<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, 2000
--------------
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
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 April 24, 2000
is 9,584,818 shares.
<PAGE>
SANDY SPRING BANCORP, INC.
INDEX
<TABLE>
<CAPTION>
Page
- ---------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets at
March 31, 2000 and December 31, 1999........................................... 1
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 2000 and 1999.................................... 2
Consolidated Statements of Cash Flows for
the Three Month Periods Ended March 31, 2000 and 1999.......................... 3
Consolidated Statements of Changes in Stockholders' Equity for the
Three month Periods Ended March 31, 2000 and 1999 ............................. 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 ............................................. 11
SIGNATURES............................................................................ 12
</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,
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 37,752 $ 44,701
Federal funds sold 16,293 5,518
Interest-bearing deposits with banks 1,904 3,701
Residential mortgage loans held for sale 959 1,822
Investments available-for-sale (at fair value) 511,482 508,715
Investments held-to-maturity -- fair value of $104,188 (2000) and
$99,189 (1999) 108,934 105,117
Other equity securities 10,087 16,207
Total Loans 855,748 826,125
Less: Allowance for credit losses (8,400) (8,231)
---------- ----------
Net loans 847,348 817,894
Premises and equipment, net 31,528 32,023
Accrued interest receivable 13,186 12,765
Other real estate owned 469 163
Goodwill and other intangible assets 19,772 20,479
Other assets 24,149 22,176
---------- ----------
TOTAL ASSETS $1,623,863 $1,591,281
========== ==========
LIABILITIES
Noninterest-bearing deposits $ 216,085 $ 206,462
Interest-bearing deposits 1,003,555 958,910
---------- ----------
Total deposits 1,219,640 1,165,372
Short-term borrowings 223,785 238,976
Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 29,456 38,120
Accrued interest payable and other liabilities 5,481 5,093
---------- ----------
TOTAL LIABILITIES 1,513,362 1,482,561
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares
issued and outstanding 9,598,853 (2000) and 9,647,975 (1999) 9,599 9,648
Surplus 23,540 24,476
Retained earnings 89,711 86,620
Accumulated other comprehensive loss
(12,349) (12,024)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 110,501 108,720
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,623,863 $1,591,281
========== ==========
</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,
-------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Interest and fees on loans $17,611 $13,362
Interest on loans held for sale 50 138
Interest on deposits with banks 48 75
Interest and dividends on securities:
Taxable 7,793 6,955
Exempt from federal income taxes 1,892 1,442
Interest on federal funds sold 198 203
---------------- --------------
TOTAL INTEREST INCOME 27,592 22,175
Interest Expense:
Interest on deposits 9,102 6,902
Interest on short-term borrowings 3,127 3,082
Interest on long-term borrowings 1,320 99
---------------- --------------
TOTAL INTEREST EXPENSE 13,549 10,083
---------------- --------------
NET INTEREST INCOME 14,043 12,092
Provision for Credit Losses 300 200
---------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 13,743 11,892
Noninterest Income:
Securities (losses) gains (8) 18
Service charges on deposit accounts 1,311 1,040
Gains on mortgage sales 169 625
Trust department income 409 364
Gains on sales of premises and equipment 1,502 1
Other income 1,363 878
---------------- --------------
TOTAL NONINTEREST INCOME 4,746 2,926
Noninterest Expenses:
Salaries and employee benefits 5,662 5,182
Occupancy expense of premises 1,172 681
Equipment expenses 769 592
Marketing 357 511
Outside data services 636 467
Intangible asset amortization 706 93
Other expenses 1,952 1,428
---------------- --------------
TOTAL NONINTEREST EXPENSES 11,254 8,954
---------------- --------------
Income Before Income Taxes 7,235 5,864
Income Tax Expense 2,215 1,610
---------------- --------------
NET INCOME $5,020 $4,254
================ ==============
Basic Net Income Per Share $0.52 $0.44
Diluted Net Income Per Share 0.52 0.44
Dividends Declared Per Share 0.20 0.18
See Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------------
2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
<S> <C> <C>
Net Income $5,020 $ 4,254
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 1,453 603
Provision for credit losses 300 200
Deferred income taxes (442) (234)
Origination of loans held for sale (12,435) (45,499)
