<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-----------------------
Commission File Number: O-19065
-------
Sandy Spring Bancorp, Inc.
-------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares of common stock outstanding as of October 25, 2000
is 9,530,372 shares.
<PAGE>
SANDY SPRING BANCORP, INC.
INDEX
Page
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at
September 30, 2000 and December 31, 1999.....................................1
Consolidated Statements of Income for the Three and
Nine Month Periods Ended September 30, 2000 and 1999 ....................... 2
Consolidated Statements of Cash Flows for
the Nine Month Periods Ended September 30, 2000 and 1999.................... 3
Consolidated Statements of Changes in Stockholders' Equity for
the Nine Month Periods Ended September 30, 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
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................... 14
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ......................................... 14
SIGNATURES........................................................................ 15
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands, except per share data) 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $33,452 $44,701
Federal funds sold 42,327 5,518
Interest-bearing deposits with banks 1,085 3,701
Residential mortgage loans held for sale 2,764 1,822
Investments available-for-sale (at fair value) 495,129 508,715
Investments held-to-maturity -- fair value of $132,097 (2000) and
$99,189 (1999) 134,881 105,117
Other equity securities 14,187 16,207
Total Loans 907,444 826,125
Less: Allowance for credit losses (9,697) (8,231)
---------------- ----------------
Net loans 897,747 817,894
Premises and equipment, net 31,399 32,023
Accrued interest receivable 14,013 12,765
Other real estate owned 152 163
Goodwill and other intangible assets, net 18,360 20,479
Other assets 24,929 22,176
---------------- ----------------
TOTAL ASSETS $1,710,425 $1,591,281
================ ================
LIABILITIES
Noninterest-bearing deposits $220,857 $206,462
Interest-bearing deposits 990,513 958,910
---------------- ----------------
Total Deposits 1,211,370 1,165,372
Short-term borrowings 312,578 238,976
Guaranteed preferred beneficial interests in the Company's
subordinated debentures 35,000 35,000
Other long-term borrowings 28,982 38,120
Accrued interest and other liabilities 7,064 5,093
---------------- ----------------
TOTAL LIABILITIES 1,594,994 1,482,561
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares
issued and outstanding 9,537,108 (2000) and 9,647,975 (1999)
9,537 9,648
Surplus 22,204 24,476
Retained earnings 94,215 86,620
Accumulated other comprehensive loss (10,525) (12,024)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 115,431 108,720
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,710,425 $1,591,281
================ ================
See Notes to Consolidated Financial Statements.
</TABLE>
1
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $19,382 $14,774 $55,601 $42,135
Interest on loans held for sale 88 82 193 320
Interest on deposits with banks 18 23 89 148
Interest and dividends on securities:
Taxable 8,448 6,466 24,736 20,108
Nontaxable 1,899 1,624 5,699 4,632
Interest on federal funds sold 565 154 955 549
----------------------------- ---------------------------
TOTAL INTEREST INCOME 30,400 23,123 87,273 67,892
Interest Expense:
Interest on deposits 10,317 6,728 29,073 20,320
Interest on short-term borrowings 4,604 2,737 11,311 8,430
Interest on long-term borrowings 1,368 447 4,047 993
----------------------------- ---------------------------
TOTAL INTEREST EXPENSE 16,289 9,912 44,431 29,743
----------------------------- ---------------------------
NET INTEREST INCOME 14,111 13,211 42,842 38,149
Provision for Credit Losses 800 266 2,090 741
----------------------------- ---------------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 13,311 12,945 40,752 37,408
Noninterest Income:
Securities gains 218 88 265 32
Service charges on deposit accounts 1,524 1,141 4,303 3,276
Gains on mortgage sales 335 335 711 1,557
Trust department income 396 418 1,241 1,159
Gain on sale of premises 0 0 1,470 0
Other income 1,859 1,122 4,922 2,985
----------------------------- ---------------------------
TOTAL NONINTEREST INCOME 4,332 3,104 12,912 9,009
Noninterest Expenses:
Salaries and employee benefits 7,123 5,644 18,875 16,362
Occupancy expense 1,203 778 3,585 2,166
Equipment expenses 813 662 2,398 1,903
Marketing 269 300 1,070 1,108
Outside data services 582 474 1,798 1,399
Intangible asset amortization 706 93 2,118 278
Other expenses 1,869 1,555 6,007 4,768
----------------------------- ---------------------------
TOTAL NONINTEREST EXPENSES 12,565 9,506 35,851 27,984
----------------------------- ---------------------------
