<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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
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Sandy Spring Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO
--- ---
The number of shares of common stock outstanding as of July 21, 1999 is
9,602,443 shares.
<PAGE>
SANDY SPRING BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998................................................. 1
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 1999 and 1998 .................................... 2
Consolidated Statements of Cash Flows for
the Six Month Periods Ended June 30, 1999 and 1998................................. 3
Consolidated Statements of Changes in Stockholders' Equity for
the Six Month Periods Ended June 30, 1999 and 1998................................. 5
Notes to Consolidated Financial Statements......................................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK...................................................................... 14
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............................. 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................................ 15
SIGNATURES............................................................................... 16
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31,
(Dollars in thousands, except per share data) 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $50,181 $43,616
Federal funds sold 16,964 4,582
Interest-bearing deposits with banks 4,746 1,434
Residential mortgage loans held for sale 3,984 12,832
Investments available-for-sale (at fair value) 431,345 539,642
Investments held-to-maturity -- fair value of $71,985 (1999) and
$55,764 (1998) 74,936 55,457
Other equity securities 16,713 18,480
Total Loans (net of unearned income) 688,850 624,412
Less: Allowance for credit losses (7,700) (7,350)
--------------- --------------
Net loans 681,150 617,062
Premises and equipment, net 27,543 27,920
Accrued interest receivable 10,909 11,719
Other real estate owned 139 0
Other assets 16,651 10,727
--------------- --------------
TOTAL ASSETS $1,335,261 $1,343,471
=============== ==============
LIABILITIES
Noninterest-bearing deposits $195,423 $185,900
Interest-bearing deposits 768,718 768,671
--------------- --------------
Total deposits 964,141 954,571
Short-term borrowings 223,243 257,026
Long-term borrowings 38,220 14,366
Accrued interest and other liabilities 2,128 6,571
--------------- --------------
TOTAL LIABILITIES 1,227,732 1,232,534
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares issued
and outstanding 9,602,110 (1999) and 9,586,021 (1998) 9,602 9,586
Surplus 23,337 22,913
Retained earnings 81,416 76,305
Accumulated other comprehensive income (loss) (6,826) 2,133
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY 107,529 110,937
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,335,261 $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 Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $13,999 $12,916 $27,361 $25,767
Interest on loans held for sale 100 220 238 354
Interest on deposits with banks 50 30 125 49
Interest and dividends on securities:
Taxable 6,687 5,952 13,642 11,658
Nontaxable 1,566 1,071 3,008 2,143
Interest on federal funds sold 192 309 395 538
---------------------------- --------------------------
TOTAL INTEREST INCOME 22,594 20,498 44,769 40,509
Interest Expense:
Interest on deposits 6,690 7,139 13,592 14,140
Interest on short-term borrowings 2,611 1,796 5,693 3,556
Interest on long-term borrowings 447 353 546 699
---------------------------- --------------------------
TOTAL INTEREST EXPENSE 9,748 9,288 19,831 18,395
---------------------------- --------------------------
NET INTEREST INCOME 12,846 11,210 24,938 22,114
Provision for Credit Losses 275 275 475 542
---------------------------- --------------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 12,571 10,935 24,463 21,572
Noninterest Income:
Securities gains (losses) (74) 161 (56) 409
Service charges on deposit accounts 1,095 994 2,135 1,928
Gains on mortgage sales 597 682 1,222 1,283
Trust income 377 341 741 696
Other income 984 807 1,863 1,537
---------------------------- --------------------------
TOTAL NONINTEREST INCOME 2,979 2,985 5,905 5,853
Noninterest Expenses:
Salaries and employee benefits 5,536 4,846 10,718 9,393
Occupancy expense of premises 707 696 1,388 1,376
Equipment expenses 649 664 1,241 1,319
Marketing 297 328 808 579
Outside data services 458 376 925 733
Other expenses 1,877 1,550 3,398 2,955
---------------------------- --------------------------
TOTAL NONINTEREST EXPENSES 9,524 8,460 18,478 16,355
---------------------------- --------------------------
Income Before Income Taxes 6,026 5,460 11,890 11,070
Income Tax Expense 1,622 1,585 3,232 3,335
---------------------------- --------------------------
NET INCOME $4,404 $3,875 $8,658 $7,735
============================ ==========================
Basic Net Income Per Share* $0.46 $0.40 $0.90 $0.80
Diluted Net Income Per Share* 0.46 0.40 0.90 0.80
Dividends Declared Per Share* 0.19 0.15 0.37 0.28
</TABLE>
* Per share data have been adjusted to give retroactive effect to a 2-for-1
stock split declared on January 28, 1998.