Proceeds from sales of loans held for sale 13,467 52,728
Gains on sales of loans held for sale (169) (625)
Securities losses (gains) 8 (18)
Gains on sales of premises and equipment (1,502) (1)
Net change in:
Accrued interest receivable (421) (248)
Accrued income taxes 2,201 1,195
Other accrued expenses (3,168) (2,535)
Other - net (158) 711
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,154 10,531
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks 1,797 (164)
Purchases of investments held-to-maturity (3,820) (16,565)
Purchases of other equity securities (5,038) (940)
Purchases of investments available-for-sale (23,001) (75,104)
Proceeds from sales of investments available-for-sale 14,071 12,093
Proceeds from maturities, calls and principal payments of investments 0 3,598
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 5,643 107,745
available-for-sale
Redemption of Federal Home Loan Bank of Atlanta Stock 11,158 71
Net increase in loans receivable (29,929) (21,004)
Purchases of loans 0 (12,037)
Proceeds from sales of premises and equipment 2,965 57
Expenditures for premises and equipment (1,673) (365)
----------------------------
NET CASH USED BY INVESTING ACTIVITIES (27,827) (2,615)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 49,047 12,330
Net increase (decrease) in time and other deposits 5,221 (2,722)
Net decrease in short-term borrowings (15,291) (32,474)
Proceeds from long-term borrowings 26,436 35,000
Retirement of long-term borrowings (35,000) (46)
Common stock purchased and retired (1,544) (466)
Proceeds from issuance of common stock 559 658
Dividends paid (1,929) (1,727)
----------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 27,499 10,553
----------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,826 18,469
Cash and Cash Equivalents at Beginning of Quarter 50,219 48,198
----------------------------
CASH AND CASH EQUIVALENTS AT END OF QUARTER* $54,045 $66,667
============================
</TABLE>
3
<PAGE>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
Supplemental Disclosures:
Interest payments
Income tax payments $13,816 $9,993
Noncash Investing Activities: 14 91
Transfers from loans to other real estate owned 300 62
Reclassification of borrowings from long-term to short-term 100 11,100
</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, 2000 $9,648 $24,476 $86,620 $(12,024) $108,720
Comprehensive Income:
Net income 5,020 5,020
Other comprehensive loss,
net of tax and reclassification
adjustment (325) (325)
--------
Total comprehensive income 4,695
Cash dividends - $0.20 per share (1,929) (1,929)
Common stock issued pursuant to:
Dividend reinvestment and stock
purchase plan - 26,687 shares 27 532 559
Stock repurchases - 75,809 shares (76) (1,468) (1,544)
------ -------- -------- --------- --------
BALANCES AT MARCH 31, 2000 $9,599 $23,540 $89,711 $(12,349) $110,501
====== ======== ======== ========= ========
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 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
====== ======== ======== ========= ========
</TABLE>
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 1999 Annual
Report to Shareholders. The results shown in this interim report are not
necessarily indicative of results to be expected for the full year 2000.
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 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.
2000 1999
---- ----
Basic:
Net income available to common stockholders $ 5,020 $ 4,254
Average common shares outstanding 9,633 9,582
Basic net income per share $ 0.52 $ 0.44
-----------------------
Diluted:
Net income available to common stockholders $ 5,020 $ 4,254
Average common shares outstanding 9,633 9,582
Stock option adjustment 28 41
-----------------------
Average common shares outstanding - diluted 9,661 9,623
Diluted net income per share $ 0.52 $ 0.44
=======================
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; 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; 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.
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 thirty community offices in Montgomery, Howard, Prince George's
and Anne Arundel Counties in Maryland and in Fairfax County, Virginia, together
with an insurance agency. The Company has established a strategy of
independence, and intends to establish or acquire additional offices or banking
or nonbanking organizations as appropriate opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $1,623,863,000 at March 31, 2000,
compared to $1,591,281,000 at December 31, 1999, increasing $32,582,000 or 2.0%
during the first quarter of 2000. Earning assets increased $38,202,000 or 2.6%
to $1,505,407,000 at March 31, 2000, from $1,467,205,000 at December 31, 1999.
