<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: O-19065
-------
Sandy Spring Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
---------------------- -------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ______
------
The number of shares of common stock outstanding as of April 22, 1999 is
9,591,105 shares.
<PAGE>
SANDY SPRING BANCORP
INDEX
<TABLE>
<CAPTION>
PAGE
- --------------------------------------------------------------------------------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998................................. 1
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 1999 and 1998.......................... 2
Consolidated Statements of Cash Flows for
the Three Month Periods Ended March 31, 1999 and 1998................ 3
Consolidated Statements of Changes in Stockholders' Equity
for the Three month Periods Ended March 31, 1999 and 1998 ........... 5
Notes to Consolidated Financial Statements........................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................... 7
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 12
SIGNATURES................................................................. 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $37,551 $43,616
Federal funds sold 29,116 4,582
Interest-bearing deposits with banks 1,598 1,434
Residential mortgage loans held for sale 6,228 12,832
Investments available-for-sale (at fair value) 489,909 539,642
Investments held-to-maturity -- fair value of $68,405 (1999) and
$55,764 (1998) 68,420 55,457
Other equity securities 19,350 18,480
Total Loans (net of unearned income) 657,391 624,412
Less: Allowance for credit losses (7,491) (7,350)
---------------- --------------
Net loans 649,900 617,062
Premises and equipment, net 27,719 27,920
Accrued interest receivable 11,967 11,719
Other real estate owned 62 0
Other assets 12,095 10,727
---------------- --------------
TOTAL ASSETS $1,353,915 $1,343,471
================ ==============
LIABILITIES
Noninterest-bearing deposits $183,394 $185,900
Interest-bearing deposits 780,785 768,671
---------------- --------------
Total deposits 964,179 954,571
Short-term borrowings 235,652 257,026
Long-term borrowings 38,220 14,366
Accrued interest and other liabilities 5,231 6,571
---------------- --------------
TOTAL LIABILITIES 1,243,282 1,232,534
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares issued
and outstanding 9,593,220 (1999) and 9,586,021 (1998) 9,593 9,586
Surplus 23,098 22,913
Retained earnings 78,832 76,305
Accumulated other comprehensive income (loss)
(890) 2,133
---------------- --------------
TOTAL STOCKHOLDERS' EQUITY 110,633 110,937
================ ==============
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,353,915 $1,343,471
================ ==============
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $13,362 $12,851
Interest on loans held for sale 138 134
Interest on deposits with banks 75 19
Interest and dividends on securities:
Taxable 6,955 5,706
Exempt from federal income taxes 1,442 1,072
Interest on federal funds sold 203 229
-------------------------------
TOTAL INTEREST INCOME 22,175 20,011
Interest expense:
Interest on deposits 6,902 7,001
Interest on short-term borrowings 3,082 1,760
Interest on long-term borrowings 99 346
-------------------------------
TOTAL INTEREST EXPENSE 10,083 9,107
-------------------------------
NET INTEREST INCOME 12,092 10,904
Provision for Credit Losses 200 267
-------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 11,892 10,637
Noninterest Income:
Securities gains 18 248
Service charges on deposit accounts 1,040 934
Gains on mortgage sales 625 601
Trust income 364 355
Other income 879 730
-------------------------------
TOTAL NONINTEREST INCOME 2,926 2,868
Noninterest Expenses:
Salaries and employee benefits 5,182 4,547
Occupancy expense of premises 681 680
Equipment expenses 592 655
Marketing 511 251
Outside data services 467 357
Other expenses 1,521 1,405
-------------------------------
TOTAL NONINTEREST EXPENSES 8,954 7,895
-------------------------------
Income Before Income Taxes 5,864 5,610
Income Tax Expense 1,610 1,750
===============================
NET INCOME $4,254 $3,860
===============================
Basic Net Income Per Share* $0.44 $0.40
Diluted Net Income Per Share* 0.44 0.40
Dividends Declared Per Share* 0.18 0.13
</TABLE>
*Per share data have been adjusted to give retroactive effect to a 2-for-1 stock
split declared on January 28, 1998. See Notes to Consolidated Financial
Statements.