Income Before Income Taxes 5,078 6,543 17,813 18,433
Income Tax Expense 952 1,829 4,467 5,061
----------------------------- ---------------------------
NET INCOME $4,126 $4,714 $13,346 $13,372
============================= ===========================
Basic Net Income Per Share $0.43 $0.49 $1.39 $1.39
Diluted Net Income Per Share 0.43 0.49 1.39 1.39
Dividends Declared Per Share 0.20 0.19 0.60 0.56
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------
2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $13,346 $13,372
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,287 1,857
Provision for credit losses 2,090 741
Deferred income taxes 768 (358)
Origination of loans held for sale (46,783) (115,263)
Proceeds from sales of loans held for sale 46,552 127,438
Gains on sales of loans held for sale (711) (1,557)
Securities gains (265) (32)
Gain on sale of premises (1,470) 0
Net change in:
Accrued interest receivable (1,248) (548)
Accrued income taxes 563 130
Other accrued expenses 54 4,003
Other - net (3,926) (19,017)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,257 10,766
Cash Flows from Investing Activities:
Net decrease (increase) in interest-bearing deposits with banks 2,616 (2,581)
Purchases of investments held-to-maturity (29,774) (43,744)
Purchases of other equity securities (10,063) (4,447)
Purchases of investments available-for-sale (61,813) (303,902)
Proceeds from sales of investments available-for-sale 23,643 54,104
Proceeds from maturities, calls and principal payments of investments 0 3,598
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 54,554 233,492
available-for-sale
Redemption of Federal Home Loan Bank of Atlanta stock 12,083 6,222
Proceeds from sales (purchases) of other real estate owned 380 (90)
Net increase in loans receivable (81,625) (116,962)
Purchases of loans 0 (33,014)
Proceeds from sale of premises 2,965 0
Expenditures for premises and equipment (2,991) (3,435)
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (90,025) (210,759)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 49,868 157,703
Net (decrease) increase in time and other deposits (3,870) 54,898
Net increase (decrease) in short-term borrowings 73,402 (47,200)
Proceeds from long-term borrowings 26,062 35,000
Retirement of long-term borrowings (35,000) (46)
Common stock purchased and retired (3,983) (832)
Proceeds from issuance of common stock 1,600 1,887
Dividends paid (5,751) (5,372)
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102,328 196,038
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,560 (3,955)
Cash and Cash Equivalents at Beginning of Period 50,219 48,198
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD* $75,779 $44,243
=============== ===============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
<S> <C> <C>
Supplemental Disclosures:
Interest payments $43,581 $29,410
Income tax payments 4,834 4,771
Noncash Investing Activities:
Transfers from loans to other real estate owned 306 62
Reclassification of borrowings from long-term to short-term 200 11,200
</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 TOTAL
Compre- STOCK-
Retained hensive HOLDERS'
Common Surplus Earnings Income EQUITY
Stock (loss)
----------------------------------------------------------------------------------------------------------------
<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 13,372 13,372
Other comprehensive income (loss):
unrealized loss on securities
net of tax and reclassification
adjustment (10,000) (10,000)
------------
Total comprehensive income 3,372
Cash dividends - $0.56 per share (5,372) (5,372)
Common stock issued pursuant to:
Incentive stock option plan -
1,165 shares 1 28 29
Dividend reinvestment and stock
purchase plan - 68,433 shares 68 1,790 1,858
Stock repurchases - 29,529 shares (29) (803) (832)
---------- ---------- ---------- ----------- ------------
BALANCES AT SEPT. 30, 1999 $9,626 $23,928 $84,305 $(7,867) $109,992
========== ========== ========== =========== ============
BALANCES AT JANUARY 1, 2000 $9,648 $24,476 $86,620 $(12,024) $108,720
Comprehensive Income:
Net income 13,346 13,346
Other comprehensive loss:
unrealized loss on securities
net of tax and reclassification
adjustment 1,499 1,499
------------
Total comprehensive income 14,845
Cash dividends - $0.60 per share (5,751) (5,751)
Common stock issued pursuant to:
Dividend reinvestment and stock
purchase plan - 74,631 shares 75 1,525 1,600
Stock repurchases - 185,498 shares (186) (3,797) (3,983)
---------- ---------- ---------- ----------- ------------
BALANCES AT SEPT. 30, 2000 $9,537 $22,204 $94,215 $(10,525) $115,431
========== ========== ========== =========== ============
</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
September 30 are 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.