Total loans rose 3.6% or $29,623,000 during the first quarter of 2000
to $855,748,000. Of the major loan categories, consumer loans rose $16,770,000
(up 9.1%) due largely to growth in marine loan financings, mortgage loans
increased $12,185,000 (up 2.6%) with the majority attributable to an increase in
1-4 family residential first mortgages, and commercial loans increased
$1,995,000 (up 2.2%). Construction loans decreased $1,327,000 (down 1.7%) from
the end of 1999 to first quarter-end 2000 reflecting a decline in residential
construction loans. Also, residential mortgage loans held for sale decreased by
$863,000 (down 47.4%) from December 31, 1999 to $959,000 at March 31, 2000.
The investment portfolio increased slightly by $464,000 or 0.1% from
December 31, 1999 to March 31, 2000, as small increases in available-for-sale
and held-to-maturity securities were largely offset by a decline in other equity
securities caused by the sale of excess Federal Home Loan Bank of Atlanta stock
following a change in regulation. The aggregate of federal funds sold and
interest-bearing deposits with banks nearly doubled, rising $8,978,000 during
the quarter to $18,197,000 at March 31, 2000.
Total deposits were $1,219,640,000 at March 31, 2000, increasing
$54,268,000 or 4.7% from $1,165,372,000 at December 31, 1999. While all of the
major categories of deposits rose, growth in interest-bearing demand deposits
and money market savings accounts provided the majority of the overall increase.
During this period, the increase in core deposits exceeded the amount of funds
required to support the growth in total loans by more than $20,000,000. Total
borrowings decreased by 7.6% or $23,855,000, reflecting the net effect of
declines in federal funds purchased and short- and long-term advances from the
Federal Home Loan Bank of Atlanta and an increase in repurchase agreements
related primarily to commercial cash management services.
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
7
<PAGE>
March 31, 2000, the simulation analysis indicates that the Bank's net interest
income would decline by 9% 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 12%, as
compared to a policy limit of 25%.
Liquidity
The Company'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 $30,174,000 or 1.9% of total assets at March 31, 2000. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $(40,918,000) or (2.5)% of total assets. Given
external sources of liquidity available to the Company, investments
available-for-sale not included as liquid assets in the computations above, and
budgeted deposit growth, management believes the liquidity position at March 31,
2000 is appropriate.
Capital Management
The Company recorded a total risk-based capital ratio of 14.92% at
March 31, 2000, compared to 15.23% at December 31, 1999; a tier 1 risk-based
capital ratio of 14.06%, compared to 14.34%; and a capital leverage ratio of
8.66%, compared to 8.74%. Declines were attributable to asset growth and share
repurchases. Capital adequacy, as measured by these ratios, was well above
regulatory requirements. Management believes the level of capital at March 31,
2000 was appropriate.
Stockholders' equity for March 31, 2000 totaled $110,501,000 (net of
$12,349,000 reported for accumulated other comprehensive loss), representing an
increase of 1.6% from $108,720,000 at December 31, 1999 (net of $12,024,000
reported for accumulated other comprehensive loss). The Company's accumulated
other comprehensive loss category is comprised of net unrealized losses on
available-for-sale securities. Internal capital generation (net income less
dividends) provided $3,091,000 in additional equity during the first quarter of
2000, representing an annualized rate (when considered as a percentage of
average total stockholders' equity) of 11.6% versus 9.4% for the year ended
December 31, 1999. When the nonrecurring gain of $908,000, after tax, on the
sale of a building during the first quarter of 2000 is excluded from net income,
internal capital formation was $2,183,000 at a rate of 8.2%.
External capital formation, primarily from stock issuances under the
dividend reinvestment and stock purchase plan, totaled $559,000 during the first
quarter of 2000. However, share repurchases amounted to $1,544,000 through March
31, 2000, for a net decrease in stockholders' equity from these sources of
$985,000.
First quarter dividends were $0.20 per share in 2000, compared to
$0.18 per share in 1999, for dividend payout ratios of dividends declared per
share to diluted net income per share of 38.46% and 40.91%, respectively.
