLE>
The Company has a line of credit arrangement with the FHLB under which it
may borrow up to $200,000 at interest rates based upon current market
conditions.
31
<PAGE>
NOTE 10 - LONG-TERM BORROWINGS
The Company had outstanding mortgages with balances due of $72 at December 31,
1997, and $100 at December 31, 1996. 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 $14,520 at December 31, 1997, and $4,720 at December 31, 1996
(see line of credit described in Note 9). Interest rates at December 31, 1997,
range up to 8.21% and the maximum maturity is March 2006.
NOTE 11 - STOCKHOLDERS EQUITY
Bancorps Articles of Incorporation authorize 15,000,000 shares of capital stock
(par value $1.00 per share) which were initially classified as common stock with
the provision that remaining unissued shares may later 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.
On October 31, 1997, the Company announced changes to the plan, renamed the
Sandy Spring Bancorp Dividend Reinvestment and Stock Purchase Plan, permitting
shareholders to make optional quarterly cash purchases of stock, subject to
minimum and maximum dollar amounts, and increasing the number of shares reserved
for issuance under the plan from 400,000 to 800,000 (share amounts have been
adjusted to give retroactive effect to a 2-for-1 stock split declared on January
28, 1998).
On April 16, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 5%, or 492,084 shares (adjusted to give
retroactive effect to a 2-for-1 stock split declared on January 28, 1998), of
Bancorps outstanding common stock, par value $1.00 per share, in connection with
shares expected to be issued pursuant to the Companys dividend reinvestment and
stock purchase plan, incentive stock option plan, employee benefit plans, and
for other corporate purposes. The share repurchases would be made from time to
time, either on the open market or in privately negotiated transactions, until
March 31, 1999, or earlier termination of the program by the Board.
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 Bancorp. At
December 31, 1997, the Bank could have paid dividends to its parent company
amounting to $28,363. There were no loans outstanding between the Bank and
Bancorp at December 31, 1997 and 1996.
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 and have been adjusted to give
retroactive effect to a 2-for-1 stock split declared on January 28, 1998.
Nontransferrable warrants to acquire 7,510 shares of common stock at $6.65 per
share were outstanding at December 31, 1997 and 1996, and expire on March 31,
1998.
NOTE 12-INCENTIVE STOCK OPTION PLAN
The Companys 1992 Stock Option Plan, which essentially replaced the expired 1982
Incentive Stock Option Plan, provides for the granting of incentive and
nonincentive 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 splits declared on
March 29, 1995 and on January 28, 1998. The 1992 Plan authorizes the issuance of
up to 540,000 shares of common stock, has a term of ten years, and is
administered by the Compensation 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 and 1997 become exercisable over a period of two years from each
grant date.
A total of 207,800 shares of common stock were granted under the 1982 Plan,
of which 12,000 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>
1997 1996 1995
-------------------------------------------------------------------------------
NUMBER WEIGHTED Number Weighted Number Weighted
OF AVERAGE of Average of Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning of year 72,002 $12.67 153,872 $ 8.95 164,384 $ 7.82
Granted 44,000 24.63 12,000 16.83 10,500 18.50
Exercised 0 0 (93,870) 7.10 (21,012) 4.88
------- ------- -------
BALANCE, END OF YEAR 116,002 $ 17.21 72,002 $ 12.67 153,872 $ 8.95
======= ======= =======
Weighted average fair value of
options granted during the year $ 4.79 $ 3.84 $ 5.06
</TABLE>
32
<PAGE>
The following table summarizes information about options outstanding at
December 31, 1997:
<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> <C>
$ 6.99 - $ 12.25 49,502 5.7 $ 10.43 49,502 $ 10.43
$ 16.63 - $ 24.63 66,500 9.5 22.25 33,636 20.77
------- ------
116,002 $ 17.17 83,138 $ 14.61
======= ====== ======
</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 during the three years ended December 31:
1997 1996 1995
- --------------------------------------------------------------------------------
Dividend yield 2.14% 2.67% 2.67%
Expected volatility 20.41% 25.00% 25.00%
Risk-free interest rate 5.48% 5.58% 5.58%
Expected lives (in years) 10 10 10
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(FASB 123), but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. No compensation
expense related to the plans was recorded during the three years ended December
31, 1997. 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:
1997 1996 1995
- --------------------------------------------------------------------------------
Net income:
As reported $ 13,195 $ 11,494 $ 9,994
Pro forma $ 12,984 $ 11,475 $ 9,961
Basic earnings per share:
As reported $ 1.35 $ 1.18 $ 1.05
Pro forma $ 1.33 $ 1.18 $ 1.05
Diluted earnings per share:
As reported $ 1.34 $ 1.18 $ 1.04
Pro forma $ 1.32 $ 1.18 $ 1.04
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 employees compensation during the last five years of employment. The
Companys 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:
1997 1996 1995
- --------------------------------------------------------------------------------
Service cost for benefits earned $ 436 $ 377 $ 333
Interest cost on projected benefit obligation 340 351 301
Actual (return) loss on plan assets (699) (362) (721)
Net amortization and deferral 283 (45) 479
Early retirement window options 0 0 274
----- ----- -----
PENSION EXPENSE FOR THE YEAR $ 360 $ 321 $ 666
===== ===== =====
For 1997, 1996 and 1995, 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%.