<TABLE>
<CAPTION>
(Dollars and amounts in thousands, except Three Months Ended Nine Months Ended
Per share data) September 30, September 30,
------------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic:
Net income available to common stockholders $4,126 $4,714 $13,346 $13,372
Average common shares outstanding 9,546 9,606 9,586 9,593
Basic net income per share $0.43 $0.49 $1.39 $1.39
==============================================================
Diluted:
Net income available to common stockholders $4,126 $4,714 $13,346 $13,372
Average common shares outstanding 9,546 9,606 9,586 9,593
Stock option adjustment 28 33 28 37
--------------------------------------------------------------
Average common shares outstanding-diluted 9,574 9,639 9,614 9,630
Diluted net income per share $0.43 $0.49 $1.39 $1.39
==============================================================
</TABLE>
6
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes forward looking statements in this management's
discussion and analysis that are subject to risks and uncertainties. These
forward looking statements include: statements of goals, intentions and
expectations; estimates of risks and of future costs and benefits; projections
of potential liquidity needs and sources; assessments of probable future loan
losses; 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 twenty-nine community offices in Montgomery, Howard, Prince
George's and Anne Arundel Counties in Maryland, together with an insurance
agency. Management closed the Fairfax county, Virginia branch effective August
31, 2000, recording a minimal gain on the sale of its deposits. This branch was
one of seven branches acquired from Mellon Bank (MD), NA, in September 1999.
The Company offers a broad range of financial services to consumers and
businesses in this market area. Through September 30, 2000, year-to-date average
commercial and commercial real estate loans accounted for approximately 45% of
the Company's loan portfolio, and year-to-date average consumer and consumer
real estate loans accounted for approximately 55%. Consumer deposits accounted
for approximately 80% of total average deposits for the period. Approximately
57% of the Company's revenues for the first nine months of 2000 were derived
from consumer loans, consumer deposits and other consumer services. The Company
has established a strategy of independence, and intends to establish or acquire
additional offices, banking organizations and nonbanking organizations as
appropriate opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $1,710,425,000 at September 30, 2000,
compared to $1,591,281,000 at December 31, 1999, increasing $119,144,000 or 7.5%
during the first nine months of 2000. Earning assets increased $130,612,000 or
8.9% to $1,597,817,000 at September 30, 2000, from $1,467,205,000 at December
31, 1999.
Total loans rose 9.8% or $81,319,000 during the first nine months of
2000 to $907,444,000. Of the major loan categories, consumer loans rose
$28,765,000 (up 15.7%) reflecting growth in home equity products, mortgage loans
increased $27,959,000 (up 5.9%), attributable primarily to an increase in 1-4
family residential first mortgages, commercial loans increased $17,728,000 (up
19.1%) and construction loans increased $6,867,000 (up 8.9%) with growth
occurring mainly in the commercial construction portfolio. Additionally,
residential mortgage loans held for sale increased by $942,000 (up 51.7%) from
December 31, 1999 to $2,764,000 at September 30, 2000.
Analysis of Loans
The following table presents the trends in the composition of the loan portfolio
at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 2000 % 1999 %
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate - mortgage $501,036 55% $473,077 57%
Real estate - construction 83,844 9 76,977 10
Consumer 212,162 24 183,397 22
Commercial 110,402 12 92,674 11
----------------------------------------------------------
Total Loans 907,444 100% 826,125 100%
========= =========
Less: Allowance for credit losses
(9,697) (8,231)
-------------------- --------------------
NET LOANS $897,747 $817,894
==================== ====================
</TABLE>
7
<PAGE>
The investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities, increased $14,158,000 or 2.2% from
December 31, 1999 to September 30, 2000. This change reflected higher
held-to-maturity securities as the Company increased its holdings of tax-exempt
securities, partially offset by decreases in the other investment categories.