2
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $4,254 $3,860
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 603 620
Provision for credit losses 200 267
Deferred income taxes (234) (205)
Origination of loans held for sale (45,499) (52,875)
Proceeds from sales of loans held for sale 52,728 44,423
Gains on sales of loans held for sale (625) (601)
Securities gains (18) (248)
Net change in:
Accrued interest receivable (248) (753)
Accrued income taxes 1,195 1,480
Other accrued expenses (2,535) (1,063)
Other - net 710 (3,741)
-------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 10,531 (8,836)
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (164) (190)
Purchases of investments held-to-maturity (16,565) (2,705)
Purchases of other equity securities (940) (2,574)
Purchases of investments available-for-sale (75,104) (132,796)
Proceeds from sales of investments available-for-sale 12,093 4,918
Proceeds from maturities, calls and principal payments of investments 3,598 11,860
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 107,745 129,914
available-for-sale
Redemption of Federal Home Loan Bank of Atlanta Stock 71 1,332
Net increase in loans receivable (21,004) (14,979)
Purchases of loans (12,037) 0
Expenditures for premises and equipment (308) (728)
-------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (2,615) (5,948)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 12,330 4,926
Net (decrease) increase in time and other deposits (2,722) 9,392
Net decrease in short-term borrowings (32,474) (10,460)
Proceeds from long-term borrowings 35,000 11,000
Retirement of long-term borrowings (46) (6)
Common stock purchased and retired (466) (1,949)
Proceeds from issuance of common stock 658 685
Dividends paid (1,727) (1,255)
-------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,553 12,333
-------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,469 2,451
Cash and Cash Equivalents at Beginning of Quarter 48,198 48,680
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER* $66,667 $46,229
======================================
</TABLE>
3
<PAGE>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental Disclosures:
Interest payments $9,993 $8,939
Income tax payments 91 628
Noncash Investing Activities:
Transfers from loans to other real estate owned 62 246
Reclassification of borrowings from long-term to short-term 11,100 100
</TABLE>
*Cash and cash equivalents include amounts of "Cash and due from banks" and
"Federal funds sold" on the Consolidated Balance Sheets.
See Notes to Consolidated Financial Statements.
4
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Accum-
ulated
Other
Compre- TOTAL
hensive STOCK-
Common Retained Income HOLDERS'
Stock Surplus Earnings (loss) EQUITY
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1999 $9,586 $22,913 $76,305 $ 2,133 $110,937
Comprehensive Income:
Net income 4,254 4,254
Other comprehensive income
(loss), net of tax and
reclassification adjustment (3,023) (3,023)
------------
Total comprehensive income 1,231
Cash dividends - $0.18 per share (1,727) (1,727)
Common stock issued pursuant to:
Incentive stock option plan - 332
shares 8 8
Dividend reinvestment and stock
purchase plan - 23,153 shares 23 627 650
Stock repurchases - 16,286 shares (16) (450) (466)
---------- ---------- ---------- ---------- ------------
BALANCES AT MARCH 31, 1999 $9,593 $23,098 $78,832 $ (890) $110,633
========== ========== ========== ========== ============
BALANCES AT JANUARY 1, 1998 $4,862 $31,695 $66,261 $1,857 $104,675
Increase in beginning shares as
a result of 2-for-1 stock split in the
form of a stock dividend 4,863 (4,863) 0
Comprehensive Income:
Net income 3,860 3,860
Other comprehensive income, net
of tax and reclassification
adjustment 501 501
------------
Total comprehensive income 4,361
Cash dividends*- $0.13 per share (1,255) (1,255)
Common stock issued pursuant to:
Dividend reinvestment and stock
purchase plan - 18,552 shares 18 617 635
Stock repurchases - 74,788 shares (75) (1,874) (1,949)
Exercise of warrants of pooled
bank - 7,510 shares 8 42 50
---------- ---------- ---------- ---------- ------------
BALANCES AT MARCH 31, 1998 $9,676 $25,617 $68,866 $2,358 $106,517
========== ========== ========== ========== ============
</TABLE>
* Adjusted to give retroactive effect to a 2-for-1 stock split declared on
January 28, 1998. See Notes to Consolidated Financial Statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The foregoing financial statements are unaudited; however, in the opinion of
Management, all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the results of the interim periods have
been included. These statements should be read in conjunction with the financial
statements and accompanying notes included in Sandy Spring Bancorp's 1998 Annual
Report to Shareholders. The results shown in this interim report are not
necessarily indicative of results to be expected for the full year 1999.