The Plans funded status as of December 3 is:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $3,709 in 1997 and $2,871 in 1996 $ 4,079 $ 3,205
Additional liability based upon projected compensation 1,687 1,385
------- -------
Projected benefit obligation for service rendered to date (PBO) 5,766 4,590
Plan assets at fair value 6,110 4,903
------- -------
Plan Assets greater than (less than) PBO 344 313
Unrecognized net gain 1,199 962
Prior service cost not yet recognized in net periodic pension expense 8 9
Unrecognized net asset, net of amortization (6) (9)
------- -------
PREPAID PENSION COST INCLUDED IN OTHER ASSETS $ 1,545 $ 1,275
======= =======
</TABLE>
33
<PAGE>
The Company has a qualified, noncontributory profit sharing plan that
covers all employees after ninety days of service. The Plan permits employees to
purchase shares of Sandy Spring Bancorps 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 $465 in 1997,
$442 in 1996 and $400 in 1995. Beginning in 1996, the Company expanded its
benefit plans to include a performance based compensation benefit which provides
additional incentives to employees based on the Companys financial performance
as measured against key performance indicator goals set by management. Payments
are made quarterly and total expense under the plan amounted to $465 in 1997 and
$510 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 1997, 1996 and 1995 were $55, $25 and $99, 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 $50 in 1997, $7 in 1996
and $18 in 1995.
NOTE 14-INCOME TAXES
Income tax expense for the years ended December 31 consists of:
1997 1996 1995
- --------------------------------------------------------------------------------
Current Income Taxes:
Federal $ 5,718 $ 4,692 $ 3,398
State 975 1,249 983
------- ------- -------
TOTAL CURRENT 6,693 5,941 4,381
Deferred Income Tax Benefit:
Federal (86) (122) 223
State (19) (30) 49
------- ------- -------
TOTAL DEFERRED (105) (152) 272
------- ------- -------
TOTAL INCOME TAX EXPENSE $ 6,588 $ 5,789 $ 4,653
======= ======= =======
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:
1997 1996
- --------------------------------------------------------------------------------
Deferred Tax Assets:
Allowance for credit losses $ 2,262 $ 2,021
Deferred loan fees and costs 542 464
Net operating loss carry forward 395 434
Other 300 164
------- -------
Gross Deferred Tax Assets 3,499 3,083
Deferred Tax Liabilities:
Depreciation (928) (841)
Pension plan costs (823) (424)
Unrealized gains on investments available-for-sale (1,309) (337)
Other (366) (331)
------- -------
Gross Deferred Tax Liabilities (3,426) (1,933)
------- -------
NET DEFERRED TAX ASSET $ 73 $ 1,150
======= =======
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:
1997 1996 1995
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX RATE 35.0% 35.0% 34.0%
Increase (decrease) resulting from:
Tax-exempt interest income (5.2) (5.8) (7.1)
State income taxes, net of
federal income tax benefits 5.0 4.6 4.6
Other (1.5) (0.3) 0.3
---- ---- ----
EFFECTIVE TAX RATE 33.3% 33.5% 31.8%
==== ==== ====
34
<PAGE>
NOTE 15- NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share (FASB 128), which
became effective for the Company for reporting periods ending after December 15,
1997. Under the provisions of FASB 128, primary and fully diluted earnings per
share were replaced with basic and diluted earnings per share in an effort to
simplify the computation of these measures and align them more closely with the
methodology used internationally. Basic earnings per share is arrived at by
dividing net income available to common stockholders by the weighted-average
number of common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings per share
calculation method is arrived at by dividing net income by the weighted-average
number of shares outstanding, adjusted for the dilutive effect of outstanding
stock options and warrants. For purposes of comparability, all prior-period
earnings per share data has been restated. All per share data and share amounts
below 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. A 2-for-1 stock split
in the form of a stock dividend was declared on January 28, 1998, and all per
share data and share amounts below have been adjusted to give retroactive effect
to this subsequent event.