B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Net income for the first three months of the year rose $766,000 or
18.0% in 2000 over 1999, to $5,020,000 from $4,254,000. Diluted earnings per
share for the first quarter were $0.52 in 2000 and $0.44 in 1999. The annualized
return on average assets for the first three months of the year was 1.27% in
2000, compared to 1.30% in 1999. The annualized returns on average equity for
the same three month periods were 18.90% and 15.54% in 2000 and 1999,
respectively. Excluding significant non-operating items of noninterest income
and expense, which include gains and losses on sales of securities, other real
estate owned and premises and equipment as well as intangible asset
amortization, first quarter net income was $4,545,000 ($0.47 per diluted share)
in 2000, or 5.7% above $4,299,000 ($0.45 per diluted share) in 1999. These
results primarily reflect exclusion of an after tax gain of $908,000 from the
sale of a building in the first quarter of 2000, partially offset by a $371,000
after tax increase in amortization expense. The Company is amortizing its
intangible assets, most of which were acquired in the third quarter of 1999,
over a relatively short period of time. This charge is a non-cash item and does
not affect cash earnings.
8
<PAGE>
Net Interest Income
Net interest income for the first three months of the year was
$14,043,000 in 2000, an increase of 16.1% over $12,092,000 in 1999, reflecting a
higher volume of average earning assets.
For the first three months, tax-equivalent interest income increased
$5,755,000 or 25.0% in 2000, compared to 1999. Average earning assets rose 18.7%
over the prior year period while the average yield earned on those assets
increased 33 basis points to 7.83% from 7.50%. Comparing the first three months
of 2000 versus 1999, average loans grew 33.0% to $839,662,000 (56.8% of average
earning assets, versus 50.7% a year ago), while the average yield on loans
decreased 20 basis points to 8.45% from 8.65%. Except for residential
construction, all major loan categories increased, with the remainder of the
real estate sector, especially residential mortgages, accounting for most of the
overall increase. Average consumer loans also rose significantly, due in large
part to increased marine loan financings and more emphasis on selling home
equity loans and lines in 2000. Average total securities increased 5.7% to
$624,116,000 (42.2% of average earning assets, versus 47.4% a year ago) and
recorded a 65 basis point increase in average yield to 7.03% from 6.38%.
First quarter interest expense increased $3,466,000 or 34.4% in 2000
over 1999, due to the combined effects of 23.1% or $241,575,000 higher average
interest-bearing liabilities and a 33 basis point increase in the average rate
paid for those funds to 4.23% from 3.90%. Most of the increase in average
balance was due to the acquisition of seven branch offices in the third quarter
of 1999.
Credit Risk Management
During the first three months of the year, the provision for credit
losses was $300,000 in 2000, compared to $200,000 in 1999. Net charge-offs of
$131,000 were recorded for the three month period ended March 31, 2000 while
there were net charge-offs of $59,000 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, 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 0.98% of total loans at March 31, 2000 and 1.10%
at December 31, 1999. Management believes the allowance for credit losses at
March 31, 2000 was adequate.
Nonperforming loans decreased by $452,000 to $1,533,000 and total
nonperforming assets decreased by $146,000 to $2,002,000 from December 31, 1999
to March 31, 2000. Expressed as a percentage of total assets, nonperforming
assets were 0.12% at March 31, 2000 and 0.13% at December 31, 1999. The
allowance for credit losses represented 548% of nonperforming loans at March 31,
2000, compared to coverage of 415% at December 31, 1999. 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 $469,000 at March 31, 2000, compared to $163,000 at
December 31, 1999. The balance of impaired loans at March 31, 2000 was $350,000,
with reserves against those loans totalling $100,000, versus a balance at
December 31, 1999 of $219,000, with reserves of $50,000.