Federal funds sold increased by $36,809,000 during the first nine months of 2000
reaching $43,412,000 at September 30, 2000.
Total deposits were $1,211,370,000 at September 30, 2000, increasing
$45,998,000 or 3.9% from $1,165,372,000 at December 31, 1999. Growth was
achieved for noninterest-bearing demand deposits, up 7.0% or $14,395,000,
attributable primarily to increases in small business checking balances.
Interest-bearing deposits had a net increase of $31,603,000 or 3.3%, with the
most significant change occurring in the money market savings account component,
which increased by $43,694,000, or 15.9%. Over the same period, total borrowings
recorded a net increase of 20.7% or $64,464,000, reflective of a $75,000,000
increase in short-term advances from the Federal Home Loan Bank of Atlanta,
along with $25,672,000 higher short-term repurchase agreements related primarily
to commercial cash management services. Partially offsetting these increases,
federal funds purchased, which are also short-term borrowings, declined by
$27,070,000 to a zero balance at September 30, 2000, while other long-term
borrowings decreased by $9,138,000 for the period.
Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 2000 % 1999 %
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing Deposits $220,857 18% $206,462 18%
Interest-bearing Deposits:
Demand 143,498 12 154,523 13
Money market savings 317,644 26 273,950 24
Regular savings 102,998 9 105,160 9
Time deposits less than $100,000 323,530 27 327,827 28
Time deposits $100,000 or more 102,843 8 97,450 8
---------------------------------------------------------------
Total Interest-bearing 990,513 82 958,910 82
TOTAL DEPOSITS $1,211,370 100% $1,165,372 100%
===============================================================
</TABLE>
Market Risk Management
By employing simulation analysis through use of computer models, the
Company intends to effectively manage the potential adverse impacts that
changing interest rates can have on its 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 September 30, 2000, the simulation analysis
indicates that 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 9%, as compared to a policy limit of 25%.
Liquidity
In June 2000, the Company implemented a new liquidity management
approach designed to take into account the Company's growth, mortgage banking
activities and expanded leverage programs along with the greater sophistication
and, more recently, the decreased liquidity of its investment portfolio. Under
this approach, the Company's liquidity position is measured weekly, looking
forward thirty, sixty and ninety days.
8
<PAGE>
The measurement is based upon the asset-liability management model's projection
of a funds sold or purchased position, along with ratios and trends developed to
measure dependence on purchased funds, leverage limitations and core growth. A
range of liquidity standards will be employed. Resulting projections as of
September 30, 2000 show short-term investments exceeding short-term borrowings
over the next 90 days. This excess of liquidity over projected requirements for
funds indicates that the Company can continue to increase its loans and other
earning assets without incurring additional borrowing. The Company also has
external sources of funds, which can be drawn upon when funds are required. The
primary source of external liquidity is an available line of credit for
$485,000,000 with the Federal Home Loan Bank of Atlanta, of which approximately
$222,000,000 was outstanding at September 30, 2000. Other external sources of
liquidity available to the Company in the form of lines of credit granted by the
Federal Reserve, correspondent banks and other institutions totaled $254,000,000
at September 30, 2000 against which there were no outstandings. Based upon its
liquidity analysis, including external sources of liquidity available,
management believes the liquidity position is appropriate at September 30, 2000.
Capital Management
The Company recorded a total risk-based capital ratio of 14.60% at
September 30, 2000, compared to 15.23% at December 31, 1999; a tier 1 risk-based
capital ratio of 13.67%, compared to 14.34%; and a capital leverage ratio of
8.44%, compared to 8.74%. Declines in the total and tier 1 ratios 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 September 30, 2000 was appropriate.
Stockholders' equity for September 30, 2000 totaled $115,431,000 (net
of $10,525,000 reported for accumulated other comprehensive loss), representing
an increase of 6.2% 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 $7,595,000 in additional equity during the first nine months
of 2000, 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, 1999. When one-time items occurring in 2000 are excluded from net
income (the after tax gain of $889,000 on the sale of a building net of after
tax costs of $495,000 for the early retirement opportunity plan), internal
capital formation was $7,201,000, or a rate of 8.8%.