See Notes to Consolidated Financial Statements.
2
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $8,658 $7,735
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,226 1,258
Provision for credit losses 475 542
Deferred income taxes (341) 70
Origination of loans held for sale (90,929) (106,415)
Proceeds from sales of loans held for sale 100,402 99,385
Gains on sales of loans held for sale (625) (1,283)
Purchases of trading securities 0 (9,376)
Proceeds from sales of trading securities 0 9,388
Securities (gains) losses 56 (409)
Net change in:
Accrued interest receivable 810 (504)
Accrued income taxes (386) (236)
Other accrued expenses (4,054) (443)
Other - net (158) 658
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,134 370
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (3,312) (1,248)
Purchases of investments held-to-maturity (23,088) (3,088)
Purchases of other equity securities (941) (2,574)
Purchases of investments available-for-sale (103,492) (268,706)
Proceeds from sales of investments available-for-sale 45,387 14,981
Proceeds from maturities, calls and principal payments of investments
held-to-maturity 3,598 16,786
Proceeds from maturities, calls and principal payments of investments
available-for-sale 151,674 214,408
Redemption of Federal Home Loan Bank of Atlanta stock 2,707 3,324
Purchases of other real estate owned, net of sales proceeds (90) 76
Net increase in loans receivable (52,463) (23,111)
Purchases of loans (12,037) 0
Expenditures for premises and equipment (664) (1,202)
------------- ------------
NET CASH USED BY INVESTING ACTIVITIES 7,279 (50,354)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 22,703 13,805
Net increase (decrease) in time and other deposits (13,133) 22,761
Net decrease in short-term borrowings (44,883) (196)
Proceeds from long-term borrowings 35,000 11,000
Retirement of long-term borrowings (46) (12)
Common stock purchased and retired (833) (3,753)
Proceeds from issuance of common stock 1,273 1,331
Dividends paid (3,547) (2,699)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (3,466) 42,237
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 18,947 (7,747)
Cash and Cash Equivalents at Beginning of Period 48,198 48,680
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CASH AND CASH EQUIVALENTS AT END OF PERIOD* $67,145 $40,933
============= ============
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</TABLE>
3
<PAGE>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
Supplemental Disclosures:
Interest payments $20,071 $18,227
Income tax payments 3,221 3,606
Noncash Investing Activities:
Transfers from loans to other real estate owned 62 393
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 8,658 8,658
Other comprehensive income
(loss), net of tax and
reclassification (8,959)
adjustment (8,959)
------------
Total comprehensive income (301)
Cash dividends - $0.37 per share (3,547) (3,547)
Common stock issued pursuant to:
Incentive stock option plan - 832
shares 1 19 20
Dividend reinvestment and stock
purchase plan - 44,786 shares 45 1,208 1,253
Stock repurchases - 29,529 shares (30) (803) (833)
---------- ---------- ---------- ---------- ------------
BALANCES AT JUNE 30, 1999 $9,602 $23,337 $81,416 $(6,826) $107,529
========== ========== ========== ========== ============
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 7,735 7,735
Other comprehensive income, net
of tax and reclassification
adjustment 113 113
------------
Total comprehensive income 7,848
Cash dividends*- $0.28 per share (2,699) (2,699)
Common stock issued pursuant to:
Incentive stock option plan -
3,000 shares 3 34 37
Dividend reinvestment and stock
purchase plan - 38,133 shares 38 1,207 1,245
Stock repurchases - 133,188 shares (133) (3,621) (3,754)
Exercise of warrants of pooled
bank - 7,510 shares 7 43 50
---------- ---------- ---------- ---------- ------------
BALANCES AT JUNE 30, 1998 $9,640 $24,495 $71,297 $1,970 $107,402
========== ========== ========== ========== ============
</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 and
Subsidiaries (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 - STOCKHOLDERS' EQUITY
On April 5, 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to 5%, or approximately 480,000 shares, of
Bancorp's outstanding common stock, par value $1.00 per share, in connection
with shares expected to be issued pursuant to Bancorp's dividend reinvestment,
stock option, and employee benefit plans and for other corporate purposes. The
share repurchases would be made on the open market and in privately negotiated
transactions, from time to time until March 31, 2001, or earlier termination of
the program by the Board. Bancorp's previous repurchase program expired on March
31, 1999.
