-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TUWXAz+UZ4vt0b8tJR+8fstlC0c5IKqhC9xJGeSGgAjUbkO/UJneout6tdjzEII2 i4yDejburXAat5OqsxiG+Q== 0001125282-05-002407.txt : 20050510 0001125282-05-002407.hdr.sgml : 20050510 20050509184151 ACCESSION NUMBER: 0001125282-05-002407 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SANDY SPRING BANCORP INC CENTRAL INDEX KEY: 0000824410 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 520312970 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19065 FILM NUMBER: 05813420 BUSINESS ADDRESS: STREET 1: 17801 GEORGIA AVE CITY: OLNEY STATE: MD ZIP: 20832 BUSINESS PHONE: 3017746400 MAIL ADDRESS: STREET 1: 17801 GEORGIA AVENUE CITY: OLNEY STATE: MD ZIP: 20832 10-Q 1 b406588_10q.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 -------------- 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: 0-19065 ------- 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 ------- ------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO ------- ------- The number of shares of common stock outstanding as of April 20, 2005 is 14,649,595 shares. SANDY SPRING BANCORP, INC. INDEX
PAGE - ---------------------------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at March 31, 2005 and December 31, 2004.................................................. 1 Consolidated Statements of Income for the Three Month Periods Ended March 31, 2005 and 2004........................................... 2 Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2005 and 2004 .......................................... 3 Consolidated Statements of Changes in Stockholders' Equity for the Three Month Periods Ended March 31, 2005 and 2004..................................... 4 Notes to Consolidated Financial Statements............................................ 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ................................................................ 20 ITEM 4. CONTROLS AND PROCEDURES............................................................... 20 PART II - OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS........................... 21 ITEM 6. EXHIBITS.............................................................................. 21 SIGNATURES.................................................................................... 22
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
March 31, December 31, (Dollars in thousands, except per share data) 2005 2004 - -------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 43,905 $ 43,728 Federal funds sold 6,240 5,467 Interest-bearing deposits with banks 838 610 Residential mortgage loans held for sale (at fair value) 14,329 16,211 Investments available-for-sale (at fair value) 300,446 346,903 Investments held-to-maturity -- fair value of $310,340 (2005) and $312,661 (2004) 304,909 305,293 Other equity securities 12,734 13,912 Total loans and leases 1,468,814 1,445,525 Less: allowance for loan and lease losses (14,738) (14,654) ----------- ----------- Net loans and leases 1,454,076 1,430,871 Premises and equipment, net 44,292 42,054 Accrued interest receivable 11,776 11,674 Goodwill 8,554 7,335 Other intangible assets 9,370 9,866 Other assets 72,729 75,419 ----------- ----------- Total assets $ 2,284,198 $ 2,309,343 =========== =========== LIABILITIES Noninterest-bearing deposits $ 428,906 $ 423,868 Interest-bearing deposits 1,316,769 1,308,633 ----------- ----------- Total deposits 1,745,675 1,732,501 Short-term borrowings 259,341 231,927 Subordinated debentures 35,000 35,000 Other long-term borrowings 29,421 94,608 Accrued interest payable and other liabilities 16,052 20,224 ----------- ----------- Total liabilities 2,085,489 2,114,260 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 50,000,000; shares issued and outstanding 14,642,686 (2005) and 14,628,511 (2004) 14,643 14,629 Additional paid in capital 21,839 21,522 Retained earnings 161,242 156,315 Accumulated other comprehensive income 985 2,617 ----------- ----------- Total stockholders' equity 198,709 195,083 ----------- ----------- Total liabilities and stockholders' equity $ 2,284,198 $ 2,309,343 =========== ===========
See Notes to Consolidated Financial Statements. 1 Sandy Spring Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, -------------------- (In thousands, except per share data) 2005 2004 - -------------------------------------------------------------------------------- Interest Income: Interest and fees on loans and leases $21,041 $16,369 Interest on loans held for sale 167 138 Interest on deposits with banks 4 3 Interest and dividends on securities: Taxable 3,328 6,556 Exempt from federal income taxes 3,594 3,587 Interest on federal funds sold 53 59 ------- ------- TOTAL INTEREST INCOME 28,187 26,712 Interest Expense: Interest on deposits 4,188 2,730 Interest on short-term borrowings 2,018 3,751 Interest on long-term borrowings 781 1,692 ------- ------- TOTAL INTEREST EXPENSE 6,987 8,173 ------- ------- NET INTEREST INCOME 21,200 18,539 Provision for loan and lease losses 100 0 ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES 21,100 18,539 Noninterest Income: Securities gains 15 228 Service charges on deposit accounts 1,671 1,868 Gains on sales of mortgage loans 731 769 Fees on sales of investment products 445 629 Trust department income 872 754 Insurance agency commissions 1,811 1,121 Income from bank owned life insurance 555 574 Visa check fees 491 424 Other income 1,249 1,223 ------- ------- TOTAL NONINTEREST INCOME 7,840 7,590 Noninterest Expenses: Salaries and employee benefits 11,289 9,877 Occupancy expense of premises 1,924 1,628 Equipment expenses 1,322 1,190 Marketing expenses 288 513 Outside data services 740 721 Amortization of intangible assets 496 486 Other expenses 2,378 2,299 ------- ------- TOTAL NONINTEREST EXPENSES 18,437 16,714 ------- ------- Income Before Income Taxes 10,503 9,415 Income Tax Expense 2,647 2,114 ------- ------- NET INCOME $ 7,856 $ 7,301 ======= ======= Basic Net Income Per Share $ 0.54 $ 0.51 Diluted Net Income Per Share 0.53 0.50 Dividends Declared Per Share 0.20 0.19