The accounting and reporting policies of Sandy Spring Bancorp (the
"Company") conform to generally accepted accounting principles and to general
practice within the banking industry. Certain reclassifications have been made
to amounts previously reported to conform with current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
NOTE 2 - PER SHARE DATA
The calculations of net income per common share for the periods ended March 31
were as shown in the following table. Basic net income per share is computed 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 arrive at by dividing net income available to common
stockholders by the weighted average number of common shares outstanding
adjusted for the dilutive effect of outstanding stock options. Data in the table
has been adjusted to give retroactive effect to a 2 for 1 stock split declared
on January 28, 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Basic:
Net income (available to common stockholders) $4,254 $3,860
Average common shares outstanding 9,582 9,668
Basic net income per share $0.44 $0.40
===================
Diluted:
Net income (available to common stockholders) $4,254 $3,860
Average common shares outstanding 9,582 9,668
Stock option adjustment 41 48
-------------------
Average common shares outstanding - diluted 9,623 9,716
Diluted net income per share $0.44 $0.40
===================
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes forward looking statements in this management's
discussion and analysis that are subject to risks and uncertainties. These
forward looking statements include: statements of goals, intentions, and
expectations; estimates of risks and of future costs and benefits; statements of
the ability to achieve "Y2K" compliance; and statements of the ability to
achieve financial and other goals. These forward looking statements are subject
to significant uncertainties because they are based upon or are affected by:
management's estimates and projections of future interest rates and other
economic conditions; statements by suppliers of data processing equipment and
services, government agencies, and other third parties as to "Y2K" compliance
and costs; future laws and regulations; and a variety of other matters. Because
of these uncertainties, the actual future results may be materially different
from the results indicated by these forward looking statements. In addition, the
Company's past results of operations do not necessarily indicate its future
results.
In the following discussion, per share amounts have been adjusted to
reflect a 2 for 1 stock split declared on January 28, 1998.
THE COMPANY
The Company is the registered bank holding company for Sandy Spring
National Bank of Maryland (the "Bank"), headquartered in Olney, Maryland. The
Bank operates twenty-three community offices in Montgomery, Howard, Prince
George's and Anne Arundel Counties in Maryland, together with a mortgage banking
company and an insurance agency. The Company has established a strategy of
independence, and intends to establish or acquire additional offices or banking
organizations as appropriate opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $1,353,915,000 at March 31, 1999,
compared to $1,343,471,000 at December 31, 1998, increasing $10,444,000 or 0.8%
during the first quarter of 1999. Earning assets increased $15,173,000 or 1.2%
to $1,272,012,000 at March 31, 1999, from $1,256,839,000 at December 31, 1998.
Total loans rose 5.3% or $32,979,000 during the first quarter of 1999
to $657,391,000. Of the major loan categories, mortgage loans increased
$24,380,000 (up 5.7%) including similar increases in residential and commercial
mortgages, consumer loans rose $10,912,000 (up 22.5%) due largely to growth in
marine loan financings, and commercial loans increased $1,214,000 (up 1.5%).
During the first quarter of 1999, the Bank purchased $12,037,000 of residential
first mortgages. Construction loans decreased $3,527,000 (down 4.9%) from the
first quarter of 1998 to the first quarter of 1999 due to a decline in
residential construction loans. Also, residential mortgage loans held for sale
decreased by $6,604,000 (down 51.5%) from December 31, 1998 to $6,228,000 at
March 31, 1999.
The investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities, decreased $35,900,000 or 5.9% from
December 31, 1998 to March 31, 1999, due to a 9.2% decline in available-for-sale
securities as funding requirements for loans increased. During this period, the
increase in total loans was almost three times the growth achieved for total
deposits and borrowings. Federal funds sold rose $24,698,000 or 410.5%.
Total deposits were $964,179,000 at March 31, 1999, increasing
$9,608,000 or 1.0% from $954,571,000 at December 31, 1998. Growth in money
market savings accounts provided most of the increase. Checking accounts, both
noninterest-bearing and interest-bearing, recorded decreases, due primarily to
seasonal declines in personal accounts. Time deposits less than $100,000 also
decreased. Total borrowings were essentially unchanged.