The calculation of net income per common share for the years ended December
31 was as follows:
1997 1996 1995
- --------------------------------------------------------------------------------
Basic:
Net income (available to common stockholders) $ 13,195 $ 11,494 $ 9,994
Average common shares outstanding 9,799 9,736 9,544
Basic net income per share $ 1.35 $ 1.18 $ 1.05
======== ======== =======
Diluted:
Net income (available to common stockholders) $ 13,195 $ 11,494 $ 9,994
Average common shares outstanding 9,799 9,736 9,544
Stock option adjustment 13 22 70
Warrant stock adjustment 5 5 4
-------- -------- -------
Average common shares outstanding diluted 9,817 9,763 9,618
Diluted net income per share $ 1.34 $ 1.18 1.04
======== ======== =======
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 1997.
1997 1996
- --------------------------------------------------------------------------------
Balance at January 1 $ 7,401 $ 7,223
Additions 1,090 4,859
Repayments (2,065) (4,681)
------- -------
BALANCE AT DECEMBER 31 $ 6,426 $ 7,401
======= =======
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 Companys clients. The
associated credit risk is controlled by subjecting such activity to the same
credit and quality controls as exist for the Companys 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 $105,229 at December 31, 1997 and $101,126 at December
31, 1996. These commitments are contingent upon continuing customer compliance
with the terms of the agreement.
Unused portions of equity lines at year-end amounted to $59,157 in 1997 and
$59,859 in 1996. The Companys home equity line accounts, which are secured by
the borrowers residence, are reviewed annually.
<PAGE>
Irrevocable letters of credit, totalling $4,124 at December 31, 1997, and
$4,082 at December 31, 1996, are obligations to make payments under certain
conditions to meet contingencies related to customers contractual agreements.
They are primarily used to guarantee a customers 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 Companys financial condition, operating results or liquidity.
35
<PAGE>
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 (FASB 119), requires the disclosure in
statement form of estimated fair values of financial instruments. Financial
instruments have been defined broadly to encompass 96.6% of the Companys 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 Companys 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
Companys 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 Companys financial instruments at December
31 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------- -------------------------
BOOK ESTIMATED Book Estimated
VALUE FAIR VALUE Value Fair Value
- ------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
<S> <C> <C> <C> <C>
Cash and temporary investments(1) $ 55,737 $ 55,866 $ 65,023 $ 65,050
Investments available-for-sale 344,258 344,258 234,423 234,423
Investments held-to-maturity and
other equity securities 120,476 121,922 127,383 128,178
Loans, net of allowance 551,877 568,565 516,775 522,945
Accrued interest receivable and other assets(2) 10,254 10,254 9,404 9,404
FINANCIAL LIABILITIES
Deposits $ 853,011 $853,184 $806,341 $806,602
Short-term borrowings 144,426 144,423 66,768 66,961
Long-term borrowings 14,592 14,583 4,820 4,886
Accrued interest payable and other liabilities(2) 2,749 2,749 2,054 2,054
ESTIMATED Estimated
AMOUNT FAIR VALUE Amount Fair Value
- -----------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET FINANCIAL ASSETS
Commitments to extend credit(3) $ 164,386 $ (567) $ 160,985 $ (684)
Irrevocable letters of credit 4,124 (21) 4,082 (20)
Servicing rights on mortgages sold 78,344 783 91,249 940
</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.
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.
<PAGE>
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.