See Notes to Consolidated Financial Statements. 2 Sandy Spring Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, ----------------------- 2005 2004 - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 7,856 $ 7,301 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,653 1,549 Provision for loan and lease losses 100 0 Origination of loans held for sale (55,254) (68,718) Proceeds from sales of loans held for sale 57,867 61,800 Gains on sales of loans held for sale (731) (769) Securities gains (15) (228) Net (increase) decrease in accrued interest receivable (102) 1,124 Net decrease in other assets 2,541 2,708 Net increase (decrease) in accrued expenses and other liabilities (4,170) 3,480 Other - net 417 361 --------- --------- Net cash provided by operating activities 10,162 8,608 Cash flows from investing activities: Net decrease (increase) in interest-bearing deposits with banks (228) 16 Purchases of investments held-to-maturity 0 (2,828) Purchases of other equity securities 0 0 Purchases of investments available-for-sale 0 (266,387) Proceeds from sales of investments available-for-sale 34,334 97,974 Proceeds from the sales of other equity securities 1,178 1,259 Proceeds from maturities, calls and principal payments of investments held-to-maturity 230 31,602 Proceeds from maturities, calls and principal payments of investments available-for-sale 9,397 173,051 Net decrease (increase) in loans and leases (23,362) (48,801) Expenditures for premises and equipment (3,564) (2,579) --------- --------- Net cash used by investing activities 17,985 (16,693) Cash flows from financing activities: Net increase in deposits 13,174 56,760 Net (decrease) in short-term borrowings (12,773) (31,043) Retirement of long-term borrowings (25,000) 0 Common stock purchased and retired 0 (20) Proceeds from issuance of common stock 331 357 Dividends paid (2,929) (2,756) --------- --------- Net cash provided by financing activities (27,197) 23,298 --------- --------- Net increase in cash and cash equivalents 950 15,213 Cash and cash equivalents at beginning of period 49,195 49,067 --------- --------- Cash and cash equivalents at end of period $ 50,145 $ 64,280 ========= ========= Supplemental Disclosures: Interest payments $ 7,052 $ 8,285 Income tax payments 0 128 Noncash Financing Activities: Reclassification of borrowings from long-term to short-term 40,187 187
See Notes to Consolidated Financial Statements. 3 Sandy Spring Bancorp, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum- ulated Other Compre- Total Additional hensive Stock- Common Paid-in Retained Income holders' (Dollars in thousands, except per share data) Stock Capital Earnings (loss) Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balances at January 1, 2005 $ 14,629 $ 21,522 $ 156,315 $ 2,617 $ 195,083 Comprehensive income: Net income 7,856 7,856 Other comprehensive loss, net of tax effects and reclassification adjustment (1,632) (1,632) --------- Total comprehensive income 6,224 Cash dividends - $0.20 per share (2,929) (2,929) Common stock issued pursuant to: Stock option plan - 9,436 shares 9 176 185 Employee stock purchase plan - 4,739 shares 5 141 146 --------- --------- --------- --------- --------- Balances at March 31, 2005 $ 14,643 $ 21,839 $ 161,242 $ 985 $ 198,709 ========= ========= ========= ========= ========= Balances at January 1, 2004 $ 14,496 $ 18,970 $ 153,280 $ 6,703 $ 193,449 Comprehensive income: Net income 7,301 7,301 Other comprehensive income, net of tax effects and reclassification adjustment 1,284 1,284 --------- Total comprehensive income 8,585 Cash dividends - $0.19 per share (2,756) (2,756) Common stock issued pursuant to: Stock option plan - 10,029 shares 10 205 215 Employee stock purchase plan - 4,614 shares 5 137 142 Stock repurchases - 550 shares (1) (19) (20) --------- --------- --------- --------- --------- Balances at March 31, 2004 $ 14,510 $ 19,293 $ 157,825 $ 7,987 $ 199,615 ========= ========= ========= ========= =========
See Notes to Consolidated Financial Statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - General The foregoing financial statements are unaudited. 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 2004 Annual Report to Shareholders. There have been no significant changes to the Company's Accounting Policies as disclosed in the 2004 Annual Report. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2005. The accounting and reporting policies of Sandy Spring Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Sandy Spring Bank (the "Bank"), together with its subsidiaries, Sandy Spring Insurance Corporation and The Equipment Leasing Company, conform to accounting principles generally accepted in the United States of America and to general practices within the financial services industry. Certain reclassifications have been made to amounts previously reported to conform to current classifications. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold (which have original maturities of three months or less). New Accounting Pronouncements On September 30, 2004, the FASB issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue No. 03-1-1 delaying the effective date of paragraphs 10-20 of EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," which provides guidance for determining the meaning of "other-than-temporarily impaired" and its application to certain debt and equity securities within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. The delay of the effective date of EITF 03-1 will be superceded concurrent with the final issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to provide implementation guidance with respect to all securities analyzed for impairment under paragraphs 10-20 of EITF 03-1. Management continues to closely monitor and evaluate how the provisions of EITF 03-1 and proposed FSP Issue 03-1-a will affect the Company. In December 2004, the FASB published FASB Statement No. 123 (revised 2004), "Share-Based Payment" ("FAS 123 (R)" or the "Statement"). FAS 123 (R) requires that compensation cost relating to share-based payment transactions, including grants of employee stock options, be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. FAS 123 (R) permits entities to use any option-pricing model that meets the fair value objective in the Statement. In April 2005 the Securities and Exchange Commission adopted a new rule that delays the effective date of FAS 123 (R) to fiscal years beginning after June 15, 2005. The impact of this Statement on the Company in 2006 and beyond will depend upon various factors, among them being the Company's future compensation strategy. The pro forma compensation costs presented (in note 2 below) and in prior filings for the Company have been calculated using a binomial option pricing model and may not be indicative of amounts that should be expected in future periods. No decisions have been made as to whether the Company will apply the modified prospective or retrospective method of application. Note 2 - Stock Option Plan At March 31, 2005, the Company had options outstanding under two stock-based employee compensation plans, the 1992 stock option plan (expired but having outstanding options that may still be exercised) and the 1999 stock option plan. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effects on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation for the periods indicated. 5
Three Months Ended March 31, ------------------------ (In thousands, except per share data) 2005 2004 - -------------------------------------------------------------------------------------------------------- Net income, as reported $ 7,856 $ 7,301 Less pro forma stock-based employee compensation expense determined under fair value based method, net of related tax effects (278) (310) --------- --------- Pro forma net income $ 7,578 $ 6,991 ========= ========= Net income per share: Basic - as reported $ 0.54 $ 0.51 Basic - pro forma $ 0.52 $ 0.48 Diluted - as reported $ 0.53 $ 0.50 Diluted - pro forma $ 0.51 $ 0.47
Note 3 - Per Share Data The calculations of net income per common share for the three month periods ended March 31 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.