MARKET RISK MANAGEMENT
By employing simulation analysis through use of a computer model, the Bank
intends to effectively manage the potential adverse impacts that changing
interest rates can have on the institution's short-term earnings, long term
value, and liquidity. The simulation model captures optionality factors such as
call features and
7
<PAGE>
interest rate caps and floors imbedded in investment and loan portfolio
contracts. Measured from March 31, 1999, the simulation analysis indicates that
the Bank's net interest income would decline by 8.8% over a twelve month period
given an increase in interest rates of 200 basis points, against a policy limit
of 15%. In terms of equity capital on a fair value basis, a 200 basis point
decline in interest rates is estimated to reduce the fair value of capital (as
computed) by 17.4%, as compared to a policy limit of 25%.
LIQUIDITY
The Bank's liquidity position is measured monthly, looking forward ninety
days. Liquid assets, defined to include cash on hand, federal funds sold,
interest-bearing deposits with banks, loans held for sale, investments
held-to-maturity maturing within ninety days and investments available-for-sale
maturing within one year, net of projected loan growth over the following ninety
days, totaled $120,341,000 or 8.9% of total assets at March 31, 1999. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $46,582,000 or 3.5% of total assets, which slightly
exceeded management's target range.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 15.48% at
March 31, 1999, compared to 15.67% at December 31, 1998; a tier 1 risk-based
capital ratio of 14.44%, compared to 14.58%; and a capital leverage ratio of
8.31%, compared to 8.50%. Capital adequacy, as measured by these ratios, was
well above regulatory requirements. The Company's leverage and share repurchase
programs have maintained capital at levels that management believes are
appropriate.
Stockholders' equity totaled $110,633,000 at March 31, 1999, down 0.3%
from $110,937,000 at December 31, 1998. This decline reflects the change in
accumulated other comprehensive income, comprised of net unrealized gains and
losses on available-for-sale securities, from $2,133,000 at December 31, 1998 to
$(890,000) at March 31, 1999, a decrease of $3,023,000. Excluding accumulated
other comprehensive income, stockholders' equity rose $2,719,000 or 2.5%.
Internal capital generation (net income less dividends) provided $2,527,000 in
additional equity during the first quarter of 1999, representing an annualized
rate (when considered as a percentage of average total stockholders' equity) of
9.2% versus 9.4% for the year ended December 31, 1998.
External capital formation, primarily from stock issuances under the
dividend reinvestment and stock purchase plan, totaled $658,000 during the first
quarter of 1999. However, share repurchases amounted to $466,000 through March
31, 1999, for a net increase in stockholders' equity from these sources of
$192,000.
First quarter dividends were $0.18 per share in 1999, compared to $0.13
per share in 1998, for dividend payout ratios of dividends declared per share to
diluted net income per share of 40.91% and 32.50%, respectively. The increase in
the dividend payout ratio reflects the Board's desire to return a higher
percentage of earnings to the shareholders.
B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net income for the first three months of the year rose $394,000 or
10.2% in 1999, to $4,254,000, from $3,860,000. Diluted earnings per share for
the first quarter were $0.44 in 1999 and $0.40 in 1998. The annualized return on
average assets for the first three months of the year was 1.30% in 1999 compared
to 1.40% in 1998. The annualized returns on average equity for the same three
month periods were 15.54% and 14.98% in 1999 and 1998, respectively. The stock
repurchase program discussed above, coupled with leverage achieved through
purchase of available-for-sale securities with Federal Home Loan Bank of Atlanta
borrowings, have had the effect of lowering the return on average assets while
increasing earnings per share and the return on average equity.
8
<PAGE>
NET INTEREST INCOME
Net interest income for the first three months of the year was
$12,092,000 in 1999, an increase of 10.9% over $10,904,000 in 1998, reflecting a
higher volume of average earning assets.