External capital formation resulting from stock issuances under the
dividend reinvestment and stock purchase plan totaled $1,600,000 during the
first nine months of 2000. However, share repurchases amounted to $3,983,000
through September 30, 2000, for a net decrease in stockholder's equity from
these sources of $2,383,000.
Dividends for the first nine months of the year were $0.60 per share in
2000, compared to $0.56 per share in 1999, for dividend payout ratios (dividends
declared per share to diluted net income per share) of 43.22% and 40.29%,
respectively.
B. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Net income for the first nine months of the year declined $26,000 or
0.2% in 2000 over 1999, to $13,346,000 from $13,372,000. Diluted earnings per
share after nine months were level at $1.39 for 2000 and 1999. The annualized
returns on average equity for the nine month periods ended September 30 were
16.28% in 2000 and 16.22% in 1999. The annualized return on average assets for
the same nine month periods were 1.09% and 1.34% in 2000 and 1999, respectively.
Excluding nonoperating items of income and expense, net income for the first
nine months of the year was $14,035,000 ($1.46 per diluted share) or 3.8% above
$13,525,000 ($1.40 per diluted share) in 1999, for a returns on average equity
of 17.13% and 16.40%, respectively, and returns on average assets of 1.14% and
1.35%, respectively. Two of the most significant
9
<PAGE>
nonoperating items occurred in 2000 and were partially offsetting, the gain on
sale of a building ($889,000 after tax) and costs of an early retirement
opportunity plan ($495,000 after tax). Intangibles amortization (up $1,112,000
after tax) was the other significant nonoperating item. Most of the Company's
intangible assets were acquired in September 1999. The amortization of these
intangible assets is a non-cash item and does not affect cash earnings. Other
nonoperating items were securities gains and gains and losses on sales of other
real estate owned.
The Company's stock repurchase and leverage programs have had the
effect of reducing the return on average assets while increasing earnings per
share and the return on average equity, compared to the ratios that could be
expected without the repurchases and programs. Comparing the nine month periods
ended September 30, the net interest margin decreased by 33 basis points, to
4.06% in 2000 from 4.39% in 1999, while the net interest spread decreased by 28
basis points, to 3.47% from 3.75%. The greater decline shown for the net
interest margin than for the net interest spread reflects a decline in the
percentage of average earning assets funded from noninterest-bearing sources
during the first nine months of 2000 compared to the same period of 1999.
Net Interest Income
Net interest income for the first nine months of the year was
$42,842,000 in 2000, an increase of 12.3% over $38,149,000 in 1999, reflecting a
higher volume of average earning assets. On a tax-equivalent basis, net interest
income increased 13.4% to $46,638,000 in 2000 from $41,135,000 in 1999. The
effects of average balances, yields and rates are presented in the table on page
11.
For the first nine months, tax-equivalent interest income increased
$20,191,000 or 28.5% in 2000, compared to 1999. Average earning assets rose
22.3% over the prior year period while the average yield earned on those assets
increased 38 basis points to 7.94% from 7.56%. Comparing the first nine months
of 2000 versus 1999, average loans grew 30.0% to $870,122,000 (56.8% of average
earning assets, versus 53.4% a year ago), while the average yield on loans
increased 9 basis points to 8.56% from 8.47%. Except for residential
construction, all major loan categories increased. Average total securities
increased 13.3% to $640,235,000 (41.8% of average earning assets, versus 45.1% a
year ago) and recorded a 58 basis point increase in average yield to 7.14% from
6.56%.
Interest expense for the first nine months of the year increased
$14,688,000 or 49.4% in 2000 over 1999, due to the combined effects of 27.1% or
$282,779,000 higher average interest-bearing liabilities and a 66 basis point
increase in the average rate paid for those funds to 4.47% from 3.81%. Most of
the increase in average balance, concentrated in money market deposit accounts,
was due to the acquisition of seven established branch offices at the end of the
third quarter of 1999.