36
<PAGE>
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 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, the Treasury demand note, 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 Banks 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 Companys consolidated financial
statements are presented below:
<TABLE>
<CAPTION>
December 31,
----------------------
BALANCE SHEETS 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,280 $ 10,264
Investments available-for-sale (at fair value) 3,702 831
Investment in subsidiary 93,756 85,136
Other assets 258 261
--------- ---------
Total Assets $ 103,996 $ 96,492
========= =========
LIABILITIES
Other liabilities $ 496 $ 223
--------- ---------
Total Liabilities 496 223
STOCKHOLDERS EQUITY
Common stock 4,862 4,902
Surplus 31,695 33,474
Retained earnings 66,261 57,669
Unrealized gain on investments available-for-sale, net of taxes 682 224
---------- ----------
Total Stockholders Equity 103,500 96,269
--------- ---------
Total Liabilities and Stockholders Equity $ 103,996 $ 96,492
========= =========
<CAPTION>
Years Ended December 31,
------------------------------
STATEMENTS OF INCOME 1997 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Cash dividends from subsidiary $ 4,601 $ 3,620 2,826
Interest and dividends on securities 379 366 358
------- ------- ------
Total Income 4,980 3,986 3,184
Interest and other expenses 395 647 337
------- ------- ------
Income before income taxes and equity in
undistributed income of subsidiary 4,585 3,339 2,847
Income tax expense (benefit) 12 (14) 8
------- ------- ------
Income before equity in undistributed income
of subsidiary 4,573 3,353 2,839
Equity in undistributed income of subsidiary 8,622 8,141 7,155
------- ------- ------
NET INCOME $13,195 $11,494 $9,994
======= ======= ======
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
STATEMENTS OF CASH FLOWS 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 13,195 $ 11,494 $ 9,994
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income subsidiary (8,622) (8,141) (7,155)
Other- net 14 73 (11)
----- ----- -----
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,587 3,426 2,828
Cash Flows from Investing Activities:
Purchase of investments available-for-sale (2,126) 0 (465)
Capital contributed to subsidiary 0 0 (1,070)
------ ----- ------
NET CASH USED BY INVESTING ACTIVITIES (2,126) 0 (1,535)
Cash Flows from Financing Activities:
Retirement of long-term debt (23) (21) (17)
Common stock purchased and retired (3,857) 0 0
Proceeds from issuance of common stock 2,038 1,741 2,379
Dividends paid (4,603) (3,763) (2,881)
------ ------ ------
NET CASH USED BY FINANCING ACTIVITIES (6,445) (2,043) (519)
------ ------ ----
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,984) 1,383 774
Cash and Cash Equivalents at Beginning of Year 10,264 8,881 8,107
------ ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,280 $ 10,264 $ 8,881
======== ========== =======
</TABLE>
NOTE 21 - 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 Companys and the Banks 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 Banks assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Banks 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 below) 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, 1997 and 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, 1997, 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
Companys or the Banks category.
The Companys and the Banks actual capital amounts and ratios are also
presented in the table.
<PAGE>
<TABLE>
<CAPTION>
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, 1997:
Total Capital (to risk weighted assets):
Company $ 109,043 17.07% $ 51,116 8.00% $ 63,895 10.00%
Sandy Spring National Bank of Maryland 99,981 15.73 50,834 8.00 63,542 10.00
Tier 1 Capital (to risk weighted assets):
Company 102,027 15.97 25,558 4.00 38,337 6.00
Sandy Spring National Bank of Maryland 92,965 14.63 25,417 4.00 38,125 6.00
Tier 1 Capital (to average assets):
Company 102,027 9.46 41,262 4.00 51,577 5.00
Sandy Spring National Bank of Maryland 92,965 8.63 41,224 4.00 51,530 5.00
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
</TABLE>
38
<PAGE>
NOTE 22- QUARTERLY FINANCIAL RESULTS (unaudited)
A summary of selected consolidated quarterly financial data for the two years
ended December 31, 1997, is reported as follows, with all per share amounts
retroactively adjusted to give effect to a 2-for-1 stock split declared on
January 28, 1998:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
1997
Interest income $ 17,592 $ 18,693 $ 19,411 $ 19,869
Net interest income 9,719 10,244 10,328 10,788
Provision for credit losses 100 125 300 461
Income before income taxes 4,817 4,815 5,277 4,874
Net income $ 3,203 $ 3,120 $ 3,514 $ 3,358
Basic net income per share $ 0.33 $ 0.32 $ 0.36 $ 0.34
Diluted net income per share 0.33 0.32 0.35 0.34
1996
Interest income $ 16,163 $ 16,379 $ 16,773 17,306
Net interest income 8,704 8,929 9,193 9,562
Provision for credit 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
Basic net income per share $ 0.30 $ 0.30 $ 0.26 $ 0.32
Diluted net income per share 0.30 0.30 0.26 0.32
</TABLE>
Amounts shown above for the first and second quarters of 1996 have been
retroactively restated to reflect the acquisition of Annapolis Bancshares, Inc.