9
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
3 Months Ended 12 Months Ended
March 31, 2000 December 31, 1999
- --------------------------------------------------------------------------------
Balance, January 1 $8,231 $7,350
Provision for credit losses 300 1,216
Loan charge-offs:
Real estate-mortgage (20) (105)
Real estate-construction 0 0
Consumer (83) (225)
Commercial (34) (85)
--------------- --------------
Total charge-offs (137) (415)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 4 48
Commercial 2 32
--------------- --------------
Total recoveries 6 80
--------------- --------------
Net charge-offs (131) (335)
--------------- --------------
BALANCE, PERIOD END $8,400 $8,231
=============== ==============
Net charge-offs to average loans
(annual basis) 0.06% 0.05%
Allowance to total loans 0.98% 1.00%
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
March 31, December 31,
2000 1999
- ------------------------------------------------------------------------------
Non-accrual loans $ 409 $ 275
Loans 90 days past due 1,124 1,710
Restructured loans 0 0
--------------- --------------
Total Nonperforming Loans* 1,533 1,985
Other real estate owned 469 163
--------------- --------------
TOTAL NONPERFORMING ASSETS $2,002 $ 2,148
=============== ==============
Nonperforming assets to total assets 0.12% 0.13%
- -----------------------------------------------------------------------------
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $6,397,000 at March 31,
2000, compared to $5,401,000 at December 31, 1999. 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 62.3% or $1,821,000 during the three
months ended March 31, 2000 versus 1999. Excluding the $1,502,000 gain on the
sale of a building in the first quarter of 2000 and other non-operating items,
the increase in noninterest income was 12.0% or $348,000, and was primarily
attributable to growth in transaction based service fees and income from sales
of investment products. First quarter gains on mortgage sales declined sharply
in 2000, by 73.0% or $456,000, reflecting lower origination volumes from higher
mortgage rates and the limited number of homes on the resale market.
For the three months ended March 31st, noninterest expenses increased
25.7% or $2,300,000 to $11,254,000 in 2000 from $8,954,000 in 1999. 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. Excluding
non-operating amortization of intangible assets, the increase in noninterest
expenses was 19.0% or $1,687,000 in the first quarter of 2000 versus the same
period of 1999. This increase was due in large part to higher salary, occupancy
and equipment expenses resulting from the branch acquisition during 1999's third
quarter along with openings of a branch office and a regional lending and sales
center during 2000's first quarter. Average full-time equivalent employees
increased by 43 persons (up 9.9%) to 476 during the first quarter of 2000
compared to 433 during the first quarter of 1999. With the increase in staff,
the ratio of net income, excluding non-operating items, per average
full-time-equivalent employee decreased to $9,500 from $9,900.
Income Taxes
The effective tax rate for the first quarter of the year was 30.6% in
2000, compared to 27.5% in 1999. Most of this increase was due to the fully
taxable nature of the $1,502,000 gain on the sale of a building in the first
quarter of 2000.
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,
1999.
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
--- -------
10* Change in Control Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank of Maryland, and Ronald E.
Kuykendall dated January 10, 2000.
27 Financial Data Schedule
* Compensatory agreement.
(b) Reports on Form 8-K. None.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /s/ Hunter R. Hollar
-----------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: May 8, 2000
By: /s/ James H. Langmead
-----------------------------------------
James H. Langmead
Vice President and Treasurer
Date: May 8, 2000
12
<PAGE>
Exhibit 10
CHANGE IN CONTROL AGREEMENT
- --------------------------------------------------------------------------------
THIS AGREEMENT (the "Agreement"), made this 10th day of January, 2000
(the "Effective Date"), by and among Sandy Spring Bancorp, Inc., a registered
bank holding company ("Bancorp"), Sandy Spring National Bank of Maryland, a
national banking association and wholly owned subsidiary of Bancorp with its
main office in Olney, Maryland (the "Bank"), and Ronald E. Kuykendall (the
"Officer").
W I T N E S S E T H
WHEREAS, the Officer has accepted employment with Bancorp as its Vice
President and Secretary and with the Bank as its Senior Vice President and
General Counsel.