Credit Risk Management
During the first nine months of the year, the provision for credit
losses was $2,090,000 in 2000, compared to $741,000 in 1999. The provision was
increased in 2000 primarily to cover growth in the loan portfolio. Net
charge-offs of $624,000 were recorded for the nine month period ended September
30, 2000 while there were net charge-offs of $154,000 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 1.07% of total loans at September 30, 2000 and
1.00% at December 31, 1999. Management believes the allowance for credit losses
at September 30, 2000 was adequate.
(Credit Risk Management discussion continued on page 12)
10
<PAGE>
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax equivalent)
<TABLE>
<CAPTION>
For the nine months ended September 30,
2000 1999
---------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
---------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Total loans $ 870,122 8.56% $ 669,477 8.47%
Total securities 640,235 7.14 565,225 6.56
Other earning assets 22,346 6.22 18,816 4.94
---------- ----------
TOTAL EARNING ASSETS 1,532,703 7.94% 1,253,518 7.56%
Nonearning assets 110,038 83,864
---------- ----------
Total Assets $1,642,741 $1,337,382
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 154,745 1.10% $ 127,917 1.39%
Money market savings deposits 295,686 4.08 166,008 2.70
Regular savings deposits 107,179 2.01 103,661 2.03
Time deposits 430,598 5.32 381,449 4.93
---------- ----------
Total interest-bearing deposits 988,208 3.93 779,035 3.49
Short-term borrowings 270,200 5.59 235,889 4.77
Long-term borrowings 67,396 8.01 28,101 4.71
---------- ----------
Total interest-bearing liabilities 1,325,804 4.47 1,043,025 3.81
------ ------
Noninterest-bearing demand deposits 211,346 180,447
Other noninterest-bearing liabilities (3,880) 3,678
Stockholders' equity 109,471 110,232
---------- ----------
Total Liabilities & Stockholders' Equity $1,642,741 $1,337,382
=========== ===========
Interest Rate Spread 3.47% 3.75%
====== ======
Net Interest Margin (1) 4.06% 4.39%
====== ======
Ratio of average earning assets to
average interest-bearing liabilities 115.61% 120.18%
=========== ==========
</TABLE>
(1) Net interest margin = net interest income / total interest-earning assets
11
<PAGE>
(Credit Risk Management discussion continued from page 10)
Nonperforming loans increased by $378,000 to $2,363,000 and total
nonperforming assets increased by $367,000 to $2,515,000 from December 31, 1999
to September 30, 2000. Expressed as a percentage of total assets, nonperforming
assets were 0.15% at September 30, 2000 and 0.13% at December 31, 1999. The
allowance for credit losses represented 410% of nonperforming loans at September
30, 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 $152,000 at September 30, 2000, compared to $163,000
at December 31, 1999. The balance of impaired loans at September 30, 2000 was
$191,000, with reserves against those loans totaling $10,000, versus a balance
at December 31, 1999 of $219,000, with reserves of $50,000. See the Analysis of
Credit Risk on page 13.
Noninterest Income and Expenses
Noninterest income increased by 43.3% or $3,903,000 during the nine months
ended September 30, 2000 versus 1999. Excluding the $1,470,000 gain on the sale
of a building in the first quarter of 2000, the increase in noninterest income
was 27.0% or $2,433,000, and was largely attributable to volume driven growth in
return check charges, a component of service charges on deposit accounts, and
fees from sales of investment products and debit card fees, which are classified
as other noninterest income. These changes reflected branch acquisition. Gains
on mortgage sales for the first nine months of the year declined in 2000, by
54.3% or $846,000, reflecting less production year-to-date September 30, 2000
versus 1999 and a greater percentage of overall production being retained in the
bank's portfolio.
For the nine months ended September 30, noninterest expenses increased
28.1%, or $7,867,000 to $35,851,000 in 2000 from $27,984,000 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 the amortization of intangible assets and non-recurring costs
for early-retirement benefits recorded in the third quarter of 2000, the
increase in noninterest expenses was 18.8% or $5,209,000 in the first nine
months of 2000 versus the same period of 1999. This increase was due in large
part to higher salary and occupancy expenses reflecting the branches acquired in
September 1999 along with openings of a branch office and a regional lending and
sales center in Annapolis, Maryland, during 2000's first quarter. Also showing
significant increases were communications expenses due in part to the increase
in offices, and costs of consultants engaged to advise the Company regarding
improvements in cost control and efficiency. Average full-time equivalent
employees increased by 21 persons (up 4.8%) to 459 during the first nine months
of 2000 compared to 438 during the first nine months of 1999. With the exclusion
of nonoperating items of income and expense from earnings, the ratio of net
income per average full-time-equivalent employee was level at $31,000 for the
first nine months of both 2000 and 1999.