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 credit 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
Basic net income per share $ 0.29 $ 0.01 $ 0.30 $ 0.29 $ 0.01 $ 0.30
Diluted net income per share 0.29 0.01 0.30 0.29 0.01 0.30
</TABLE>
NOTE 23 - 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.
39
<PAGE>
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 [re[ared the financial statements in accordance with
generally accepted accounting principles, making appropriate use of estimates
and judgement, and considering materiality. Except for tax equivalency
adjustments made to enhance comparative analysis, all financial information is
consistent with the unaudited 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, who
reports directly to the Board of Directors, to approve the audite 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 of 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 STOCKHOLDERS
SANDY SPRING BANCORP
ONLEY, MARYLAND
We have audited the accompanying consolidated balance sheets of Sandy Spring
Bancorp and Subsidiares as of December 31, 1997 and 1997, 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, 1997. These
financial statements are the responsiblity of the management of Sandy Spring
Bancorp and Subsidiaries. Ourresponsibility is to epress 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., in 1996, which has been accounted for using the pooling of
interest accounting method as described in Note 2 to the consolidated financial
statements. We did not audit the 1995 consolidated financial statements of
Annapolis Bancshares, Inc., which statements reflect net income constituting
10.7% for 1995 of the related consolidated statement of income. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, issofar 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 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 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, 1997 and 1996, and the results of operations
and cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/s/ Stegman & Company
Stegman & Company
Baltimore, maryland
January 30, 1998
40
<PAGE>
OFFICERS
(as of March 1, 1998)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SANDY SPRING BANCORP VICE PRESIDENTS Donna L. Lampe SNADY SPRING MORTGAGE
CORPORATION
Steven E. Anderson Susan D. Lemmon
EXECUTIVE OFICERS James A. Berkey Marsha E. Maloney OFFICERS
Hunter R. Hollar Lynn M. Gallagher Peter J. McGinnity Hunter R. Hollar
President and Chairman
Chief Executive Officer Victoria L. Gillespie Douglas A. Parker
Stanley L. Merson
James H. Langmead Chrystina M. Giorgio Richard S. Prin President
Vice President and Treasurer
Patricia M. Green Edward C. Ramos Richard G. Knapp, Jr.
Vice President
Susan N. Haybyrne Marsha K. Ritter
CORPORATE SECRETARY David W. Pulford, Jr.
Steven B. Haynes Eric J. Schrider Vice President
Marjorie S. Holsinger
Peter L. Hickling Cheryl A. Spell Lynne S. White
Vice President and Secretary
Brian J. Hiley Thomas E. Spilman
AUDITOR James H. Langmead
Mark G. Shullenbarger Robert J. Hoffman Carla S. Taylor Treasurer
Marjorie S. Holsinger Anthony F. Topita Lois D. Tringali
Underwriting Officer
A. Elizabeth Lipscomb Janine E. Vito
SANDY SPRING NATIONAL
BANK OF MARYLAND Debra L. C. Liverpool Daniel R. West
Thomas H. McDowell Debra A. Whelan
EXECUTIVE OFFICERS David S. Miller
Hunter R. Hollar James P. Morison, Jr. OTHER OFFICERS SANDY SPRING INSURANCE
President and CORPORATION
Chief Executive Officer Richard M. Owens Lee E. Briggs
Michael R. Penyak Barbara R. Brown OFFICERS
James H. Langmead Pamela M. Roberts Sheila L. Butler Hunter R. Hollar
Executive Vice President President
and Chief Financial Officer Sally A. Shelton Wendy J. Collins
James H. Langmead
Lawrence T. Lewis, III William M. Slade Denise M. Curtis Vice President
Executive Vice President
Sandra B. Stocksdale Sharon J. Fall Lawrence T. Lewis, III
Frank H. Small Vice President
Executive Vice President Russell R. Till Anna N. Gottlieb
Sara E. Watkins
James R. Farmer Dan J. Urgo Eileen F. Heiss Vice President
Senior Vice President
Janet M. Van Albert Christine L. Hill Sandra B. Stocksdale
Stanley L. Merson Secretary and Treasurer
Senior Vice President William A. Walker, II Joyce C. Howes
Sara E. Watkins William C. Watkins Laura E. C. Johnson
Senior Vice President
Jeffrey A. Wood Brita M. Jones
Kenneth G. Kubu
ASSISTANT VICE
PRESIDENTS Walter J. Laderer
CORPORATE SECRETARY
Richard A. Adamson Ronda M. Long
Marjorie S. Holsinger
Harriet B. Argentiere Mary C. Matthews
AUDITOR C. Louise Basore Nicol M. Morris
Mark G. Shullenbarger Fredrick T. Billig Kevin W. O'Hara
Joseph F. Brown Gizelle Petit
SENIOR VICE PRESIDENTS Mary Jo Clark Sharon L. Rhodes
Frank L. Bentz Elenore W. Cone Lisa R. Saunders
Janice L. Biennas Shirley A. Connelly Melanie N. Stranix
Carole A. Corrigan Michael J. Dee Carolyn S. Tihila
Dennis P. Neville Dominick A. Del Grosso Kenneth V. Wilhelm
Kathleen F. Pieper Donald S. Emel Marcia M. Wong
Daniel J. Schrider Nancy J. Gibson Sandra S. Wright
Edward W. Kinsella Cathryn D. Zinkgraf
</TABLE>
<PAGE>
[SANDY SPRING BANORP LOGO]
EXECUTIVE OFFICES
17801 Georgia Avenue
Onley, Maryland 20832
(301) 774- 6400
CUSTOMER SERVICE CENTER
(301) 774-8477
(800) 399-5919
INTERNET ADDRESS
http://www.ssnd.com
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.