WHEREAS, Bancorp, the Bank, and the Officer each desire that the
Officer be provided with certain benefits in the event of a Change in Control,
as defined below.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. Definitions:
a. Change in Control. A "Change in Control" shall be deemed to
occur on the earliest of any of the following events after the date of
this Agreement:
i. The acquisition by any entity, person or group (other
than the acquisition by a tax-qualified retirement plan
sponsored by Bancorp or the Bank) of beneficial ownership, as
that term is defined in Rule 13d-3 under the Securities
Exchange Act of 1934, of more than 25% of the outstanding
capital stock of Bancorp or the Bank entitled to vote
generally for the election of directors ("Voting Stock");
ii. The commencement by any entity, person, or group
(other than Bancorp or the Bank, a subsidiary of Bancorp or
the Bank, or a tax-qualified retirement plan sponsored by
Bancorp or the Bank) of a tender offer or an exchange offer
for more than 20% of the outstanding Voting Stock of Bancorp
or the Bank;
iii. The effective time of (a) a merger or consolidation of
Bancorp or the Bank with one or more other corporations as a
result of which the holders of the outstanding Voting Stock of
Bancorp or the Bank immediately prior to such merger exercise
voting control over less than 80% of the Voting Stock of the
surviving or resulting corporation, or (b) a transfer of
substantially all of the property of Bancorp or the Bank other
than to an entity of which Bancorp or the Bank owns at least
80% of the Voting Stock;
iv. Upon the acquisition by any entity, person, or group of
the control of the election of a majority of the Bank's or
Bancorp's directors;
v. At such time that, during any period of two consecutive
years, individuals who at the beginning of such period
constitute the Board of Directors ("Board") of Bancorp or the
Board of the Bank (the "Continuing Directors") cease for any
reason to constitute at least two-thirds of such Board,
provided that any individual whose election or nomination for
election as a member of the Board was approved by a vote of at
least two-thirds of the Continuing Directors of such Board
then in office shall be considered a Continuing Director.
b. Covered Period. The "Covered Period" shall mean the period
beginning six months before a Change in Control and ending at the end
of the term specified in Section 2 hereof.
c. Good Reason. "Good Reason" shall be deemed to exist at the
time that any of the following events occurs without the Officer's
express written consent:
i. A material reduction in the Officer's responsibilities
or authority in connection with his employment by Bancorp or
the Bank;
10-1
<PAGE>
ii. Assignment to the Officer of duties for which he is not
reasonably equipped by his skills and experience;
iii. A reduction in salary or material reduction in
benefits;
iv A requirement that the Officer relocate his principal
business office or his principal place of residence outside
Montgomery County, Maryland, or the assignment to the Officer
of duties that would reasonably require such a relocation; or
v. Failure to provide office facilities, secretarial
services, and other administrative services to Officer that
are substantially equivalent to the facilities and services
provided to the Officer immediately after the Effective Date
(excluding brief periods during which office facilities may be
temporarily unavailable due to fire, natural disaster, or
other calamity).
Notwithstanding the foregoing, a reduction or elimination of
the Officer's benefits under one or more benefit plans maintained by
Bancorp or the Bank as part of a good faith, overall reduction or
elimination of such plan or plans or benefits thereunder applicable to
all participants in a manner that does not discriminate against the
Officer (except as such discrimination may be necessary to comply with
law) shall not constitute an event of Good Reason or a material breach
of this Agreement, provided that benefits of the type or to the
general extent as those offered under such plan or plans prior to such
reduction or elimination are not available to other officers of
Bancorp or the Bank or any company that controls either of them under
a plan or plans in or under which the Officer is not entitled to
participate and to receive benefits on a fair and nondiscriminatory
basis.
d. Just Cause. Termination for "Just Cause" shall mean termination
of employment by reason of the Officer's:
i. Personal dishonesty;
ii. Incompetence;
iii. Willful misconduct;
iv. Breach of fiduciary duty involving personal profit;
v. Intentional failure to perform duties; or
vi. Willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final
cease-and-desist order.
Bancorp or the Bank shall determine if Just Cause exists with respect
to its employment of the Officer in the exercise of its good faith
discretion.
e. Total Annual Compensation. For purposes of this Agreement,
Total Annual Compensation shall mean:
i. One-year's base salary at the highest rate in effect
in the period beginning six months before the last Change in
Control to occur before termination of the Officer's
employment; plus
ii. Other compensation, including, without limitation,
bonus payments, at the rate paid for (i) the calendar year
preceding such Change in Control or (ii) the calendar year
preceding termination of the Officer's employment, whichever
is greater, but shall not include the value of benefits that
are not subject to current federal income taxation to the
Officer. Such other compensation for a calendar year shall be
annualized on a monthly basis based upon the number of months
in the calendar year in which the Officer was employed.
2. Term. The term of this Agreement shall be the period commencing on the
----
Effective Date and ending on the last moment of the second anniversary of the
Effective Date.