Three Months Ended March 31, (Dollars and amounts in thousands, except ------------------------ Per share data) 2005 2004 - -------------------------------------------------------------------------------------------------------- Basic: Net income available to common stockholders $ 7,856 $ 7,301 Average common shares outstanding 14,637 14,505 Basic net income per share $ 0.54 $ 0.51 ======= ======= Diluted: Net income available to common stockholders $ 7,856 $ 7,301 Average common shares outstanding 14,637 14,505 Stock option adjustment 124 220 ------- ------- Average common shares outstanding-diluted 14,761 14,725 Diluted net income per share $ 0.53 $ 0.50 ======= =======
Options for 371,835 shares and 189,489 shares of common stock were not included in computing diluted net income per share for the three months ended March 31, 2005 and 2004 respectively, because their effects are antidilutive. Note 4 -Pension, Profit Sharing, and Other Employee Benefit Plans Defined Benefit Pension Plan The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all employees. Benefits equal the sum of two parts: (a) the benefit accrued as of December 31, 2000, based on the formula of 1.5% of the highest five year average salary as of that date times years of service as of that date, plus (b) 1.75% of each year's earnings after December 31, 2000 (1.75% of career average earnings). In addition, if the participant's age plus years of service as of January 1, 2001, equal at least 60 and the participant had at least 15 years of service at that date, he or she will receive an additional benefit of 1% of year 2000 earnings for each of the first 10 years of service completed after December 31, 2000. Early retirement is also permitted by the Plan at age 55 after 10 years of service. The Company's funding policy is to contribute at least the minimum amount necessary to keep the plan fully funded. The plan invests primarily in a diversified portfolio of managed fixed income and equity funds. Contributions provide not only for benefits attributed to service to date, but also for the benefit expected to be earned in the coming year. The Company, with input from its actuaries, estimates that the 2005 contribution will be approximately $2.0 million which will maintain the pension plan's fully funded status. 6 Net periodic benefit cost for the three months ended March 31 for the previous two years includes the following components:
Three months Ended March 31, ---------------------- (In thousands) 2005 2004 - ------------------------------------------------------------------------------------------------------ Service cost for benefits earned $ 406 $ 412 Interest cost on projected benefit obligation 273 232 Expected return on plan assets (287) (260) Amortization of prior service cost (16) (15) Recognized net actuarial loss 84 82 ----- ----- Net periodic benefit cost $ 460 $ 451 ===== =====
Cash and Deferred Profit Sharing Plan The Company has a qualified Cash and Deferred Profit Sharing Plan that includes a 401 (k) provision with a Company match. The profit sharing component is non-contributory and covers all employees after ninety days of service. The 401(k) plan provision is voluntary and also covers all employees after ninety days of service. Employees contributing under the 401 (k) provision receive a matching contribution up to the first 4% of compensation based on years of service and subject to employee contribution limitations. The Company match includes a vesting schedule with employees becoming 100% vested after four years of service. The Plan permits employees to purchase shares of Sandy Spring Bancorp common stock with their profit sharing allocations, 401 (k) contributions, Company match, and other contributions under the Plan. The Company had expenses related to the qualified Cash and Deferred Profit Sharing Plan of $620,000 and $241,000 for the three months ended March 31, 2005 and 2004, respectively. The Company also has a performance based compensation benefit which is integrated with the Cash and Deferred Profit Sharing Plan and which provides incentives to employees based on the Company's financial results as measured against key performance indicator goals set by management. The Company had expenses related to the performance based compensation benefit of $720,000 and $75,000 for the three months ended March 31, 2005 and 2004, respectively. The Company has Supplemental Executive Retirement Agreements (SERAs) with its executive officers, providing for retirement income benefits as well as pre-retirement death benefits. Retirement benefits payable under SERAs, if any, are integrated with other pension plan and Social Security retirement benefits expected to be received by the executive. The Company is accruing the present value of these benefits over the remaining years to the executives' retirement dates. The Company had expenses (benefits) related to the SERAs of $135,000 and $(4,000) for the three months ended March 31, 2005 and 2004, respectively. The Company has an Executive Health Insurance Plan that provides for payment of defined medical and dental expenses not otherwise covered by insurance for selected executives and their families. Benefits, which are paid during both employment and retirement, are subject to a $6,500 limitation for each executive per year. The Company had expenses related to the Executive Health Insurance Plan of $64,000 for both the three months ended March 31, 2005 and March 31, 2004. Note 5 - Unrealized Losses on Investments Shown below is information that summarizes the gross unrealized losses and fair value for the Company's available-for-sale and held-to-maturity investment portfolios. 7 Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position at March 31, 2005 and 2004 are as follows:
Continuous unrealized losses (In thousands) existing for: ------------------------------ Less than 12 More than 12 Total Unrealized Available for sale as of March 31, 2005 Fair Value months months Losses ---------- ------------ ------------ ---------------- U.S. Agency $157,018 $ 2,063 $ 494 $ 2,557 State and municipal 10,651 66 98 164 Mortgage-backed 7,536 2 176 178 Corporate Bonds 520 5 0 5 -------- -------- -------- -------- $175,725 $ 2,136 $ 768 $ 2,094 ======== ======== ======== ========
Continuous unrealized losses (In thousands) existing for: ------------------------------ Less than 12 More than 12 Total Unrealized Available for sale as of March 31, 2004 Fair Value months months Losses ---------- ------------ ------------ ---------------- U.S. Agency $151,658 $ 67 $ 0 $ 67 State and municipal 4,161 12 9 21 Mortgage-backed 10,197 10 3 13 -------- -------- -------- -------- $166,016 $ 89 $ 12 $ 101 ======== ======== ======== ========
Approximately 99% of the bonds carried in the available-for-sale investment portfolio experiencing continuous losses as of March 31, 2005 and 2004 are rated AAA. The securities representing the unrealized losses in the available-for-sale portfolio as of March 31, 2005 and 2004 all have modest duration risk (3.24 years in 2005 and 3.07 years in 2004), low credit risk, and minimal loss (approximately 1%) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the fact that the Company has both the intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the available-for-sale portfolio are temporary. Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position a March 31, 2005 and 2004 are as follows:
Continuous unrealized losses (In thousands) existing for: ------------------------------ Less than 12 More than 12 Total Unrealized Held to Maturity as of March 31, 2005 Fair Value months months Losses ---------- ------------ ------------ ---------------- U.S. Agency $33,972 $ 414 $ 0 $ 414 State and municipal 59,831 270 435 705 ------- ------- ------- ------- $93,803 $ 684 $ 435 $ 1,119 ======= ======= ======= =======
8
Continuous unrealized losses (In thousands) existing for: ------------------------------ Less than 12 More than 12 Total Unrealized Held to Maturity as of March 31, 2004 Fair Value months months Losses ---------- ------------ ------------ ---------------- State and municipal $40,793 $ 286 $ 329 $ 615 ------- ------- ------- ------- $40,793 $ 286 $ 329 $ 615 ======= ======= ======= =======