For the first three months, tax-equivalent interest income increased
$2,645,000 or 13.0% in 1999, compared to 1998. Average earning assets rose 19.9%
over the prior year period while the average yield earned on those assets
decreased 46 basis points to 7.50% from 7.96%. Comparing the first three months
of 1999 versus 1998, average loans grew 10.5% to $631,170,000 (50.7% of average
earning assets, versus 55.0% a year ago), while the average yield on loans
decreased 54 basis points to 8.65% from 9.19%. Virtually all major categories
increased, with the real estate sector, especially commercial mortgages,
accounting for most of the overall increase. Average consumer loans also rose
significantly, reflecting a favorably priced auto loan product offering in the
second half of 1998 and increased marine loan financings in 1999. Average total
securities increased 31.4% to $590,396,000 (47.4% of average earning assets,
versus 43.2% a year ago) and recorded a 12 basis point decrease in average yield
to 6.38% from 6.50%. Available-for-sale securities purchased under a leverage
program were a major factor in the rise in securities.
Interest expense for the first three months increased $976,000 or
10.7%, due to 20.3% higher average interest-bearing liabilities against a 34
basis point decline in the average rate paid on those funds to 3.90% from 4.24%.
While virtually all categories of interest-bearing liabilities rose, by far the
greatest percentage increase occurred in average borrowings, which primarily
resulted from Federal Home Loan Bank of Atlanta advances used to invest in
securities.
CREDIT RISK MANAGEMENT
During the first three months of the year, the provision for credit
losses was $200,000 in 1999, compared to $267,000 in 1998. Net charge-offs of
$59,000 were recorded for the three month period ended March 31, 1999 while
there were net charge-offs of $53,000 for the same period a year earlier.
The Company regularly analyzes the sufficiency of its allowance for
credit losses based upon a number of factors, including, among others: lending
risks associated with growth and entry into new markets, loss allocations for
specific problem credits, the level of the allowance to nonperforming loans,
historical loss experience, economic conditions, portfolio trends and credit
concentrations, the year 2000 issue, changes in the size and character of the
loan portfolio, and management's judgment with respect to current and expected
economic conditions and their impact on the existing loan portfolio. Management
establishes the allowance for credit losses in an amount that it determines,
based upon these factors, is sufficient to provide for losses inherent in the
loan portfolio. The allowance for credit losses was 1.14% of total loans at
March 31, 1999 and 1.18% at December 31, 1998. Management believes the allowance
for credit losses at March 31, 1999 was adequate.
Nonperforming loans increased by $775,000 to $2,576,000 and total
nonperforming assets increased by $837,000 to $2,638,000 from December 31, 1998
to March 31, 1999. Expressed as a percentage of total assets, nonperforming
assets were 0.19% at March 31, 1999 and 0.13% at December 31, 1998. The
allowance for credit losses represented 291% of nonperforming loans at March 31,
1999, compared to coverage of 408% at December 31, 1998. Significant variation
in this 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 $62,000 at March 31, 1999, compared to none owned at
December 31, 1998. The balance of impaired loans was $910,000 at March 31, 1999,
with reserves against those loans totaling $25,000, and $773,000 at December 31,
1998, with no reserves. A loan for $711,000 which was included in impaired loans
at both March 31, 1999 and December 31, 1998 is no longer impaired since it has
subsequently been repaid by the borrower with a small loss.
9
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
3 Months Ended 12 Months Ended
March 31, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $7,350 $7,016
Provision for credit losses 200 552
Loan charge-offs:
Real estate-mortgage (25) (40)
Real estate-construction 0 0
Consumer (60) (176)
Commercial (1) (119)
------------------------- --------------------------
Total charge-offs (86) (335)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 6 35
Commercial 21 82
------------------------- --------------------------
Total recoveries 27 117
------------------------- --------------------------
Net charge-offs (59) (218)
------------------------- --------------------------
BALANCE, PERIOD END $7,491 $7,350
========================= ==========================
Net charge-offs to average loans
(annual basis) 0.04% 0.04%
Allowance to total loans 1.14% 1.18%
</TABLE>
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $1,229 $832
Loans 90 days past due 1,345 965
Restructured loans 2 4
------------------------- --------------------------
Total Nonperforming Loans* 2,576 1,801
Other real estate owned 62 0
------------------------- --------------------------
TOTAL NONPERFORMING ASSETS $2,638 $1,801
========================= ==========================
Nonperforming assets to total assets 0.19% 0.13%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $6,330,000 at March 31,
1999, compared to $9,894,000 at December 31, 1998. Although these are loans
where known information about the borrowers' possible credit problems causes
management to have doubts as to their ability to comply with the present loan
repayment terms, most are well collateralized and are not believed to present
significant risk of loss.