NOTE 3 - STOCK OPTION PLAN
On April 14, 1999, the shareholders approved the Sandy Spring Bancorp 1999 Stock
Option Plan (the "Option Plan"). The Option Plan, which replaces the Sandy
Spring Bancorp 1992 Stock Option Plan (the "1992 Option Plan"), provides
incentive and non-incentive stock options to the Company's directors and key
employees. The Option Plan authorizes the issuance of up to 400,000 shares of
common stock, has a term of ten years, and is administered by a committee of at
least three directors appointed by the Board of Directors. In general, the
exercise price of options may not be less than 100% of the fair market value of
the Common Stock on the date of grant and must be exercised within ten years.
NOTE 4 - SUBSEQUENT EVENT - ACQUISITION AGREEMENT
On July 21, 1999, Sandy Spring National Bank of Maryland (the "Bank"), Olney,
Maryland, entered into an Agreement with Mellon Bank (MD) N.A. ("Mellon"),
Pittsburgh, Pennsylvania, to purchase certain fixed assets, leasehold
improvements and loans, and to assume certain deposit liabilities and lease
obligations, relating to five Mellon branches located in Montgomery County,
Maryland, one Mellon branch located in Anne Arundel County, Maryland, and one
Mellon branch located in Fairfax County, Virginia. As of July 7, 1999, aggregate
loans to be purchased were approximately $35.0 million, and the aggregate
deposit liabilities to be assumed by the Bank were approximately $235.0 million.
The Bank will pay a premium of 8.97% of the principal amount of the loans
transferred and a deposit premium of 8.70% of the deposits as of the date of
closing under the Agreement. The acquisition, once completed, will be accounted
for under the purchase method of accounting, in accordance with Accounting
Principles Board Opinion No. 16 (Accounting for Business Combinations) and
accordingly the results of operations of the acquired branches will be included
in the Company's consolidated financial statements only from the acquisition's
completion date. It is contemplated that the Agreement and the transactions
contemplated thereby, which are subject to regulatory approval,
6
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
NOTE 4 (continued)
will become effective during 1999. The acquisition will result in recognition of
a loan premium of approximately $0.8 million (to be amortized into interest
income over six years), a deposit premium of approximately $4.4 million (to be
amortized into interest expense over 4 years), and goodwill of approximately
$19.0 million (to be amortized into noninterest expenses over 10 years).
NOTE 5 - PER SHARE DATA
The calculations of net income per common share for the periods ended June 30
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 arrived 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>
(Dollars and amounts in thousands, except Three Months Ended Six Months Ended
per share data) June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Net income applicable to common stock $4,404 $3,875 $8,658 $7,735
Average common shares outstanding 9,591 9,644 9,586 9,656
Basic net income per share $0.46 $0.40 $0.90 $0.80
==============================================================
Diluted:
Net income applicable to common stock $4,404 $3,875 $8,658 $7,735
Average common shares outstanding 9,591 9,644 9,586 9,656
Stock option adjustment 38 53 40 51
Warrant stock adjustment 0 0 0 2
--------------------------------------------------------------
Diluted average common shares outstanding 9,629 9,697 9,626 9,709
Diluted net income per share $0.46 $0.40 $0.90 $0.80
==============================================================
</TABLE>
7
<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 $1,335,261,000 at June 30, 1999, compared
to $1,343,471,000 at December 31, 1998, decreasing $8,210,000 or 0.6% during the
first six months of 1999. Earning assets decreased $19,301,000 or 1.5% to
$1,237,538,000 at June 30, 1999, from $1,256,839,000 at December 31, 1998.
Total loans rose 10.3% or $64,438,000 during the first six months of 1999
to $688,850,000. Of the major loan categories, consumer loans rose $25,033,000
(up 51.6%) due largely to growth in marine loan financings, mortgage loans
increased $38,662,000 (up 9.1%) including a 10.8% or $22,664,000 increase in
commercial mortgages, and commercial loans increased $1,250,000 (up 1.6%).
Construction loans decreased $507,000 (down 0.7%) from June 30, 1998 to June 30,
1999. Also, residential mortgage loans held for sale decreased by $8,848,000
(down 69.0%) from December 31, 1998 to $3,984,000 at June 30, 1999.
The investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities, decreased $90,585,000 or 14.8%
from December 31, 1998 to June 30, 1999, due primarily to a 20.1% decline in
available-for-sale securities. During this period, funding requirements for
loans increased, with the rise in total loans amounting to almost seven times
the growth shown for total deposits. Also, the Company is moving funds from the
investment portfolio into federal funds sold for greater liquidity as year 2000
approaches. Federal funds sold rose $12,382,000 or 270.2%.