Approximately 90% and 72% of the bonds carried in the held-to-maturity investment portfolio experiencing continuous unrealized losses as of March 31, 2005 and 2004, respectively, are rated AAA and 10% and 28% as of March 31, 2005 and 2004, respectively, are rated AA1. The securities representing the unrealized losses in the held-to-maturity portfolio all have modest duration risk (4.0 years in 2005 and 3.5 years in 2004), low credit risk, and minimal losses (approximately 1%) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the Company's intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the held-to-maturity portfolio are temporary. Note 6 - Segment Reporting The Company operates in three operating segments--Community Banking, Insurance, and Leasing. Only Community Banking presently meets the threshold for reportable segment reporting; however, the Company is disclosing separate information for all three operating segments. Each of the operating segments is a strategic business unit that offers different products and services. The Insurance and Leasing segments were businesses that were acquired in separate transactions where management at the time of acquisition was retained. The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements. However, the segment data reflect intersegment transactions and balances. The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products to both individuals and businesses. Parent company income is included in the Community Banking segment, as the majority of parent company activities are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income, fees on sales of investment products and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment and other expenses. Included in Community Banking expenses are noncash charges associated with amortization of intangibles related to acquired entities totaling $446,000 for both 2005 and 2004. The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank, and offers annuities as an alternative to traditional deposit accounts. Sandy Spring Insurance Corporation operates the Chesapeake Insurance Group, a general insurance agency located in Annapolis, Maryland, and Wolfe and Reichelt Insurance Agency, located in Burtonsville, Maryland. Major sources of revenue are insurance commissions from commercial lines and personal lines. Expenses include personnel and support charges. The Leasing segment is conducted through The Equipment Leasing Company, a subsidiary of the Bank, that provides leases for such items as computers, telecommunications systems and equipment, medical equipment and point-of-sale systems for retail businesses. Equipment leasing is conducted through vendors located primarily in states along the east coast from New Jersey to Florida and in Illinois. The typical lease is a "small ticket" by industry standards, averaging less than $30,000, with individual leases generally not exceeding $250,000. Major revenue sources include interest income. Expenses include personnel and support charges. 9 Information about operating segments and reconciliation of such information to the consolidated financial statements follows:
Community Inter-Segment (In thousands) Banking Insurance Leasing Elimination Total - ------------------------------------------------------------------------------------------------------------------- Quarter ended March 31, 2005 Interest income $ 27,913 $ 6 $ 408 $ (140) $ 28,187 Interest expense 6,994 0 133 (140) 6,987 Provision for loan and lease losses 100 0 0 0 100 Noninterest income 5,853 1,944 224 (181) 7,840 Noninterest expenses 17,289 1,116 213 (181) 18,437 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes 9,383 834 286 0 10,503 Income tax expense 2,204 330 113 0 2,647 ---------- ---------- ---------- ---------- ---------- Net income (loss) $ 7,179 $ 504 $ 173 $ 0 $ 7,856 ========== ========== ========== ========== ========== Assets $2,283,362 $ 8,546 $ 20,737 $ (28,447) $2,284,198 Quarter ended March 31, 2004 Interest income $ 26,385 $ 2 $ 462 (137) $ 26,712 Interest expense 8,175 0 135 (137) 8,173 Provision for loan and lease losses 0 0 0 0 0 Noninterest income 6,156 1,350 202 (118) 7,590 Noninterest expense 15,771 849 212 (118) 16,714 ---------- ---------- ---------- ---------- ---------- Income before income taxes 8,595 503 317 0 9,415 Income tax expense 1,789 200 125 0 $ 2,114 ---------- ---------- ---------- ---------- ---------- Net income $ 6,806 $ 303 $ 192 $ 0 7,301 ========== ========== ========== ========== ========== Assets $2,369,289 $ 7,863 $ 20,502 $ (26,082) $2,371,572
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Sandy Spring Bancorp makes forward-looking statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include: statements of goals, intentions, earnings expectations, and other expectations; estimates of risks and of future costs and benefits; assessments of probable loan and lease losses; assessments of 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, market behavior, 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, Sandy Spring Bancorp's actual future results may differ materially 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 Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George's 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 March 31, 2005, year-to-date average commercial loans and leases and commercial real estate loans accounted for approximately 43% of the Company's loan and lease portfolio, and year-to-date average consumer and residential real estate loans accounted for approximately 57%. 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. 10 CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The estimates used in management's assessment of the adequacy of the allowance for loan and lease losses require that management make assumptions about matters that are uncertain at the time of estimation. Differences in these assumptions and differences between the estimated and actual losses could have a material effect. NON-GAAP FINANCIAL MEASURE The Company has for many years used a traditional efficiency ratio that is a non-GAAP financial measure as defined in Commission Regulation G and Item 10 of U.S. Securities and Exchange Commission Regulation S-K. This traditional efficiency ratio is used as a measure of operating expense control and efficiency of operations. Management believes that its traditional ratio better focuses attention on the operating performance of the Company over time than does a GAAP-based ratio, and that it is highly useful in comparing period-to-period operating performance of the Company's core business operations. It is used by management as part of its assessment of its performance in managing noninterest expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the traditional efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions. In general, the efficiency ratio is noninterest expenses as a percentage of net interest income plus total noninterest income. This is a GAAP financial measure. Noninterest expenses used in the calculation of the traditional, non-GAAP efficiency ratio exclude intangible asset amortization. Income for the traditional ratio is increased for the favorable effect of tax-exempt income, and excludes securities gains and losses, which can vary widely from period to period without appreciably affecting operating expenses. The traditional measure is different from the GAAP-based efficiency ratio. The GAAP-based measure is calculated using noninterest expense and income amounts as shown on the face of the Consolidated Statements of Income. The traditional and GAAP-based efficiency ratios are presented and reconciled in Table 1. 11 Table 1 - GAAP based and traditional efficiency ratios
Three Months Ended March 31, ----------------------- (Dollars in thousands) 2005 2004 - -------------------------------------------------------------------------------- Noninterest expenses-GAAP based $18,437 $16,714 Net interest income plus noninterest income- GAAP based 29,040 26,129 Efficiency ratio-GAAP based 63.49% 63.97% ======= ======= Noninterest expenses-GAAP based $18,437 $16,714 Less non-GAAP adjustments: Amortization of intangible assets 496 486 ------- ------- Noninterest expenses-traditional ratio 17,941 16,228 Net interest income plus noninterest income- GAAP based 29,040 26,129 Plus non-GAAP adjustment: Tax-equivalency 1,709 1,965 Less non-GAAP adjustments: Securities gains 15 228 ------- ------- Net interest income plus noninterest Income - traditional ratio 30,734 27,866 Efficiency ratio - traditional 58.38% 58.24% ======= =======
A. FINANCIAL CONDITION The Company's total assets were $2,284,198,000 at March 31, 2005, compared to $2,309,343,000 at December 31, 2004, decreasing $25,145,000 or 1% during the first three months of 2005. Earning assets also decreased by 1%, to $2,108,310,000 at March 31, 2005, from $2,133,921,000 at December 31, 2004. Total loans and leases, excluding loans held for sale, increased 2% or $23,289,000 during the first three months of 2005, to $1,468,814,000. During this period, all three major loan categories showed increases. The most significant of these increases occurred in commercial loans and leases, which increased $13,761,000 or 2%, primarily due to growth in commercial real estate loans. Residential real estate loans showed growth of 1% or $5,906,000 due mainly to growth in residential mortgage loans. Growth in consumer loans totaled 1% or $3,623,000 driven largely by growth in home equity lines. Finally, residential mortgage loans held for sale decreased by $1,882,000 from December 31, 2004, to $14,329,000 at March 31, 2005. Table 2 - Analysis of Loans and Leases The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated:
(In thousands) March 31, 2005 % December 31, 2004 % - ---------------------------------------------------------------------------------------------------------- Residential real estate $ 515,710 35% $ 509,804 35% Commercial loans and leases 640,379 44 626,619 43 Consumer 312,725 21 309,102 22 ----------- --- ----------- --- Total Loans and Leases 1,468,814 100% 1,445,525 100% === === Less: Allowance for loan and lease losses (14,738) (14,654) ----------- ----------- Net loans and leases $ 1,454,076 $ 1,430,871 =========== ===========
The total investment portfolio decreased by 7% or $48,019,000 from December 31, 2004, to $618,089,000 at March 31, 2005, primarily to support loan growth and to reduce total borrowings. The decrease was driven primarily by a decline of $46,457,000 or 13% of available-for-sale securities. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $1,001,000 during the first three months of 2005, reaching $7,078,000 at March 31, 2005. 12 Total deposits were $1,745,675,000 at March 31, 2005, increasing $13,174,000 or 1% from $1,732,501,000 at December 31, 2004. First quarter growth rates of slightly over 1% were achieved in 2005 for noninterest-bearing demand deposits (up $5,038,000). Money market savings increased $11,148,000 or 3% in the first quarter. This increase was partially offset by a decline of $7,169,000 or 3% in interest bearing demand deposits. Total borrowings were $323,762,000 at March 31, 2005, which represented a decrease of $37,773,000 or 10% from December 31, 2004, primarily reflecting management's efforts to reduce the overall cost of funds. Table 3 - Analysis of Deposits The following table presents the trends in the composition of deposits at the dates indicated:
(In thousands) March 31, 2005 % December 31, 2004 % - ------------------------------------------------------------------------------------------------------ Noninterest-bearing deposits $ 428,906 25% $ 423,868 25% Interest-bearing deposits: Demand 234,209 13 241,378 14 Money market savings 382,665 22 371,517 21 Regular savings 228,468 13 228,301 13 Time deposits less than $100,000 276,910 16 275,671 16 Time deposits $100,000 or more 194,517 11 191,766 11 ---------- --- ---------- --- Total interest-bearing 1,316,769 75 1,308,633 75 ---------- --- ---------- --- Total deposits $1,745,675 100% $1,732,501 100% ========== === ========== ===
MARKET RISK AND INTEREST RATE SENSITIVITY OVERVIEW The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity. The Company's Board of Directors has established a comprehensive interest rate risk management policy, which is administered by Management's Asset Liability Management Committee ("ALCO"). The policy establishes limits of risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity ("EVE") at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers' ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products. The Company prepares a current base case and eight alternative simulations, at least once a quarter, and reports the analysis to the Board of Directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate. If a measure of risk produced by the alternative simulations of the entire balance sheet violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a level that complies with policy limits within two quarters. The Company's interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets and, (2) to minimize fluctuations in net interest margin as a percentage of earning assets. Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis. 13 The balance sheet is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points ("bp"), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management's goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels. From time to time the Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists. ANALYSIS OF POSSIBLE OUTCOMES Measures of net interest income at risk produced by simulation analysis are indicators of an institution's short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution. ESTIMATED CHANGES IN NET INTEREST INCOME
------------------------------------------------------------------------------------------------------- CHANGE IN NET INTEREST INCOME: + 400 BP + 300 BP + 200 BP + 100 BP - 100 BP ------------------------------------------------------------------------------------------------------- POLICY LIMIT 30% 25% 20% 15% 15% March 2005 +1.14 -0.09 -0.98 -0.10 -2.75 December 2004 +0.97 -0.06 -0.48 +0.62 -2.45
As shown above, measures of net interest income remained at approximately the same levels as December 31, 2004 at all interest rate shock levels. All measures remained well within prescribed policy limits. Although assumed to be unlikely, our largest exposure is at the -100bp level, with a measure of -2.75% compared to -2.45% at December 31, 2004. This is also well within our prescribed policy limit of 15%. The maintenance of the net interest income sensitivity is consistent with management's decision to reduce the size of the investment portfolio in the first quarter of 2005 in anticipation of rising interest rates in the future and to support the funding of loan growth. The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company's cash flows, and discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the market value of the Company's net assets. ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
--------------------------------------------------------------------------------------------------------------- DECREASE IN ECONOMIC VALUE OF EQUITY: + 400 BP + 300 BP + 200 BP + 100 BP - 100 BP --------------------------------------------------------------------------------------------------------------- POLICY LIMIT 60% 40% 22.5% 10.0% 12.5% March 2005 -14.95 -11.08 -6.17 -1.53 -1.73 December 2004 -22.44 -17.07 -9.98 -2.12 -1.04
Measures of the economic value of equity (EVE) at risk improved over year-end 2004 in all but the -100bp interest rate shock levels. A reduction in the size of the investment portfolio, as well as core deposit balance growth and an increase in core deposit estimated lives were key contributors to the improved risk position. The economic value of equity exposure at +200bp is now - -6.17% compared to -9.98% at year-end 2004, and is well within the policy limit of 22.5%, as are measures at all other shock levels. LIQUIDITY Liquidity is measured using an approach designed to take into account loan and lease payments, maturities, calls and pay downs of securities, earnings, growth, mortgage banking activities, leverage programs, investment portfolio liquidity, and other factors. Through this approach, implemented by the funds management subcommittee 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 March 31, 2005 showed short-term investments exceeding short-term borrowings over the subsequent 90 days by $47,277,000, which increased from a projected shortfall of $34,799,000 at December 31, 2004. This excess of liquidity over projected requirements for funds indicates that the Company can increase its loans and other earning assets without incurring additional borrowing. 14 The Company also has external sources of funds, which can be drawn upon when required. The main source of external liquidity is a line of credit for $691,416,000 from the Federal Home Loan Bank of Atlanta, of which approximately $139,971,000 was outstanding at March 31, 2005. 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 $265,638,000 at March 31, 2005, against which there were outstandings of approximately $27,000,000. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position is appropriate at March 31, 2005. The following is a schedule of significant commitments at March 31, 2005: (In thousands) Commitments to extend credit: Unused lines of credit (home equity and business) $392,626 Other commitments to extend credit $161,811 Standby letters of credit $ 34,594 -------- Total $589,031 ======== CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 14.02% at March 31, 2005, compared to 13.82% at December 31, 2004; a tier 1 risk-based capital ratio of 13.12%, compared to 12.92%; and a capital leverage ratio of 9.47%, compared to 8.67%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Management believes the level of capital at March 31, 2005, is appropriate. Stockholders' equity for March 31, 2005, totaled $198,709,000, representing an increase of $3,626,000 or 2% from $195,083,000 at December 31, 2004. Accumulated other comprehensive income, a component of stockholders' equity comprised of unrealized gains and losses on available-for-sale securities, net of taxes, decreased by 62% or $1,632,000 from December 31, 2004 to March 31, 2005. Internal capital generation (net income less dividends) added $4,927,000 to total stockholders' equity during the first three months of 2005. When internally formed capital is annualized and expressed as a percentage of average total stockholders' equity, the resulting rate was 10% compared to 2% reported for the full-year 2004. External capital formation (equity created through the issuance of stock under the employee stock purchase plan and the stock option plan) totaled $331,000 during the three month period ended March 31, 2005. Dividends for the first three months of the year were $0.20 per share in 2005, compared to $0.19 per share in 2004, for respective dividend payout ratios (dividends declared per share to diluted net income per share) of 38% for both periods. B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2005, AND 2004 Net income for the first three months of the year increased $555,000 or 8% to $7,856,000 in 2005 from $7,301,000 in 2004, representing annualized returns on average equity of 16.20% and 15.00%, respectively. First quarter year-to-date diluted earnings per share (EPS) were $0.53 in 2005, compared to $0.50 in 2004, an increase of $0.03 or 6%. The primary factor driving the growth in net income was the increase in the net interest margin that was due primarily to the balance sheet repositioning completed in the fourth quarter of 2004. This increase was somewhat offset by higher noninterest expenses resulting from increased salary and employee benefits expenses. The net interest margin increased by 58 basis points to 4.39% for the three months ended March 31, 2005, from 3.81% for the same period of 2004, as the net interest spread also increased by 58 basis points. These results reflect to a large extent the balance sheet repositioning accomplished in the fourth quarter of 2004. 15 Sandy Spring Bancorp, Inc. and Subsidiaries Table 4 - Consolidated Average Balances, Yields and Rates (Dollars in thousands and tax equivalent)
For the three months ended March 31, --------------------------------------------------------- 2005 2004 -------------------------- --------------------------- Average Average Average Average Balance Yield/Rate(1) Balance Yield/Rate(1) - ------------------------------------------------------------------------------------------------------------- Assets Total loans and leases (2) $1,463,553 5.86% $1,187,292 5.58% Total securities 641,960 5.48 954,822 5.08 Other earning assets 9,856 2.33 25,527 0.96 ---------- ---------- TOTAL EARNING ASSETS 2,115,369 5.73% 2,167,641 5.31% Nonearning assets 170,840 161,344 ---------- ---------- Total assets $2,286,209 $2,328,985 ========== ========== Liabilities and Stockholders' Equity Interest-bearing demand deposits $ 237,637 0.25% $ 223,986 0.27% Money market savings deposits 375,483 1.17 375,140 0.53 Regular savings deposits 227,250 0.32 195,286 0.34 Time deposits 467,473 2.41 406,913 1.90 ---------- ---------- Total interest-bearing deposits 1,307,843 1.30 1,201,325 0.91 Short-term borrowings 282,079 2.87 399,822 3.72 Long-term borrowings 70,917 4.41 150,078 4.46 ---------- ---------- Total interest-bearing liabilities 1,660,839 1.70 1,751,225 1.86 ------ ------ Noninterest-bearing demand deposits 415,824 360,341 Other noninterest-bearing liabilities 12,887 21,689 Stockholders' equity 196,659 195,730 ---------- ---------- Total liabilities and stockholders' equity $2,286,209 $2,328,985 ========== ========== Net interest spread 4.03% 3.45% ====== ====== Net interest margin (3) 4.39% 3.81% ====== ====== Ratio of average earning assets to Average interest-bearing liabilities 127.37% 123.78% ====== ======
(1) Interest income includes the effects of taxable-equivalent adjustments (reduced by the nondeductible portion of interest expense) using the appropriate federal income tax rate of 35% and, where applicable, the marginal state income tax rate of 7.00% (or a combined marginal federal and state rate of 39.55%), to increase tax-exempt interest income to a taxable-equivalent basis. The net taxable-equivalent adjustment amounts utilized in the above table (on an annual basis) to compute yields were $6,931,000 and $7,903,000 in the quarters ended March 31, 2005 and 2004, respectively. (2) Non-accrual loans are included in the average balances. (3) Net interest margin = annualized net interest income on a tax-equivalent basis divided by total interest-earning assets. 16 NET INTEREST INCOME Net interest income for the first three months of the year was $21,200,000 in 2005, an increase of 14% from $18,539,000 in 2004, due primarily to the balance sheet repositioning completed in the fourth quarter of 2004 and a 23% increase in average loans compared to the first quarter of 2004. Non-GAAP tax-equivalent net interest income, which takes into account the benefit of tax advantaged investment securities, increased by 12%, to $22,909,000 in 2005 from $20,504,000 in 2004. The effects of average balances, yields and rates are presented in Table 4. For the first three months, total interest income increased by $1,475,000 or 6% in 2005, compared to 2004. On a non-GAAP tax-equivalent basis, interest income increased by 4%. Average earning assets declined slightly versus the prior period, to $2,115,369,000 from $2,167,641,000, while the average yield earned on those assets increased by 42 basis points to 5.73%. Comparing the first three months of 2005 versus 2004, average total loans and leases grew by 23% to $1,463,553,000 (69% of average earning assets, versus 55% a year ago), while recording a 28 basis point increase in average yield to 5.86%. Average residential real estate loans increased by 19% (reflecting increases in both mortgage and construction lending); average consumer loans increased by 23% (attributable primarily to home equity line growth); and, average commercial loans and leases grew by 27% (due to increases in commercial mortgages and other commercial loans). Over the same period, average total securities decreased by 33% to $641,960 (30% of average earning assets, versus 44% a year ago), while the average yield earned on those assets increased, by 40 basis points to 5.48%. Interest expense for the first three months of the year decreased by $1,186,000 or 15% in 2005, compared to 2004. Average total interest-bearing liabilities decreased by 5% over the prior year period, while the average rate paid on these funds also decreased, by 16 basis points to 1.70%. As shown in Table 4 this decrease was due to a 74 basis point decline in the average rate paid on borrowings, largely due to the payoff of $195 million in advances from the Federal Home Loan Bank in the fourth quarter of 2004. Somewhat offsetting this decrease was a 39 basis point increase in the average rate paid on interest-bearing deposits reflecting the rising trend in market interest rates. Table 5 - Effect of Volume and Rate Changes on Net Interest Income
2005 vs. 2004 2004 vs. 2003 - ------------------------------------------------------------------------------------------------------------------- Increase Due to Change Increase Due to Change Or In Average:* Or In Average:* (In thousands and tax equivalent) (Decrease) Volume Rate (Decrease) Volume Rate - ------------------------------------------------------------------------------------------------------------------- Interest income from earning assets: Loans and leases $ 4,701 $ 3,978 $ 723 $ (315) $(1,851) $ 1,536 Securities (3,221) (3,371) 150 (2,057) (946) (1,111) Other investments (5) (54) 49 (47) (29) (18) ------- ------- ------- ------- ------- ------- Total interest income 1,475 553 922 (2,419) (2,826) 407 Interest expense on funding of earning assets: Interest-bearing demand deposits (6) 9 (15) 26 26 0 Regular savings deposits 16 26 (10) 19 33 (14) Money market savings deposits 587 0 587 (275) (51) (224) Time deposits 861 313 548 (973) (211) (762) Total borrowings (2,644) (1,700) (944) (697) (604) (93) ------- ------- ------- ------- ------- ------- Total interest expense (1,186) (1,352) 166 (1,900) (807) (1,093) ------- ------- ------- ------- ------- ------- Net interest income $ 2,661 $ 1,905 $ 756 $ (519) $(2,019) $ 1,500 ======= ======= ======= ======= ======= =======
* Where volume and rate have a combined effect that cannot be separately identified with either, the variance is allocated to volume and rate based on the relative size of the variance that can be separately identified with each. CREDIT RISK MANAGEMENT The Company's loan and lease portfolio (the "credit portfolio") is subject to varying degrees of credit risk. Credit risk is mitigated through portfolio diversification, limiting exposure to any single customer, industry or collateral type. The Company maintains an allowance for credit losses (the "allowance") to absorb losses inherent in the loan and lease portfolio. The allowance is based on careful, continuous review and evaluation of the loan and lease portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio, and, to a lesser extent, in unused commitments to provide financing. The allowance represents an estimate made pursuant to Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies," or SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." The adequacy of the allowance is determined through careful and continuous evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish a prudent level. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The Company's systematic methodology for assessing the appropriateness of the allowance includes: (1) the formula allowance reflecting historical losses, as adjusted, by credit category and (2) the specific allowance for risk-rated credits on an individual or portfolio basis. 17 The formula allowance that is based upon historical loss factors, as adjusted, establishes allowances for the major loan and lease categories based upon adjusted historical loss experience over the prior eight quarters, weighted so that losses in the most recent quarters have the greatest effect. The factors used to adjust the historical loss experience address various risk characteristics of the Company's loan and lease portfolio including (1) trends in delinquencies and other non-performing loans, (2) changes in the risk profile related to large loans in the portfolio, (3) changes in the categories of loans comprising the loan portfolio, (4) concentrations of loans to specific industry segments, (5) changes in economic conditions on both a local and national level, (6) changes in the Company's credit administration and loan and lease portfolio management processes and (7) quality of the Company's credit risk identification processes. The specific allowance is used to allocate an allowance for internally risk rated commercial loans where significant conditions or circumstances indicate that a loss may be imminent. Analysis resulting in specific allowances, including those on loans identified for evaluation of impairment, includes consideration of the borrower's overall financial condition, resources and payment record, support available from financial guarantors and the sufficiency of collateral. These factors are combined to estimate the probability and severity of inherent losses. Then a specific allowance is established based on the Company's calculation of the potential loss embedded in the individual loan. Allowances are also established by application of credit risk factors to other internally risk rated loans, individual consumer and residential loans, and commercial leases on nonaccrual or 90-day past due status. Each risk rating category is assigned a credit risk factor based on management's estimate of the associated risk, complexity, and size of the individual loans within the category. Additional allowances may also be established in special circumstances involving a particular group of credits or portfolio within a risk category when management becomes aware that losses incurred may exceed those determined by application of the risk factor alone. The amount of the allowance is reviewed monthly by the senior loan committee, and reviewed and approved by the Board of Directors quarterly. The provision for loan and lease losses in the first three months of 2005 totaled $100,000 compared to none in the same period in 2004. The Company experienced net charge-offs during the first three months of 2005 and 2004 of $16,000 and $5,000, respectively. Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of probable losses inherent in the credit 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 portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, and independent consultants engaged by Sandy Spring Bank, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on these third-party judgments of information available at the time of each examination. During the first three months of 2005, there were no changes in estimation methods or assumptions that affected the allowance methodology. The allowance for loan and lease losses was 1.00% of total loans and leases at March 31, 2005 and 1.01% at December 31, 2004. The allowance increased during the first three months of 2005 by $84,000 from $14,654,000 at December 31, 2004, to $14,738,000 at March 31, 2005. The stability of the allowance reflects the required reserve computed by the allowance methodology at March 31, 2005, compared to December 31, 2004. The required reserve increased at March 31, 2005 compared to December 31, 2004 due primarily to growth in the loan portfolio. Nonperforming loans and leases increased by $414,000 to $2,203,000 from December 31, 2004 to March 31, 2005, while nonperforming assets increased by $487,000 to $2,294,000. Expressed as a percentage of total assets, nonperforming assets increased to 0.10% at March 31, 2005 from 0.08% at December 31, 2004. The allowance for loan and lease losses represented 669% of nonperforming loans and leases at March 31, 2005, compared to coverage of 819% at December 31, 2004. 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 was $73,000 at March 31, 2005 compared to none at December 31, 2004. The balance of impaired loans was $600,000 at March 31, 2005, with specific reserves against those loans of $186,000, compared to $690,000 at December 31, 2004, with specific reserves of $251,000. 18 Table 6-- Analysis of Credit Risk (Dollars in thousands) Activity in the allowance for credit losses is shown below:
Three Months Ended Twelve Months Ended March 31, 2005 December 31, 2004 - ----------------------------------------------------------------------------------------------------- Balance, January 1 $ 14,654 $ 14,880 Provision for credit losses 100 0 Loan charge-offs: Residential real estate 0 (109) Commercial loans and leases (60) (173) Consumer (2) (214) -------- -------- Total charge-offs (62) (496) Loan recoveries: Residential real estate 24 54 Commercial loans and leases 22 169 Consumer 0 47 -------- -------- Total recoveries 46 270 -------- -------- Net charge-offs (16) (226) -------- -------- Balance, period end $ 14,738 $ 14,654 ======== ======== Net charge-offs to average loans and Leases (annual basis) ** 0.02% Allowance to total loans and leases 1.00% 1.01%
The following table presents nonperforming assets at the dates indicated:
March 31 December 31, 2005 2004 - -------------------------------------------------------------------------------------------------- Non-accrual loans and leases $ 672 $ 746 Loans and leases 90 days past due 1,531 1,043 -------- -------- Total nonperforming loans and leases* 2,203 1,789 Other assets and real estate owned 94 18 -------- -------- Total nonperforming assets $ 2,294 $ 1,807 ======== ======== Nonperforming assets to total assets 0.10% 0.08% - --------------------------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which the Company classifies as substandard), as defined and identified by management, amounted to approximately $8,675,000 March 31, 2005, compared to $7,801,000 at December 31, 2004. 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, which could result in their reclassification as nonperforming credits in the future, most are well collateralized and are not believed to present significant risk of loss. ** Less than 0.01% 19 NONINTEREST INCOME AND EXPENSES Total noninterest income was $7,840,000 for the three-month period ended March 31, 2005, a 3% or $250,000 increase from the same period of 2004. Net securities gains, which are included in noninterest income, were $15,000 in 2005 versus $228,000 in 2004. The increase in noninterest income for the quarter was due primarily to an increase of $690,000 or 62% in insurance agency commissions, resulting from higher premiums from existing commercial property and casualty lines ($583,000) and the acquisition of a small insurance agency ($113,000) in December, 2004. In addition, trust fees increased $118,000 or 16% due primarily to growth in assets under management while Visa(R) check fees increased $67,000 or 16% reflecting a growing volume of electronic checking transactions. These increases were somewhat offset by a decline of $197,000 or 11% in service charges on deposit accounts due to lower commercial account fees and return check charges. Fees on sales of investment products also declined $184,000 or 29% due mainly to an increased emphasis on the sale of mutual funds that pay annual fees as opposed to one-time up-front fees. This strategy provides a more consistent long-term source of income and is consistent with the Bank's long-term client relationship management goals. Total noninterest expenses were $18,437,000 for the three-month period ended March 31, 2005, a 10% or $1,723,000 increase from the first quarter of 2004. 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 rise in noninterest expenses during the first quarter of 2005 occurred in salaries and employee benefits which increased $1,412,000 or 14%, as a result of higher incentive compensation costs and increased benefits expenses. Occupancy and equipment expenses increased $428,000 or 15% as a result of the opening of the Bank's Columbia Center office facility in the second quarter of 2004 and an expanded branch network. Average full-time equivalent employees decreased to 569 during the first three months of 2005, from 578 during the like period in 2004, a 2% decrease. The ratio of net income per average full-time-equivalent employee after completion of the first three months of the year was $14,000 in 2005 and $13,000 in 2004. .. INCOME TAXES The effective tax rate increased to 25% for the three-month period ended March 31, 2005, from 22% for the prior year period. This increase was due primarily to a decline in the amount of state tax-advantaged investments as a result of the balance sheet deleveraging accomplished in the fourth quarter of 2004. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Financial Condition - Market Risk and Interest Rate Sensitivity" in Management's Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES The Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were adequate. There were no significant changes in the Company's internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 20 PART II - OTHER INFORMATION Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The following table provides information on the Company's purchases of its common stock during the three months ended March 31, 2005. Issuer Purchases of Equity Securities (1)
- ----------------------------------------------------------------------------------------------------------------------------- (c) Total Number of (d) Maximum Number Shares Purchased as that May Yet Be Part of Publicly Purchased Under the (a) Total Number of (b) Average Price Paid Announced Plans or Plans or Programs Period Shares Purchased per Share Programs (2)(3) - ----------------------------------------------------------------------------------------------------------------------------- January 2005 0 NA 0 622,592 - ----------------------------------------------------------------------------------------------------------------------------- February 2005 0 NA 0 622,592 - ----------------------------------------------------------------------------------------------------------------------------- March 2005 0 NA 0 622,592 - -----------------------------------------------------------------------------------------------------------------------------
(1) Includes purchases of the Company's stock made by or on behalf of the Company or any affiliated purchasers of the Company as defined in Securities and Exchange Commission Rule 10b-18. (2) On March 26, 2003, the Company publicly announced a stock repurchase program that permits the repurchase of up to 5%, or 726,804 shares, of its outstanding common stock. The current program replaced a similar plan that expired on March 31, 2003. Repurchases under the program may be made on the open market and in privately negotiated transactions from time to time until March 31, 2005, or earlier termination of the program by the Board. The repurchases are made in connection with shares expected to be issued under the Company's stock option and benefit plans, as well as for other corporate purposes. (3) Indicates the number of shares remaining under the plan at the end of the indicated month. Item 6. EXHIBITS Exhibit 31(a) and (b) Rule 13a-14(a) / 15d-14(a) Certifications Exhibit 32 (a) and (b) 18 U.S.C. Section 1350 Certifications 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized. SANDY SPRING BANCORP, INC. (Registrant) By: /S/ HUNTER R. HOLLAR ----------------------------------------- Hunter R. Hollar President and Chief Executive Officer Date: May 6, 2005 By: /S/ PHILIP J. MANTUA ----------------------------------------- Philip J. Mantua Executive Vice President and Chief Financial Officer Date: May 6, 2005 22 EX-31.(A) 2 b406588_ex31a.txt EXHIBIT 31(A) EXHIBIT 31(a) Rule 13a-14(a) / 15d-14(a) Certifications I, Hunter R. Hollar, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sandy Spring Bancorp, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d--15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2005 /s/ Hunter R. Hollar ----------------- ----------------------------------- Hunter R. Hollar President and Chief Executive Officer EX-31.(B) 3 b406588_ex31b.txt EXHIBIT 31(B) EXHIBIT 31(b) I, Philip J. Mantua, Executive Vice President and Chief Financial Officer of Sandy Spring Bancorp, Inc. ("Bancorp"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sandy Spring Bancorp, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d--15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 6, 2005 /s/ Philip J. Mantua ------------------ ----------------------------------- Philip J. Mantua Executive Vice President and Chief Financial Officer EX-32.(A) 4 b406588_ex32a.txt EXHIBIT 32(A) EXHIBIT 32(a) 18 U.S.C. Section 1350 Certification I hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section. 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the accompanying Form 10-Q of Sandy Spring Bancorp, Inc. ("Bancorp") for the quarterly period ended March 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934(15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Bancorp. By: /S/ HUNTER R. HOLLAR ----------------------------------------- Hunter R. Hollar President and Chief Executive Officer Date: May 6, 2005 EX-32.(B) 5 b406588_ex32b.txt EXHIBIT 32(B) EXHIBIT 32(b) 18 U.S.C. Section 1350 Certification I hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the accompanying Form 10-Q of Sandy Spring Bancorp, Inc. ("Bancorp") for the quarterly period ended March 31, 2005, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Bancorp. By: /S/ PHILIP J. MANTUA ----------------------------------------- Philip J. Mantua Executive Vice President and Chief Financial Officer Date: May 6, 2005 -----END PRIVACY-ENHANCED MESSAGE-----