10
<PAGE>
NONINTEREST INCOME AND EXPENSES
Noninterest income increased 2.0% or $58,000 during the three months
ended March 31, 1999 versus 1998, primarily from growth in fees from sales of
annuities and mutual funds and increased transaction based service fees. The
rise in service fees reflected in large part higher return check charges and
debit card fees. The Bank's mortgage banking subsidiary, Sandy Spring Mortgage
Corporation, continued to achieve strong mortgage loan origination volumes and
related gains on sales of loans, due to the continuation of favorable interest
rates.
For the three months ended March 31, 1999, noninterest expenses increased
13.4%, or $1,059,000, to $8,954,000, from $7,895,000 in 1998. The Company incurs
additional costs in order to enter new markets, provide new services, and
support the growth of the Company. Management controls its operating expenses,
however, with the goal of maximizing profitability over time. The growth in
noninterest expenses was due primarily to a 14.0%, or $635,000, increase in
salaries and employee benefits. The increase in salaries reflected higher
compensation levels and growth in staff. Incentive compensation and health
insurance costs drove the increase in benefit expenses. Average full-time
equivalent employees reached 433 during the first quarter of 1999 compared to
419 during the first quarter of 1998. Despite the increase in staff, the ratio
of net income per average full-time-equivalent employee increased to $9,800 from
$9,200. The other significant category of increase was marketing expense, which
grew by $260,000 or 103.6%, largely the result of an image advertising campaign
in 1999 on radio and cable television. Occupancy expenses remained virtually
constant while equipment expenses decreased by 9.6% or $63,000.
INCOME TAXES
The effective tax rate for the first quarter of the year was 27.5% in
1999, compared to 31.2% in 1998, due in large part to the higher level of
certain U.S. Government Agency obligations that are exempt from state income
tax.
YEAR 2000 ISSUE
Many computer programs now in use have not been designed to properly
recognize years after 1999. If not corrected, these programs could fail or
create erroneous results. This Year 2000 ("Y2K") issue affects the entire
banking industry because of its reliance on computers and other equipment that
use computer chips. This problem is not limited to computer systems. Y2K issues
may affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom the Company
does business such as vendors, suppliers, utility companies, and customers.
Risks Related To Year 2000
The Y2K issue poses certain risks to the Company and its operations.
Some of these risks are present because the Company purchases technology and
information system applications from other parties who also face Y2K challenges.
Other risks are specific to the banking industry. Commercial banks may
experience a deposit base reduction if customers withdraw significant amounts of
cash in anticipation of Y2K. Such a deposit contraction could cause an increase
in interest rates, require the Company to locate alternative sources of funding
or sell investment securities or other liquid assets to meet liquidity needs,
and may reduce future earnings. To reduce customer concerns regarding Y2K
noncompliance, a customer awareness plan has been implemented which is directed
towards making deposit customers knowledgeable about the Company's Y2K
compliance efforts.
The Company lends significant amounts to businesses and individuals in
its marketing areas. If these borrowers are adversely affected by Y2K problems,
they may not be able to repay their loans in a timely manner. This increased
credit risk could adversely affect the Company's financial performance. In an
effort to identify any potential loan loss risk because of borrower Y2K
noncompliance, all loan customers with loans or commitments exceeding $500,000
were surveyed using a Y2K questionnaire. The Company is in the process of
analyzing the results and any risks identified. The Company has also modified
its loan underwriting controls to ensure that potential borrowers are carefully
evaluated for Y2K compliance before any new loan is approved.
11
<PAGE>
The Company's operations, like those of many other companies, can be
adversely affected by Y2K triggered failures which may be experienced by third
parties upon whom the Company relies for processing transactions. The Company
has identified all critical third-party service providers and vendors and is
monitoring their Y2K compliance programs. The Company's primary supplier of data
processing services has adopted a Y2K compliance plan that includes a timetable
for making changes necessary to be able to provide services in the Y2K. That
supplier has provided written assurances to the Company regarding its progress
toward Y2K compliance and has been examined for Y2K readiness by federal bank
examiners. The Company's operations may also be adversely affected by Y2K
related failures of third party providers of electricity, telecommunications
services and other utility services. Failures in these areas could impact the
Company's ability to conduct business. The Y2K compliance of these providers is
largely beyond the control of the Company.