Total deposits were $964,141,000 at June 30, 1999, increasing $9,570,000 or
1.0% from $954,571,000 at December 31, 1998. Growth was achieved for
noninterest-bearing demand deposits, up $9,523,000 or 5.1%, attributable
primarily to increases in commercial and small business checking balances.
Interest-bearing deposits remained virtually level, with modest increases in
money market and regular savings accounts being approximately offset by the
decrease in time deposits under $100,000. Total borrowings decreased by 3.7% or
$9,929,000, representing a decrease in leveraging of the balance sheet through
purchase of available-for-sale securities with short-term Federal Home Loan Bank
of Atlanta advances. Repurchase agreements, which are short-term borrowings
related primarily to cash management services for commercial clients, increased
23.5% or $17,498,000 from December 31, 1998 to June 30, 1999.
8
<PAGE>
Market Risk Management
By employing simulation analysis through use of a computer model, the Bank
intends to effectively manage the potential adverse impacts that changing
interest rates can have on the institution's short-term earnings, long term
value, and liquidity. The simulation model captures optionality factors such as
call features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. Measured from June 30, 1999, the simulation analysis
indicates that the Bank's net interest income would decline by 5.8% 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 increase in interest rates is estimated to reduce the fair
value of capital (as computed) by 22.3%, 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, totalled $46,321,000 or 3.5% of total assets at June 30, 1999. This
represents a net liquidity position, which includes estimated potential cash
outflows for deposits and borrowings, of $(39,408,000) or (3.0)% of total
assets. Given external sources of liquidity available to the Company,
investments available-for-sale not included as liquid assets in the computation
above, and deposit growth, management believes the liquidity position is
appropriate. The Company is implementing plans to increase liquid assets and is
putting in place additional borrowing facilities to cover its estimates of
potential cash outflows which could occur as January 1, 2000 approaches.
Capital Management
The Company recorded a total risk-based capital ratio of 15.20% at June 30,
1999, compared to 15.67% at December 31, 1998; a tier 1 risk-based capital ratio
of 14.18%, compared to 14.58%; and a capital leverage ratio of 8.53%, 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 $107,529,000 at June 30, 1999, down 3.1% 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
$(6,826,000) at June 30, 1999, a decrease of $8,959,000. Excluding accumulated
other comprehensive income, stockholders' equity rose $5,551,000 or 5.1%.
Internal capital generation (net income less dividends) provided $5,111,000 in
additional equity during the first six months of 1999, representing an
annualized rate (when considered as a percentage of average total stockholders'
equity) of 9.3% 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 $1,273,000 during the
first six months of 1999. Share repurchases amounted to $833,000 over the same
period, for a net increase in stockholders' equity from these sources of
$440,000.
Dividends for the first six months were $0.37 per share in 1999, compared
to $0.28 per share in 1998, for dividend payout ratios of dividends declared per
share to diluted net income per share of 41.11% and 35.00%, 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 - SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net income for the first six months of the year rose $923,000 or 11.9% in
1999 over 1998, to $8,658,000 from $7,735,000. Diluted earnings per share for
the first six months were $0.90 in 1999 and $0.80 in 1998. The annualized return
on average assets for the first six months of the year was 1.31% in 1999,
compared to 1.38% in 1998. The annualized returns on average equity for the same
six month periods were 15.71% and 14.83% in 1999 and 1998, respectively. The
Company's stock repurchase program, 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.
9
<PAGE>
Net Interest Income
Net interest income for the first six months of the year was $24,938,000 in
1999, an increase of 12.8% over $22,114,000 in 1998, reflecting a higher volume
of average earning assets.
For the first six months, tax-equivalent interest income increased
$5,262,000 or 12.7% in 1999, compared to 1998. Average earning assets rose 18.6%
over the prior year period while the average yield earned on those assets
decreased 39 basis points to 7.55% from 7.94%. Comparing the first six months of
1999 versus 1998, average loans grew 13.3% to $651,031,000 (52.2% of average
earning assets, versus 54.7% a year ago), while the average yield on loans
decreased 62 basis points to 8.53% from 9.15%. Virtually all major loan
categories showed average volume balance increases, 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 26.2% to $574,246,000
(46.1% of average earning assets, versus 43.3% a year ago) and recorded a 1
basis point decrease in average yield to 6.53% from 6.54%. Available-for-sale
securities purchased under a leverage program were a major factor in the rise in
securities.
