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, 2002 -------------- 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 April 30, 2002, is 14,500,316 shares.
SANDY SPRING BANCORP, INC. INDEX Page PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at March 31, 2002, and December 31, 2001 ............................ 1 Consolidated Statements of Income for the Three Month Periods Ended March 31, 2002 and 2001 ................ 2 Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 2002 and 2001 ................ 4 Consolidated Statements of Changes in Stockholders' Equity for the Three Month Periods Ended March 31, 2002 and 2001................. 6 Notes to Consolidated Financial Statements ....................... 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ............... 8 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................ 15 SIGNATURES .............................................................. 15
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> March 31, December 31, (Dollars in thousands, except per share data) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 38,876 $ 45,609 Federal funds sold 51,720 10,774 Interest-bearing deposits with banks 842 840 Residential mortgage loans held for sale 10,814 16,682 Investments available-for-sale (at fair value) 644,561 732,629 Investments held-to-maturity -- fair value of $201,435 (2002) and $165,015 (2001) 201,429 164,921 Other equity securities 16,929 16,929 Total loans and leases 1,019,590 995,919 Less: allowance for credit losses (13,877) (12,653) ---------- ---------- Net loans and leases 1,005,713 983,266 Premises and equipment, net 32,855 32,584 Accrued interest receivable 14,238 15,163 Goodwill 7,642 7,642 Other intangible assets 15,920 16,584 Other assets 41,293 38,211 ---------- ---------- Total assets $2,082,832 $2,081,834 ========== ========== LIABILITIES Noninterest-bearing deposits $ 280,021 $ 277,592 Interest-bearing deposits 1,113,346 1,109,867 ---------- ---------- Total deposits 1,393,367 1,387,459 Short-term borrowings 412,224 411,132 Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000 Other long-term borrowings 79,112 79,116 Accrued interest payable and other liabilities 11,699 18,454 ---------- ---------- Total liabilities 1,931,402 1,931,161 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 50,000,000; shares issue and outstanding 14,493,950 (2002) and 14,483,564 (2001) 14,494 14,484 Surplus 20,540 20,347 Retained earnings 115,999 111,906 Accumulated other comprehensive income 397 3,936 ---------- ---------- Total stockholders' equity 151,430 150,673 ---------- ---------- Total liabilities and stockholders' equity $2,082,832 $2,081,834 ========== ========== </TABLE> See Notes to Consolidated Financial Statements. 1
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended March 31, ------------------ (In thousands, except per share data) 2002 2001 - ------------------------------------------------------------------------------------ <S> <C> <C> Interest income: Interest and fees on loans and leases $17,723 $20,996 Interest on loans held for sale 173 132 Interest on deposits with banks 8 20 Interest and dividends on securities: Taxable 9,259 8,751 Exempt from federal income taxes 2,412 1,913 Interest on federal funds sold 120 307 ------- ------- Total interest income 29,695 32,119 Interest expense: Interest on deposits 5,324 10,099 Interest on short-term borrowings 3,723 4,459 Interest on long-term borrowings 2,072 2,020 ------- ------- Total interest expense 11,119 16,578 ------- ------- Net interest income 18,576 15,541 Provision for credit losses 1,185 492 ------- ------- Net interest income after provision for credit losses 17,391 15,049 Noninterest income: Securities gains 233 130 Service charges on deposit accounts 1,878 1,747 Gains on sales of mortgage loans 738 521 Fees on sales of investment products 640 441 Trust department income 569 435 Insurance agency commissions 986 0 Income from bank owned life insurance 435 387 Other income 1,319 1,261 ------- ------- Total noninterest income 6,798 4,922 Noninterest expenses: Salaries and employee benefits 9,297 6,684 Occupancy expense of premises 1,306 1,237 Equipment expenses 809 816 Marketing 402 317 Outside data services 613 656 Goodwill amortization 0 167 Amortization of other intangible assets 665 689 Other expenses 2,207 2,306 ------- ------- Total noninterest expenses 15,299 12,872 ------- ------- Income before income taxes 8,890 7,099 Income tax expense 2,334 1,794 ------- ------- Net income $ 6,556 $ 5,305 ======= ======= </TABLE> 2
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Continued) <TABLE> <CAPTION> Three Months Ended March 31, ----------------------------- (In thousands, except per share data) 2002 2001 - ---------------------------------------------------------------------------------------------------------- <S> <C> <C> Basic Net Income Per Share $0.45 $0.37 Diluted Net Income Per Share 0.45 0.37 Dividends Declared Per Share 0.17 0.14 </TABLE> *Per share data have been adjusted to give retroactive effect to a 3-for-2 stock split declared on November 28, 2001. See Notes to Consolidated Financial Statements. 3
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Three Months Ended March 31, ---------------------------- (Dollars in thousands) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows from Operating Activities: Net income $ 6,556 $ 5,305 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,470 1,577 Provision for credit losses 1,185 492 Origination of loans held for sale (53,406) (41,668) Proceeds from sales of loans held for sale 60,012 35,408 Gains on sales of loans held for sale (738) (521) Securities gains (233) (130) Net decrease (increase) in accrued interest receivable 925 (158) Net increase in other assets (882) (11,182) