10-Q 1 form10-q.txt FORM 10-Q 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, 2001 ------------------ 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, 2001 is 9,630,513 shares. SANDY SPRING BANCORP, INC. INDEX
Page -------------------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 ...................................... 1 Consolidated Statements of Income for the Three and Nine Month Periods Ended September 30, 2001 and 2000 ............................... 2 Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2001 and 2000................................ 3 Consolidated Statements of Changes in Stockholders' Equity for the Nine Month Periods Ended September 30, 2001 and 2000 .......................... 5 Notes to Consolidated Financial Statements..................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................... 16 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................ 16 SIGNATURES........................................................................... 17
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS
September 30, December 31, (Dollars in thousands, except per share data) 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 44,081 $ 39,394 Federal funds sold 28,227 6,935 Interest-bearing deposits with banks 1,106 507 Residential mortgage loans held for sale 11,423 6,371 Investments available-for-sale (at fair value) 663,079 517,861 Investments held-to-maturity -- fair value of $174,572 (2001) and $135,121 (2000) 170,509 134,879 Other equity securities 16,929 14,187 Total loans and leases 1,006,277 967,817 Less: Allowance for credit losses (12,222) (11,530) ----------- ----------- Net loans and leases 994,055 956,287 Premises and equipment, net 31,814 31,282 Accrued interest receivable 15,994 15,124 Goodwill 19,879 21,686 Intangible assets 1,372 1,962 Other assets 36,670 26,526 ----------- ----------- TOTAL ASSETS $ 2,035,138 $ 1,773,001 =========== =========== LIABILITIES Noninterest-bearing deposits $ 272,017 $ 243,339 Interest-bearing deposits 1,064,245 999,588 ----------- ----------- Total deposits 1,336,262 1,242,927 Short-term borrowings 419,765 308,314 Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000 Other long-term borrowings 79,069 49,054 Accrued interest and other liabilities 15,165 10,148 ----------- ----------- TOTAL LIABILITIES 1,885,261 1,645,443 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 50,000,000; shares issued and outstanding 9,618,403 (2001) and 9,552,672 (2000) 9,618 9,553 Surplus 24,442 22,511 Retained earnings 108,445 97,641 Accumulated other comprehensive income (loss) 7,372 (2,147) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 149,877 127,558 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,035,138 $ 1,773,001 =========== =========== See Notes to Consolidated Financial Statements
1 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- -------------------------- (In thousands, except per share data) 2001 2000 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Interest Income: Interest and fees on loans and leases $19,950 $19,382 $61,251 $55,601 Interest on loans held for sale 175 88 515 193 Interest on deposits with banks 33 18 88 89 Interest and dividends on securities: Taxable 10,278 8,448 28,303 24,736 Exempt from federal income taxes 2,085 1,899 5,973 5,699 Interest on federal funds sold 204 565 986 955 ---------------- -------------- ------------ ----------- TOTAL INTEREST INCOME 32,725 30,400 97,116 87,273 Interest Expense: Interest on deposits 8,796 10,317 28,443 29,073 Interest on short-term borrowings 4,455 4,470 13,323 11,088 Interest on long-term borrowings 2,051 1,502 6,121 4,270 ---------------- -------------- ------------ ------------ TOTAL INTEREST EXPENSE 15,302 16,289 47,887 44,431 ---------------- -------------- ------------ ----------- NET INTEREST INCOME 17,423 14,111 49,229 42,842 Provision for Credit Losses 742 800 1,726 2,090 ---------------- -------------- ------------ ----------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 16,681 13,311 47,503 40,752 Noninterest Income: Securities gains 147 218 277 265 Service charges on deposit accounts 1,802 1,524 5,356 4,303 Gains on sales of mortgage loans 567 335 1,835 711 Trust department income 524 396 1,438 1,241 Gain on sale of premises 0 0 0 1,470 Other income 2,211 1,859 6,740 4,922 ---------------- -------------- ------------ ----------- TOTAL NONINTEREST INCOME 5,251 4,332 15,646 12,912 Noninterest Expenses: Salaries and employee benefits 7,664 7,123 21,181 18,875 Occupancy expense of premises 1,348 1,203 3,809 3,585 Equipment expenses 859 813 2,550 2,398 Marketing 331 269 979 1,070 Outside data services 544 582 1,869 1,798 Goodwill amortization 613 463 1,839 1,388 Amortization of intangible assets 124 243 589 730 Other expenses 2,314 1,869 7,068 6,007 ---------------- -------------- ------------ ------------ TOTAL NONINTEREST EXPENSES 13,797 12,565 39,884 35,851 ------------ ------------ ---------------- -------------- Income Before Income Taxes 8,135 5,078 23,265 17,813 Income Tax Expense 2,183 952 6,141 4,467 ---------------- -------------- ------------ ------------ NET INCOME $5,952 $4,126 $17,124 $13,346 ================ ============== ============ ============ Basic Net Income Per Share $0.62 $0.43 $1.79 $1.39 Diluted Net Income Per Share 0.61 0.43 1.77 1.39 Dividends Declared Per Share 0.23 0.20 0.66 0.60
See Notes to Consolidated Financial Statements. 2 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Nine Months Ended September 30, ------------------------------ 2001 2000 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net Income $ 17,124 $ 13,346 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,685 4,287 Provision for credit losses 1,726 2,090 Deferred income taxes 696 768 Origination of loans held for sale (156,272) (46,783) Proceeds from sales of loans held for sale 153,055 46,552 Gains on sales of loans held for sale (1,835) (711) Securities gains (277) (265) Gain on sale of premises 0 (1,470) Net increase in accrued interest receivable (869) (1,248) Net increase in other assets (15,510) (2,166) Net increase in accrued expenses 5,014 617 Other - net (1,760) (3,037) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,500 13,257 Cash Flows from Investing Activities: Net (increase) decrease in interest-bearing deposits with banks (599) 2,616 Purchases of investments held-to-maturity (58,930) (29,774) Purchases of other equity securities (2,742) (10,063) Purchases of investments available-for-sale (605,310) (61,813) Proceeds from sales of investments available-for-sale 60,689 23,643 Proceeds from maturities, calls and principal payments of investments 22,900 0 held-to-maturity Proceeds from maturities, calls and principal payments of investments 416,082 54,554 available-for-sale Proceeds from sales of other equity securities 0 12,083 Proceeds from sales of other real estate owned 459 380 Net increase in loans and leases (38,507) (81,625) Proceeds from sale of premises 0 2,965 Expenditures for premises and equipment (3,040) (2,991) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (208,998) (90,025) Cash Flows from Financing Activities: Net increase in deposits 93,335 45,998 Net increase in short-term borrowings 111,251 73,402 Proceeds from long-term borrowings 30,215 26,062 Retirement of long-term borrowings 0 (35,000) Common stock purchased and retired 0 (3,983) Proceeds from issuance of common stock 1,996 1,600 Dividends paid (6,320) (5,751) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 230,477 102,328 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 25,979 25,560 Cash and Cash Equivalents at Beginning of Year 46,329 50,219 --------- --------- CASH AND CASH EQUIVALENTS AT END OF QUARTER* $ 72,308 $ 75,779 ========= =========
3 Cont'd CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures: Interest payments $47,249 $43,581 Income tax payments 7,049 4,834 Noncash Investing Activities: Transfers from loans to other real estate owned 47 306 Reclassification of borrowings from long-term to short-term 200 200
*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 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data)
Accum- ulated Other Compre- TOTAL hensive STOCK- Common Retained Income HOLDERS' Stock Surplus Earnings (loss) EQUITY ------------------------------------------------------------------------------------------------------------ BALANCES AT JANUARY 1, 2001 $ 9,553 $ 22,511 $ 97,641 $ (2,147) $ 127,558 Comprehensive Income: Net income 17,124 17,124 Unrealized gain on investments available-for-sale 9,519 9,519 --------- Total comprehensive income 26,643 Cash dividends - $0.66 per share (6,320) (6,320) Common stock issued pursuant to: Stock option plan - 17,480 shares 17 411 428 Employee stock purchase plan - 1,782 shares 2 51 53 Dividend reinvestment and stock purchase plan - 46,068 shares 46 1,469 1,515 --------- --------- --------- --------- --------- BALANCES AT SEPT. 30, 2001 $ 9,618 $ 24,442 $ 108,445 $ 7,372 $ 149,877 ========= ========= ========= ========= ========= BALANCES AT JANUARY 1, 2000 $ 9,648 $ 24,476 $ 86,620 $ (12,024) $ 108,720 Comprehensive Income: Net income 13,346 13,346 Unrealized loss on investments available-for-sale (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 ========= ========= ========= ========= ========= See Notes to Consolidated Financial Statements.
5 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 2000 Annual Report to Shareholders on Form 10-K. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2001. The accounting and reporting policies of Sandy Spring Bancorp (the "Company") conform to accounting principles generally accepted in the United States and to general practices 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 - CHANGE OF BANK'S CHARTER AND NAME On September 21, 2001, Sandy Spring National Bank of Maryland, a national banking association, became Sandy Spring Bank, a Maryland chartered trust and banking company. Sandy Spring Bank continues to be a wholly-owned subsidiary of Sandy Spring Bancorp, Inc. and a member of the Federal Reserve system. The bank also retains all of the powers and authority previously held by the national association, and may engage in essentially the same range of activities. All of its deposits remain FDIC insured. NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria for intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 will require goodwill and intangible assets with indefinite useful lives to no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of the Statement. SFAS No. 142 will also require intangible assets with definite useful lives to be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Company is required to adopt the provisions of SFAS No. 141 immediately and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible assets determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001, will continue to be amortized prior to the adoption of SFAS No. 142. SFAS No. 141 will require, upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim 6 NOTE 3 - NEW ACCOUNTING PRONOUNCEMENTS (continued) period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting prinicple in the first interim period. The Company is assessing the effects of adoption of SFAS 141 and 142 on the Company's consolidated financial condition and results of operations. As of the date of adoption, excluding any purchase transactions that may occur during the fourth quarter of 2001, the Company expects to have unamortized goodwill in the amount of $19,266,000, and unamortized identifiable intangible assets in the amount of $1,248,000, all of which will be subject to the transition provisions of SFAS No. 141 and No. 142. Amortization expense related to goodwill was $1,850,000 and $1,839,000 for the year ended December 31, 2000, and for the nine months ended September 30, 2001, respectively. NOTE 4 - STOCKHOLDERS' EQUITY On April 18, 2001, the shareholders approved an increase in the number of shares of capital stock authorized to be issued from 15,000,000 to 50,000,000. On April 18, 2001, the shareholders approved the 2001 Employee Stock Purchase Plan ( the "Purchase Plan") to commence on July 1, 2001, with consecutive monthly offering periods thereafter, and reserved 300,000 authorized but unissued shares of common stock for purchase upon the exercise of options granted under the plan. Shares are placed under option to employees, to be purchased at 85% of the fair market value on the exercise date through monthly payroll deductions of not less than 1% or more than 10% of cash compensation paid in the month. The Purchase Plan is administered by a committee of at least three directors appointed by the Board of Directors. NOTE 5 - PER SHARE DATA The calculations of net income per common share for the three and nine month 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 derived 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.
(Dollars and amounts in thousands, except Three Months Ended Nine Months Ended Per share data) September 30, September 30, -------------------------------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Basic: Net income available to common stockholders $ 5,952 $ 4,126 $17,124 $13,346 Average common shares outstanding 9,597 9,546 9,576 9,586 Basic net income per share $ 0.62 $ 0.43 $ 1.79 $ 1.39 ======= ======= ======= ======= Diluted: Net income available to common stockholders $ 5,952 $ 4,126 $17,124 $13,346 Average common shares outstanding 9,597 9,546 9,576 9,586 Stock option adjustment 123 28 99 28 ------- ------- ------- ------- Average common shares outstanding-diluted 9,720 9,574 9,675 9,614 Diluted net income per share $ 0.61 $ 0.43 $ 1.77 $ 1.39 ======= ======= ======= =======
7 NOTE 6 - SUBSEQUENT EVENTS On October 24, 2001, the Company announced that it has reached an agreement to acquire certain assets and liabilities of the Chesapeake Insurance Group (CIG) located in Annapolis, Maryland. CIG is a general insurance agency serving central and southern Maryland with approximately $3 million in annual revenues. CIG's president will assume the position of president of Sandy Spring Insurance Corporation. CIG's employees will become Sandy Spring Insurance employees. The transaction is expected to be completed in the fourth quarter of 2001, pending regulatory approval. The amortization of intangible assets created in this aquisition is not expected to significantly affect noninterest expenses or net income. Effective October 1, 2001, the Company replaced its existing dividend reinvestment and stock purchase plan with the Investors Choice Plan (the "Plan"), which is sponsored and administered by the American Stock Transfer & Trust Company ("AST") as independent agent. The Plan enables current shareholders as well as first-time buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly through AST at low commissions. Participants may reinvest cash dividends and make periodic supplemental cash payments to purchase additional shares. Share purchases pursuant to the Plan are made in the open market. The Plan also allows participants to deposit their stock certificates with AST for safekeeping or sale. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management's discussion and analysis contains forward looking statements, including: statements of goals, intentions and expectations; estimates of risks and of future costs and benefits; assessments of probable loan and lease losses and market risk; 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, which, by their nature, are subject to significant uncertainties. Because of these uncertainties, the actual future results may be materially different from those indicated. 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 Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates thirty community offices in Montgomery, Howard, Prince George's and Anne Arundel Counties in Maryland, together with an insurance subsidiary and an equipment leasing company. The Company offers a broad range of financial services to consumers and businesses in this market area. Through September 30, 2001, year-to-date average commercial and commercial real estate loans and leases accounted for approximately 45% of the Company's loan and lease portfolio, and year-to-date average consumer and residential real estate loans accounted for approximately 55%. Based upon the most recent data analyzed, consumer deposits account for approximately 80% of total average deposits while approximately two-thirds of the Company's revenues are derived from consumer loans, consumer deposits and other 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 $2,035,138,000 at September 30, 2001, compared to $1,773,001,000 at December 31, 2000, increasing $262,137,000 or 14.8% during the first nine months of 2001. Earning assets increased $248,993,000 or 15.1% to $1,897,550,000 at September 30, 2001, from $1,648,557,000 at December 31, 2000. Total loans and leases rose 4.0% or $38,460,000 during the first nine months of 2001, to exceed $1 billion. During this period, residential real estate loans rose $20,082,000 (up 6.5%), reflecting sharply higher residential construction lending, partially offset by a decline in residential mortgages, while commercial loans and leases increased $19,398,000 (up 4.4%), reflecting growth in commercial real estate credits. The decrease in residential mortgages was due in large part to refinancings in the lower rate environment and the sale of fixed rate loan production. Consumer loans remained essentially level over the same period. Residential mortgage loans held for sale increased by $5,052,000 from December 31, 2000 to $11,423,000 at September 30, 2001. Analysis of Loans and Leases The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated:
September 30, December 31, (In thousands) 2001 % 2000 % ---------------------------------------------------------------------------------------------- Residential real estate $ 330,671 33% $ 310,589 32% Commercial loans and leases 462,785 46 443,387 46 Consumer 212,821 21 213,841 22 ----------- ----------- ----------- ----------- Total Loans and Leases 1,006,277 100% 967,817 100% =========== =========== Less: Allowance for credit losses (12,222) (11,530) ----------- ----------- NET LOANS AND LEASES $ 994,055 $ 956,287 =========== ===========
9 The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, increased by $183,590,000 or 27.5% from December 31, 2000, to September 30, 2001. This change, most of which occurred in available-for-sale securities, mainly reflected the investment of borrowings in the Company's leverage programs and of deposit growth not required to fund loans and leases. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $21,891,000 during the first nine months of 2001, reaching $29,333,000 at September 30, 2001. Total deposits were $1,336,262,000 at September 30, 2001, increasing $93,335,000 or 7.5% from $1,242,927,000 at December 31, 2000. Growth in money market savings accounts, noninterest-bearing demand deposits and time deposits of $100,000 or more accounted for over 90% of the overall increase. Total borrowings rose 36.1% or $141,466,000 from December 31, 2000, to September 30, 2001, primarily reflective of $70,043,000 in higher levels of short-term and long-term advances from the Federal Home Loan Bank of Atlanta, along with a $50,000,000 borrowing in the form of a short-term reverse repurchase agreement. The Company borrowed these funds primarily for the purpose of investing them in securities under its leverage programs. Analysis of Deposits The following table presents the trends in the composition of deposits at the dates indicated:
September 30, December 31, (In thousands) 2001 % 2000 % --------------------------------------------------------------------------------------- Noninterest-bearing Deposits $ 272,017 20% $ 243,339 20% Interest-bearing Deposits: Demand 147,152 11 156,266 12 Money market savings 370,006 28 337,532 27 Regular savings 102,602 8 98,592 8 Time deposits less than $100,000 324,791 24 311,871 25 Time deposits $100,000 or more 119,694 9 95,327 8 ---------- ---------- ---------- ---------- Total Interest-bearing 1,064,245 80 999,588 80 ---------- ---------- ---------- ---------- TOTAL DEPOSITS $1,336,262 100% $1,242,927 100% ========== ========== ========== ==========
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 may 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 at September 30, 2001, the simulation analysis indicates that net interest income would decline by 2% over a twelve month period given a decrease in interest rates of 200 basis points, compared to a policy limit of 15%. In terms of equity capital on a fair value basis, a 200 basis point decrease in interest rates is estimated to reduce the fair value of capital (as computed) by 22%, as compared to a policy limit of 25%. LIQUIDITY Liquidity is measured using an approach designed to take into account the Company's growth, mortgage banking activities and leverage programs. Also considered are the sophistication of investment activities and changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the funds management committee under formal policy guidelines, the Company's liquidity position is measured weekly, looking forward thirty, sixty and ninety days. 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. Resulting projections as of September 30, 2001, show short-term investments exceeding short-term borrowings by $103,770,000 (the figure was $12,369,000 at December 31, 2000) 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. 10 In addition, the Company has external sources of funds, which can be drawn upon when funds are required. The main source of external liquidity is an available line of credit for $581,635,000 with the Federal Home Loan Bank of Atlanta, of which approximately $301,269,000 was outstanding at September 30, 2001. 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 $261,400,000 at September 30, 2001, against which there were outstandings of approximately $50,000,000. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position is appropriate at September 30, 2001. CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 13.99% at September 30, 2001, compared to 13.73% at December 31, 2000; a tier 1 risk-based capital ratio of 12.92%, compared to 12.69%; and a capital leverage ratio of 7.94%, compared to 8.21%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Management believes the level of capital at September 30, 2001, is appropriate. Stockholders' equity for September 30, 2001, totaled $149,877,000 (including $7,372,000 reported for accumulated other comprehensive income), representing an increase of 17.5% from $127,558,000 at December 31, 2000 (net of $2,147,000 reported for accumulated other comprehensive loss). Excluding accumulated other comprehensive income (loss), the increase was 9.9%. The Company's accumulated other comprehensive income (loss) category is comprised of net unrealized gains and losses on available-for-sale securities. Internal capital generation (net income less dividends) added $10,804,000 to equity during the first nine months of 2001, representing an annualized rate (when considered as a percentage of average total stockholders' equity) of 10.5% versus 9.9% for the year ended December 31, 2000. External capital formation resulting from stock issuances under the dividend reinvestment and stock purchase plan and, to a lesser degree, from exercises of stock options and stock purchases under the new employee stock purchase plan, totaled $1,996,000 during the first nine months of 2001. Dividends for the first nine months of the year were $0.66 per share in 2001, compared to $0.60 per share in 2000, for respective dividend payout ratios (dividends declared per share to diluted net income per share) of 37.29% versus 43.17%. B. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001, AND 2000 Net income for the first nine months of the year increased $3,778,000 or 28.3% in 2001 over 2000, to $17,124,000 from $13,346,000. Diluted earnings per share after nine months were $1.77 in 2001 compared to $1.39 in 2000. The annualized returns on average equity for the nine month periods ended September 30 were 16.58% in 2001 and 16.28% in 2000. The annualized return on average assets for the nine month periods were 1.20% and 1.09% in 2001 and 2000, respectively. Excluding nonoperating items of income and expense, net income for the first nine months of the year was $18,269,000 (which would result in a $0.12 greater diluted earnings per share amount than shown above on a net income basis), or 29.8% above the $14,072,000 (which would result in a $0.07 greater diluted earnings per share amount) earned in 2000. The two most significant nonoperating items, which both occurred in 2000 and were partially offsetting, were the $889,000 after-tax gain on the sale of a building, and after-tax costs amounting to $495,000 for an early retirement opportunity plan. Nonoperating items also included gains on security transactions and the non-cash amortization of intangible assets in both years, and a $155,000 after-tax gain on the sale of the Company's credit card portfolio during the second quarter of 2001. Comparing the nine month periods ended September 30, the net interest margin decreased by 6 basis points, to 4.00% in 2001, from 4.06% in 2000, reflecting a similar basis point decline in the net interest spread. NET INTEREST INCOME Net interest income for the first nine months of the year was $49,229,000 in 2001, an increase of 14.9% over $42,842,000 in 2000, due to a higher volume of average earning assets. On a tax-equivalent basis, net interest income increased 13.5% to $52,952,000 in 2001, from $46,638,000 in 2000. The effects of average balances, yields and rates are presented in the table on page 12. 11 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands and tax equivalent)
For the nine months ended September 30, 2001 2000 --------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate --------------------------------------------------------- ASSETS Total loans and leases $ 993,963 8.30% $ 870,122 8.56% Total securities 745,346 6.82 640,235 7.14 Other earning assets 32,364 4.42 22,346 6.22 ---------- ------------- TOTAL EARNING ASSETS 1,771,673 7.61% 1,532,703 7.93% Nonearning assets 136,040 119,367 ---------- ------------- Total Assets $1,907,713 $ 1,652,070 ========== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing demand deposits $ 151,057 0.90% $ 154,745 1.10% Money market savings deposits 357,203 3.45 295,686 4.08 Regular savings deposits 103,830 1.62 107,179 2.01 Time deposits 420,360 5.39 430,599 5.32 ---------- ------------- Total interest-bearing deposits 1,032,450 3.68 988,209 3.93 Short-term borrowings 372,073 4.78 264,616 5.59 Long-term borrowings 113,186 7.21 72,980 7.80 ---------- ------------- Total interest-bearing liabilities 1,517,709 4.22 1,325,805 4.47 ---------- --------- Noninterest-bearing demand deposits 239,379 211,346 Other noninterest-bearing liabilities 12,563 5,448 Stockholders' equity 138,062 109,471 ---------- ---------- Total Liabilities & Stockholders' Equity $1,907,713 $ 1,652,070 ========== ========== Interest Rate Spread 3.39 3.46% ========== ========== Net Interest Margin (1) 4.00% 4.06% ========== ========== Ratio of average earning assets to Average interest-bearing liabilities 116.73% 115.61% ========== ==========
(1) Net interest margin = annualized net interest income on a tax-equivalent basis / total interest-earning assets 12 NET INTEREST INCOME (CONTINUED) For the first nine months, tax-equivalent interest income increased $9,770,000 or 10.7% in 2001, compared to 2000. Average earning assets rose 15.6% over the prior year period, to $1,771,673,000 from $1,532,703,000, while the average yield earned on those assets decreased by 32 basis points to 7.61% from 7.93%. Comparing the first nine months of 2001 versus 2000, average loans and leases grew 14.2% to $993,963,000 (56.1% of average earning assets, versus 56.8% a year ago), while the average yield on loans and leases decreased by 26 basis points to 8.30% from 8.56%. For the first nine months of the year, average commercial loans and leases increased by $66,516,000 or 17.2% in 2001, compared to 2000, and reported a 14 basis point decrease in average yield. These results reflect the favorable impact of $31,304,000 of relatively high yielding leases acquired in December, 2000. Over the same period, average residential real estate loans increased by $44,081,000 or 15.5% due primarily to growth in residential construction lending, and average consumer loans increased by $13,244,000 or 6.6%. Average total securities rose 16.4% to $745,346,000 (42.1% of average earning assets, versus 41.8% a year ago), while the average yield declined by 32 basis points to 6.82% versus 7.14% for the nine months ended September 30, 2001, and September 30, 2000, respectively. Interest expense for the first nine months of the year increased by $3,456,000 or 7.8% in 2001, over 2000, produced by the partially offsetting effects of 14.5% or $191,905,000 higher average interest-bearing liabilities versus a 25 basis point decline in the average rate paid for those funds. Significantly, the Company was able to essentially match the decline in average yield on earning assets reported above with a decline in average funding costs, achieving a reduction in the average rate paid on all major categories of interest-bearing deposits and borrowings except time deposits (see table on page 12). Average total interest-bearing deposits rose $44,241,000 or 4.5%, but the decrease in rates paid on them contributed a decrease in interest expense of $630,000 year-to-date September 30, 2001, compared to the same period of 2000. Over this time frame, average time, regular savings and interest-bearing demand deposits declined, while average money market savings deposits grew by $61,517,000 or 20.8%. The nine month year-to-date rise in average borrowings from 2000 to 2001 was $147,663,000 or 43.7%, caused in large part by the Company's leverage programs, resulting in $4,086,000 greater interest expense. CREDIT RISK MANAGEMENT During the first nine months of the year, the provision for credit losses was $1,726,000 in 2001, compared to $2,090,000 in 2000. Net charge-offs of $1,034,000 were recorded for the nine month period ended September 30, 2001, while there were net charge-offs of $624,000 for the same period a year earlier. The Company maintains an allowance for credit losses to absorb losses inherent in the loan and lease portfolio. The allowance is based on careful, continuous review and evaluation of the credit portfolio and ongoing, quarterly assessments of the probable losses inherent in the loan and lease portfolio, and, to a lesser extent, unused commitments to provide financing. The Company analyzes the sufficiency of its allowance for credit losses through a systematic methodology consisting of several key elements, which include the formula allowance, specific allowances for problem graded credits, and the unallocated allowance. The formula allowance is calculated by applying loss factors to corresponding categories of outstanding loans and leases, based on the Company's historical loss experience in the various portfolio categories over the prior eight quarters. The use of these loss factors is intended to reduce the differences between estimated losses inherent in the portfolio and observed losses. Specific allowances are established in cases where management has identified significant conditions or circumstances related to a credit that management believes indicate the probability that a loss may be incurred in an amount different from the amount determined by application of the formula allowance. For other problem graded credits, allowances are established according to the application of credit risk factors. These factors are set by management to reflect its assessment of the relative level of risk inherent in each grade. The unallocated allowance is based upon management's evaluation of various conditions that are not directly measured in the determination of the formula and specific allowances. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of internal credit examiners, and management's judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these conditions quarterly. Management believes that the allowance for credit losses is adequate. 13 ANALYSIS OF CREDIT RISK (Dollars in thousands) Activity in the allowance for credit losses is shown below:
Nine Months Ended Twelve Months Ended September 30, 2001 December 31, 2000 ------------------------------------------------------------------------------------------------------------------------- Balance, January 1 $11,530 $8,231 Provision for credit losses 1,726 2,690 Allowance acquired 0 1,300 Loan charge-offs: Residential real estate (18) (220) Commercial loans and leases (867) (246) Consumer (185) (303) ------------------------- -------------------------- Total charge-offs (1,070) (769) Loan recoveries: Residential real estate 0 0 Commercial loans and leases 19 36 Consumer 17 42 ------------------------- -------------------------- Total recoveries 36 78 ------------------------- -------------------------- Net charge-offs (1,034) (691) ------------------------- -------------------------- BALANCE, PERIOD END $12,222 $11,530 ========================= ========================== Net charge-offs to average loans and leases (annual basis) 0.14% 0.08% Allowance to total loans and leases 1.21% 1.19%
The following table presents nonperforming assets at the dates indicated:
September 30, December 31, 2001 2000 ------------------------------------------------------------------------------------------------------------------------- Non-accrual loans and leases $ 753 $684 Loans and leases 90 days past due 1,433 1,809 Restructured loans and leases 0 0 ------------------------- -------------------------- Total Nonperforming Loans and leases* 2,186 2,493 Other real estate owned 15 380 ------------------------- -------------------------- TOTAL NONPERFORMING ASSETS $2,201 $2,873 ========================= ========================== Nonperforming assets to total assets 0.11% 0.16% -------------------------------------------------------------------------------------------------------------------------
* Those performing credits considered potential problem credits, as defined and identified by management, amounted to approximately $9,686,000 at September 30, 2001, compared to $9,576,000 at December 31, 2000. Although these are credits where known information about the borrowers' possible credit problems causes management to have doubts as to their ability to comply with the present repayment terms, most are well collateralized and are not believed to present significant risk of loss. 14 CREDIT RISK MANAGEMENT (CONTINUED) However, the determination of the allowance requires significant judgment, and estimates of probable losses inherent in the loan and lease portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the loan and lease portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the Bank's loan portfolio and allowance for credit losses. Such reviews may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. During the first nine months of 2001, there were no changes in estimation methods or assumptions that affected the allowance methodology. The allowance for credit losses was 1.21% of total loans and leases at September 30, 2001, and 1.19% at December 31, 2000. Nonperforming loans and leases decreased by $307,000 to $2,186,000, while nonperforming assets declined by $672,000 to $2,201,000 from December 31, 2000, to September 30, 2001. Expressed as a percentage of total assets, nonperforming assets fell to 0.11% at September 30, 2001, from 0.16% at December 31, 2000. The allowance for credit losses represented 559% of nonperforming loans and leases at September 30, 2001, compared to coverage of 462% at December 31, 2000. Significant variation in this coverage ratio may occur from period to period because the amount of nonperforming loans and leases depends largely on the condition of a small number of individual credits and borrowers relative to the total loan and lease portfolio. Other real estate owned totaled approximately $15,000 at September 30, 2001, compared to $380,000 at December 31, 2000. The balance of impaired loans at September 30, 2001 was $58,000, with reserves against those loans and leases totaling $42,000, versus a balance at December 31, 2000 of $613,000, with reserves of $100,000. NONINTEREST INCOME AND EXPENSES Noninterest income increased by 21.2% or $2,734,000 during the nine months ended September 30, 2001, versus the same period of 2000. Significant non-operating items affecting this comparison were gains of $256,000 on the sale of the Company's credit card portfolio in 2001, and $1,470,000 on the sale of a building in 2000. Excluding such items, the increase in noninterest income was 35.2% or $3,936,000. Most of this change was due to higher gains on sales of mortgage loans, growth in service charges on deposit accounts, and increases in various types of other noninterest income, including those recorded for transaction based service fees, bank owned life insurance investments, and the Equipment Leasing Company acquired in December, 2000. For the nine months ended September 30, noninterest expenses increased 11.2% or $4,033,000 to $39,884,000 in 2001, from $35,851,000 in 2000. Exclusive of the nonoperating early retirement benefits in 2000 and the amortization of acquisition intangibles, the rise was 13.8%. 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. Most of the year-to-date increase in operating expenses from third quarter 2000, to third quarter 2001, was due to higher salaries and benefits related primarily to a larger staff, merit increases, incentive compensation, health insurance costs, and expenses for a 401(K) match of employee contributions by the Company which began in 2001. A significant increase was also reported for consulting services costs which was largely attributable to an efficiency study completed in 2000. Average full-time equivalent employees increased by 8 persons (representing a 1.7% rise), to 467 during the first nine months of 2001, compared to 459 during the first nine months of 2000. With the exclusion of nonoperating items of income and expense from earnings, the year-to-date September 30 ratio of net income per average full-time-equivalent employee increased in 2001, to $39,000 from $31,000 in 2000. INCOME TAXES The effective tax rates for the nine month periods ended September 30 were 26.4% in 2001, compared to 25.1% in 2000. 15 C. RESULTS OF OPERATIONS - THIRD QUARTER 2001 AND 2000 Third quarter net income of $5,952,000 ($0.61 per share-diluted) in 2001 was $1,826,000 or 44.3% above net income of $4,126,000 ($0.43 per share-diluted) shown for the same quarter of 2000. Excluding nonoperating items, earnings for the third quarter were $6,308,000 (which would result in a $0.04 greater diluted earnings per share amount than shown above on a net income basis) in 2001, compared to $4,915,000 (which would result in a $0.08 greater diluted earnings per share amount) in 2000, representing an increase of 28.3%. The most significant nonoperating item was a $495,000 after-tax non-recurring expense for early retirement benefits during the third quarter of 2000. Tax-equivalent net interest income rose 21.8% during the third quarter of 2001, versus the comparable period in 2000, to $18,862,000 from $15,481,000. The size of this change was determined by the combined effects of 16.5% higher average earning assets and a 17 basis point widening of the net interest margin. The provision for credit losses was $742,000 for the quarter ended September 30, 2001, compared to a similar provision of $800,000 for the same three-month period of 2000. Net charge-offs of $100,000 were recorded for the third quarter of 2001, compared to net charge-offs of $287,000 for the third quarter of 2000. Noninterest income for the third quarter increased $919,000 or 21.2% in 2001, compared to 2000. On an operating basis, which primarily reflects the exclusion of a $256,000 gain on the sale of the credit card portfolio in June 2001, the increase in noninterest income was 36.0%. Most of this rise occurred in revenue from bank owned life insurance investments, service charges on deposit accounts, and gains on sales of mortgage loans. For the three months ended September 30, noninterest expenses increased 9.8% or $1,232,000 to $13,797,000 in 2001, from $12,565,000 in 2000. Excluding the non-operating early retirement benefits in 2000 and the amortization of intangible assets, noninterest expenses rose 18.3%, with the majority attributable, as in the year-to-date comparison, to higher salaries and benefits. The third quarter effective tax rate was 26.8% in 2001, as compared to 18.7% in 2000, in part reflecting a decline in the ratio of nontaxable income to income before taxes. 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, 2000. PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. On September 27, 2001, the Company filed a Current Report on Form 8-K reporting, under Item 5, that its wholly owned subsidiary, Sandy Spring National Bank of Maryland, had become a state-chartered trust and banking company operating under the name Sandy Spring Bank. 16 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: November 2, 2001 By: /s/ JAMES H. LANGMEAD ---------------------- James H. Langmead Executive Vice President and Chief Financial Officer Date: November 2, 2001 17