Interest expense for the first six months increased $1,436,000 or 7.8%, due
to 18.6% higher average interest-bearing liabilities against a 38 basis point
decline in the average rate paid on those funds to 3.84% from 4.22%. 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 six months of the year, the provision for credit losses
was $475,000 in 1999, compared to $542,000 in 1998. Net charge-offs of $125,000
were recorded for the six month period ended June 30, 1999, while there were net
charge-offs of $24,000 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 1.12% of total loans at June
30, 1999 and 1.18% at December 31, 1998. Management believes the allowance for
credit losses at June 30, 1999 was adequate.
Nonperforming loans decreased by $172,000 to $1,629,000 and total
nonperforming assets decreased by $33,000 to $1,768,000 from December 31, 1998
to June 30, 1999. Expressed as a percentage of total assets, nonperforming
assets were 0.13% at June 30, 1999 and at December 31, 1998. The allowance for
credit losses represented 473% of nonperforming loans at June 30, 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
$139,000 at June 30, 1999, compared to none owned at December 31, 1998. The
balance of impaired loans was $320,000 at June 30, 1999, with reserves against
those loans totalling $50,000, and $773,000 at December 31, 1998, with no
reserves.
10
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
6 Months Ended 12 Months Ended
June 30, 1999 December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $7,350 $7,016
Provision for credit losses 475 552
Loan charge-offs:
Real estate-mortgage (54) (40)
Real estate-construction 0 0
Consumer (105) (176)
Commercial (1) (119)
------------------------- --------------------------
Total charge-offs (160) (335)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 13 35
Commercial 22 82
------------------------- --------------------------
Total recoveries 35 117
------------------------- --------------------------
Net charge-offs (125) (218)
------------------------- --------------------------
BALANCE, PERIOD END $7,700 $7,350
========================= ==========================
Net charge-offs to average loans
(annual basis) 0.04% 0.04%
Allowance to total loans 1.12% 1.18%
<CAPTION>
Balance sheet risk inherent in the lending function is presented as follows at the dates indicated:
June 30, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $643 $832
Loans 90 days past due 984 965
Restructured loans 2 4
------------------------- --------------------------
Total Nonperforming Loans* 1,629 1,801
Other real estate owned 139 0
------------------------- --------------------------
TOTAL NONPERFORMING ASSETS $1,768 $1,801
========================= ==========================
Nonperforming assets to total assets 0.13% 0.13%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $6,253,000 at June 30, 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.
11
<PAGE>
Noninterest Income and Expenses
Noninterest income increased slightly by 0.9% or $52,000 during the six
months ended June 30, 1999, to $5,905,000 versus $5,853,000 for the six months
ended June 30, 1998. Excluding non-operating items, the increase was 10.3% or
$556,000 due primarily to increased transaction based service fees from higher
transaction volumes and a larger customer base. Non-operating items include
gains and losses on sales of securities and other real estate owned. Most
significantly, losses on securities transactions of $56,000 were reported for
the six months ended June 30, 1999, compared to gains of $409,000 for the same
period of the prior year.
For the six months ended June 30, 1999, noninterest expenses increased
13.0%, or $2,123,000, to $18,478,000, from $16,355,000 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 14.1%, or $1,325,000, increase in
salaries and employee benefits. The increase in salaries reflected higher
compensation levels and growth in staff. Incentive compensation, health
insurance and pension costs drove the increase in benefit expenses. Average
full-time equivalent employees reached 437 during the first six months of 1999
compared to 419 during the first six months of 1998. Despite the increase in
staff, the ratio of net income per average full-time-equivalent employee
increased to $19,800 from $18,500. The other significant categories of increase
were marketing expense, up $229,000 or 39.6% due primarily to image advertising
on radio and cable television in 1999, outside data services, up $192,000 or
26.2%, and other expenses, up $493,000 or 17.0% reflecting growth of the
Company. Occupancy expenses remained virtually constant while equipment expenses
decreased by 5.9% or $78,000.
Income Taxes
The effective tax rate for the first six months of the year was 27.2% in
1999, compared to 30.1% in 1998, due in large part to the higher level of
certain U.S. Government Agency obligations that are exempt from state income
tax.