Income Taxes
The effective tax rate for the first nine months of the year was 25.1% in
2000, compared to 27.5% in 1999 reflecting an increase in the ratio of
nontaxable income to income before taxes as the Company has increased its
holdings of tax-exempt securities.
C. RESULTS OF OPERATIONS - THIRD QUARTER 2000 AND 1999
Third quarter net income of $4,126,000 ($0.43 per share-diluted) in 2000
was $588,000 or 12.5% below net income of $4,714,000 ($0.49 per share-diluted)
shown for the same quarter of 1999. Excluding nonoperating items, earnings for
the third quarter were $4,912,000 ($0.51 per share-diluted) in 2000 compared to
$4,712,000 ($0.49 per share-diluted), representing an increase of 4.2%.
Significant nonoperating items included costs of an early retirement opportunity
plan in third quarter 2000 ($495,000 after tax) and intangibles amortization,
which increased $371,000 after tax due to higher intangible assets resulting
from the purchase of seven branch offices in September 1999.
Tax-equivalent net interest income rose 8.4% during the third quarter of
2000 compared to the like three month period of 1999, to $15,481,000 from
$14,286,000, showing the net effect of a 25.5% increase in the average earning
asset base and a 60 basis point decrease in net interest margin.
(Third Quarter Results of Operations discussion continued on page 14)
12
<PAGE>
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
<TABLE>
<CAPTION>
9 Months Ended 12 Months Ended
September 30, 2000 December 31, 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1 $8,231 $7,350
Provision for credit losses 2,090 1,216
Loan charge-offs:
Real estate-mortgage (134) (105)
Real estate-construction (200) 0
Consumer (236) (225)
Commercial (123) (85)
------------------------- --------------------------
Total charge-offs (693) (415)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 37 48
Commercial 32 32
------------------------- --------------------------
Total recoveries 69 80
------------------------- --------------------------
Net charge-offs (624) (335)
------------------------- --------------------------
BALANCE, PERIOD END $9,697 $8,231
========================= ==========================
Net charge-offs to average loans
(annual basis) 0.10% 0.05%
Allowance to total loans 1.07% 1.00%
</TABLE>
The following table presents nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 540 $ 275
Loans 90 days past due 1,823 1,710
Restructured loans 0 0
------------------------- --------------------------
Total Nonperforming Loans* 2,363 1,985
Other real estate owned 152 163
------------------------- --------------------------
TOTAL NONPERFORMING ASSETS $2,515 $2,148
========================= ==========================
Nonperforming assets to total assets 0.15% 0.13%
</TABLE>
--------------------------------------------------------------------------------
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $5,118,000 at September 30,
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.
13
<PAGE>
(Third Quarter Results of Operations discussion continued from page 12)
The provision for credit losses was $800,000 for the quarter ended
September 30, 2000, compared to a provision of $266,000 for the same three-month
period of 1999. The increase reflects the significant expansion of the loan
portfolio according to management's plans. Net charge-offs of $287,000 were
recorded for the third quarter of 2000, compared to net charge-offs of $29,000
for the third quarter of 1999.
Noninterest income for the third quarter increased $1,228,000 or 39.6%
in 2000, compared to 1999. Service charges on deposit accounts and the fee
income component of other noninterest income posted significant increases due in
large part to volume, reflecting branch acquisition. Comparing the same periods,
gains on mortgage sales recorded no change and trust department income declined
slightly.
Excluding one-time costs for special early retirement benefits and
non-operating amortization of intangible assets, noninterest expenses rose
17.3%, with the majority attributable to higher salary and occupancy expenses.
These results reflect the acquisition of seven branches at the end of the third
quarter of 1999 and new offices opened in 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
----- ---------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
14
<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: HUNTER R. HOLLAR
------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: November 7, 2000
By: JAMES H. LANGMEAD
-------------------
James H. Langmead
Vice President and Treasurer
Date: November 7, 2000
15