The Company's State of Readiness
The Company has created a task force to establish a Y2K plan to
prevent or mitigate the adverse effects of the Y2K issue on the Company and its
customers. Goals of the Y2K plan include identifying Y2K risks of information
systems and equipment used by the Company, informing customers of Y2K issues and
risks, establishing a contingency plan for operating if Y2K issues cause
important systems or equipment to fail, implementing changes necessary to
achieve Y2K compliance, and verifying that these changes are effective. The
Comptroller of Currency has examined the Company's Y2K compliance plan and the
Company's progress in implementation. In addition, the Board of Directors is
carefully monitoring progress under the plan on a quarterly basis.
The Company's plan to address the Y2K issues involves several phases,
described below:
Awareness--In this phase, the Company's Y2K plan and project team were
established, the overall Y2K approach was identified, compliance standards were
defined, and responsibility for corrective action was assigned. This phase has
been completed.
Assessment--During this phase, the Company gathered and analyzed
information to determine the size and the impact of the Y2K problem and then
made decisions to modify, reengineer, or replace existing systems and programs.
This phase has been completed.
Renovation--This phase involves obtaining and implementing upgraded
software applications provided by the Company's vendors, modifying system codes,
reengineering Y2K vulnerable systems and programs, developing bridges for
systems which cannot be reengineered, and changing files and databases as
necessary. This phase has been completed.
. Validation--During the validation phase, the Company is testing
systems and software for Y2K compliance in an effort to identify and correct any
errors that may be identified in the renovation phase. This phase is in process
and will be completed by June 30, 1999.
Implementation--In this phase all new and revised systems will be
implemented, data exchange issues will be resolved, and back up and recovery
plans will be developed. This phase is in process and will be completed by June
30, 1999.
Based on information developed to date, Company management believes
that the cost of remediation will not be material to the Company's business,
operations, liquidity, capital resources, or financial condition. The Company
expects that its total cash outlay for Y2K compliance in 1999 and future years
will be less than $1.0 million. This amount includes approximately $680,000 in
costs of software and equipment upgrades or replacements and approximately
$200,000 in consulting, legal and temporary staffing costs. Approximately
$170,000 of these costs were incurred in the first quarter of 1999. The Company
expects that the total effect on net income, after tax deductions, of these Y2K
expenditures in 1999 and future years will be less than $550,000, and that the
effect on net income for the first quarter of 1999 of these costs was
approximately $15,000. These amounts do not include allocations of the salary
and other costs of the Company's regular personnel. The Company is funding Y2K
expenditures through continuing operations.
12
<PAGE>
In the event that some or all systems experience failure, the Company
has developed a detailed contingency plan. This plan calls for manual processing
of bank transactions at designated locations supported by backup power systems.
Delays in processing transactions would result in the event that the Company is
forced to process transactions manually. These delays could disrupt normal
business activities of the Company and its customers.
Forward Looking Statements
The discussion above regarding issues associated with Y2K includes
certain "forward looking statements." The Company's ability to predict results
or effects of issues related to the Y2K issue is inherently uncertain and is
subject to factors that may cause actual results to differ materially from those
projected. Factors that could affect the actual results include the following:
The possibility that protection procedures, contingency plans, and
remediation efforts will not operate as intended;
The Company's failure
to timely or completely identify all software or hardware applications
requiring remediation;
Unexpected costs;
The uncertainty associated with
the impact of Y2K issues on the banking industry and the Company's
customers, vendors, and others with whom it conducts business; and
The general economy.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Condition - Market Risk Management" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, above.
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
1998.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following is a list of Exhibits filed as part of this
Quarterly Report on Form 10-Q:
No. Exhibit
----- --------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /s/ Hunter R. Hollar
--------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: May 7, 1999
By: /s/ James H. Langmead
--------------------------------------
James H. Langmead
Vice President and Treasurer
Date: May 7, 1999
14
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