C. RESULTS OF OPERATIONS - SECOND QUARTER 1999 AND 1998
Second quarter net income of $4,404,000 ($0.46 per share-diluted) in 1999
was $529,000 or 13.7% above net income of $3,875,000 ($0.40 per share-diluted)
shown for the same quarter of 1998.
Tax-equivalent net interest income rose 18.3% during the second quarter of
1999 compared to the like three month period of 1998, showing the net effects of
a 17.4% increase in the average earning asset base and a 9 basis point increase
in net interest spread.
The provision for credit losses was $275,000 for the quarters ended June
30, 1999 and June 30, 1998. Net charge-offs of $66,000 were recorded for the
second quarter of 1999, compared to net recoveries of $29,000 for the second
quarter of 1998.
Noninterest income for the second quarter, excluding significant
non-operating items, increased $265,000 or 9.5% in 1999, compared to 1998, due
primarily to increased transaction based service fees.
Noninterest expenses rose 12.6%, attributable largely to higher salaries
and employee benefits and other expenses for reasons discussed above for the
year-to-date comparison.
The second quarter effective tax rate was 26.9% in 1999 versus 29.0% shown
in 1998, as in the year-to-date comparison reflecting the higher level of
certain U.S. Government Agency obligations that are exempt from state income
tax.
12
<PAGE>
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.
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 year 2000.
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
the 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 monthly basis.
13
<PAGE>
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 involved 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 tested systems and
software for Y2K compliance in an effort to identify and correct any errors
identified in the renovation phase. This phase has been completed
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 has been substantially completed.
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
$240,000 in consulting, legal, temporary staffing and other costs. Approximately
$210,000 of these costs were incurred in the first half 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 the effect
on net income for the first half of 1999 of these costs was approximately
$30,000. 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.
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.
14
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting held on April 14, 1999, the
shareholders of the Company elected John Chirtea, Joyce R. Hawkins, Hunter R.
Hollar and Thomas O. Keech as directors for three year terms. There were no
solicitations in opposition to management's nominees and all such nominees were
elected. All of these nominees were incumbent directors. Other directors
continuing in office are Susan D. Goff, Robert L. Mitchell, Robert L. Orndorff,
Jr., David E. Rippeon, Solomon Graham, Gilbert Hardesty, Charles F. Mess, Lewis
R. Schumann and W. Drew Stabler.
Also at the annual meeting, a proposal to approve the 1999 Stock Option
Plan for the Company and its subsidiaries (see discussion in Note 3 to the
Consolidated Financial Statements above on page 6) was adopted by the
shareholders by a vote of 6,663,938 shares in favor and 778,925 shares against,
with 153,344 shares abstaining.
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.
15
<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: August 6, 1999
By: /s/ JAMES H. LANGMEAD
-----------------------------------------------
James H. Langmead
Vice President and Treasurer
Date: August 6, 1999
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 50,181
<INT-BEARING-DEPOSITS> 4,746
<FED-FUNDS-SOLD> 16,964
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 431,345
<INVESTMENTS-CARRYING> 74,936
<INVESTMENTS-MARKET> 71,985
<LOANS> 685,134
<ALLOWANCE> 7,700
<TOTAL-ASSETS> 1,335,261
<DEPOSITS> 964,141
<SHORT-TERM> 223,243
<LIABILITIES-OTHER> 2,128
<LONG-TERM> 38,220
0
0
<COMMON> 9,602
<OTHER-SE> 97,927
<TOTAL-LIABILITIES-AND-EQUITY> 1,335,261
<INTEREST-LOAN> 27,361
<INTEREST-INVEST> 16,650
<INTEREST-OTHER> 758
<INTEREST-TOTAL> 44,769
<INTEREST-DEPOSIT> 13,592
<INTEREST-EXPENSE> 19,831
<INTEREST-INCOME-NET> 24,938
<LOAN-LOSSES> 475
<SECURITIES-GAINS> (56)
<EXPENSE-OTHER> 18,478
<INCOME-PRETAX> 11,890
<INCOME-PRE-EXTRAORDINARY> 11,890
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,658
<EPS-BASIC> 0.90
<EPS-DILUTED> 0.90
<YIELD-ACTUAL> 4.46
<LOANS-NON> 643
<LOANS-PAST> 984
<LOANS-TROUBLED> 2
<LOANS-PROBLEM> 6,253
<ALLOWANCE-OPEN> 7,350
<CHARGE-OFFS> 160
<RECOVERIES> 35
<ALLOWANCE-CLOSE> 7,700
<ALLOWANCE-DOMESTIC> 2,038
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,662
</TABLE>