3. Termination in Connection with a Change in Control.
--------------------------------------------------
10-2
<PAGE>
a. If, within the Covered Period, Bancorp or the Bank shall
terminate the Officer's employment without Just Cause or the Officer
shall terminate his employment with Good Reason, the Bank shall, within
ten calendar days of the termination of Officer's employment, make a
lump-sum cash payment to him equal to two (2) times his Total Annual
Compensation.
b. Also in the event of such a termination, the Officer shall, for a
period of 365 days following his termination of employment, continue to
participate in any benefit plans of Bancorp or the Bank that provide
health (including medical and dental), life, or disability insurance or
similar coverage in which he participated immediately prior to
termination of his employment, upon terms no less favorable than the
most favorable terms provided to senior officers of the Bank during
such period.
4. Adjustment of Certain Payments and Benefits.
-------------------------------------------
a. In the event that payments pursuant to this Agreement (including,
without limitation, any payment under any plan, program, or arrangement
referred to in Section 3 hereof) would result in the imposition of a
penalty tax pursuant to Section 280G of the Internal Revenue Code, such
payments shall be reduced to equal the maximum amount that may be paid
under such Section 280G without exceeding such limits. In the event any
such reduction in payments is necessary, the Officer may determine, in
his sole discretion, which categories of payments (including, without
limitation, the value of benefits, acceleration of vesting, or receipt
of benefits or amounts) are to be reduced or eliminated.
b. Payments made to the Officer pursuant to this Agreement or
otherwise, are subject to and conditioned upon their compliance with
Section 18(k) of the Federal Deposit Insurance Act ("FDIA"), relating
to "golden parachute" and indemnification payments and certain other
benefits.
5. Moving Allowance. The Officer agrees to repay, on a pro-rata basis, the
----------------
$20,000 moving allowance he has received in connection with his hiring within
one day of his voluntary termination or his termination by Bancorp or the Bank
for Just Cause if any such termination occurs before the end of the term
specified in Section 2 hereof. The percentage of such moving allowance that the
Officer must repay is equal to the percentage of 730 days represented by the
unexpired term of this Agreement, in days, at the date of such termination.
6. Confidentiality. The Officer agrees to maintain the confidentiality of
---------------
any and all information concerning the operation or financial status of Bancorp,
the Bank, and any of their subsidiaries; the names or addresses of any of the
borrowers, depositors, and other customers of any such companies; any
information concerning or obtained from such customers; and any other
information concerning Bancorp or the Bank or any of their subsidiaries to which
he may be exposed during the course of his employment. The Officer further
agrees that, unless required by law or specifically permitted by Bancorp or the
Bank in writing, he will not disclose to any person or entity, either during or
subsequent to his employment, any of the above-mentioned information which is
not generally known to the public, nor shall he employ such information in any
way other than for the benefit of Bancorp and the Bank.
7. Successors and Assigns.
----------------------
a. This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of Bancorp or the Bank that shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of Bancorp
or the Bank, respectively.
b. Since Bancorp and the Bank each is contracting for the unique and
personal skills of the Officer, the Officer shall be precluded from
assigning or delegating his rights or duties hereunder without first
obtaining the written consent of Bancorp and the Bank.
8. No Mitigation. The Officer shall not be required to mitigate the
-------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Officer in any subsequent employment.
9. No Plan Created. The Officer, Bancorp, and the Bank expressly declare
---------------
and agree that this Agreement was negotiated among them and that no provision or
provisions of this Agreement are intended to, or shall be deemed to, create any
plan for purposes of the Employee Retirement Income Security Act or any other
law or regulation, and Bancorp, the Bank, and the Officer each expressly waives
any right to assert the contrary. Any assertion in any judicial
10-3
<PAGE>
or administrative filing, hearing, or process by or on behalf of the Officer,
Bancorp, or the Bank that such a plan was so created by this Agreement shall be
deemed a material breach of this Agreement by the party making such an
assertion.
10. No Additional Rights. This Agreement does not confer any right to
--------------------
employment or any other right not specifically stated herein. Any assertion in
any judicial or administrative filing, hearing, or process by or on behalf of
the Officer, Bancorp, or the Bank that it does so shall be deemed a material
breach of this Agreement by the party making such an assertion.