EXHIBIT 23
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 Statements
No. 33-57182 and 333-39139 on Form S-3, and in the Annual Report on Form 10-K of
Sandy Spring Bancorp, Inc. for the year ended December 31, 1997, of our report
dated January 30, 1998, relating to the consolidated financial statements of
Sandy Spring Bancorp, Inc. and Subsidiaries.
/s/ Stegman & Company
Stegman & Company
Towson, Maryland
March 23, 1998
EXHIBIT 24
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, 1997, 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/ John Chirtea Director February 25, 1998
- -----------------------------
John Chirtea
Director
- -----------------------------
Susan D. Goff
/s/ Solomon Graham Director February 25, 1998
- -----------------------------
Solomon Graham
Director
- -----------------------------
Gilbert L. Hardesty
/s/ Joyce R. Hawkins Director February 25, 1998
- -----------------------------
Joyce R. Hawkins
/s/ Thomas O. Keech Director February 25, 1998
- -----------------------------
Thomas O. Keech
/s/ Charles F. Mess Director February 25, 1998
- -----------------------------
Charles F. Mess
Director
- -----------------------------
Robert L. Mitchell
/s/ Robert L. Orndorff, Jr. Director February 25, 1998
- -----------------------------
Robert L. Orndorff, Jr.
/s/ David E. Rippeon Director February 25, 1998
- -----------------------------
David E. Rippeon
/s/ Lewis R. Schumann Director February 25, 1998
- -----------------------------
Lewis R. Schumann
/s/ W. Drew Stabler Director, Chairman of the February 25, 1998
- ----------------------------- Board
W. Drew Stabler
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 37,644
<INT-BEARING-DEPOSITS> 387
<FED-FUNDS-SOLD> 11,036
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 344,258
<INVESTMENTS-CARRYING> 108,991
<INVESTMENTS-MARKET> 110,437
<LOANS> 558,547
<ALLOWANCE> 7,016
<TOTAL-ASSETS> 1,121,333
<DEPOSITS> 853,011
<SHORT-TERM> 144,426
<LIABILITIES-OTHER> 4,629
<LONG-TERM> 14,592
0
0
<COMMON> 4,862
<OTHER-SE> 99,813
<TOTAL-LIABILITIES-AND-EQUITY> 1,121,333
<INTEREST-LOAN> 49,658
<INTEREST-INVEST> 24,317
<INTEREST-OTHER> 1,590
<INTEREST-TOTAL> 75,565
<INTEREST-DEPOSIT> 28,700
<INTEREST-EXPENSE> 34,486
<INTEREST-INCOME-NET> 41,079
<LOAN-LOSSES> 986
<SECURITIES-GAINS> 637
<EXPENSE-OTHER> 29,442
<INCOME-PRETAX> 19,783
<INCOME-PRE-EXTRAORDINARY> 19,783
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,195
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.34
<YIELD-ACTUAL> 4.42
<LOANS-NON> 890
<LOANS-PAST> 1,764
<LOANS-TROUBLED> 18
<LOANS-PROBLEM> 7,890
<ALLOWANCE-OPEN> 6,391
<CHARGE-OFFS> 541
<RECOVERIES> 180
<ALLOWANCE-CLOSE> 7,016
<ALLOWANCE-DOMESTIC> 2,426
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,590
</TABLE>