10-4
<PAGE>
11. Certain Regulatory Events.
-------------------------
a. If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the FDIA, all obligations of the
Bank under this Agreement shall terminate as of the effective date of
the order, but vested rights of the parties shall not be affected.
b. If the Bank is in default (as defined in Section 3(x)(1) of
FDIA), all obligations of the Bank under this Agreement shall terminate
as of the date of default, but vested rights of the parties shall not
be affected.
c. If a notice served under Sections 8(e)(3) or 8(g)(1) of the FDIA
suspends and/or temporarily prohibits the Officer from participating in
the conduct of the Bank's affairs, the Bank's obligations under this
Agreement shall be suspended as of the date of such service, unless
stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may, in its discretion, (i) pay the Officer all or
part of the compensation withheld while its contract obligations were
suspended, and (ii) reinstate (in whole or in part) any of its
obligations that were suspended.
The occurrence of any of the events described in paragraphs a,
b, and c above may be considered by Bancorp or the Bank in connection
with a termination for Just Cause.
12. Notices. All notices, requests, demands and other communications in
-------
connection with this Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand or 48 hours after mailing at any general
or branch United States Post Office, by registered or certified mail, postage
prepaid, addressed as follows, or to such other address as shall have been
designated in writing by the addressee:
a. If to the Bank:
Sandy Spring National Bank of Maryland
17801 Georgia Avenue
Olney, Maryland 20832
Attention: President and Chief Executive Officer
Copy to: Executive Vice President and Chief Financial Officer
b. If to the Officer:
Ronald E. Kuykendall
13. Joint and Severally Liability; Payments by Bancorp and the Bank. To the
---------------------------------------------------------------
extent permitted by law, except as otherwise provided herein, Bancorp and the
Bank shall be jointly and severally liable for the payment of all amounts due
under this Agreement, provided that Bancorp shall not be required by this
Agreement to make any payment to the Officer unless and to the extent that the
Bank does not fulfill the obligations to the Officer hereunder for such
payments.
14. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless made in writing and signed by all of the parties.
15. Applicable Law. Except to the extent preempted by Federal law, the laws
--------------
of the State of Maryland, without regard to its conflict of laws principles,
shall govern this Agreement in all respects, whether as to its validity,
construction, capacity, performance or otherwise.
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Headings. Headings contained herein are for convenience of reference
--------
only.
10-5
<PAGE>
18. Entire Agreement. This Agreement, together with any understanding or
----------------
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement among the parties hereto with respect to the subject matter
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first set forth above.
SANDY SPRING BANCORP, INC.
By: /s/James H. Langmead
Title: Vice President and Treasurer
SANDY SPRING NATIONAL BANK OF MARYLAND
By: /s/James H. Langmead
Title: Executive Vice President and Chief
Financial Officer
OFFICER
/s/Ronald E. Kuykendall
Ronald E. Kuykendall
10-6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 37,752
<INT-BEARING-DEPOSITS> 1,904
<FED-FUNDS-SOLD> 16,293
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 511,482
<INVESTMENTS-CARRYING> 108,934
<INVESTMENTS-MARKET> 104,188
<LOANS> 848,307
<ALLOWANCE> 8,400
<TOTAL-ASSETS> 1,623,863
<DEPOSITS> 1,219,640
<SHORT-TERM> 223,785
<LIABILITIES-OTHER> 5,481
<LONG-TERM> 64,456
0
0
<COMMON> 9,599
<OTHER-SE> 100,902
<TOTAL-LIABILITIES-AND-EQUITY> 1,623,863
<INTEREST-LOAN> 17,611
<INTEREST-INVEST> 9,685
<INTEREST-OTHER> 296
<INTEREST-TOTAL> 27,592
<INTEREST-DEPOSIT> 9,102
<INTEREST-EXPENSE> 13,549
<INTEREST-INCOME-NET> 14,043
<LOAN-LOSSES> 300
<SECURITIES-GAINS> (8)
<EXPENSE-OTHER> 11,354
<INCOME-PRETAX> 7,235
<INCOME-PRE-EXTRAORDINARY> 7,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,020
<EPS-BASIC> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 4.15
<LOANS-NON> 409
<LOANS-PAST> 1,124
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,397
<ALLOWANCE-OPEN> 8,231
<CHARGE-OFFS> 137
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 8,400
<ALLOWANCE-DOMESTIC> 2,042
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,358
</TABLE>
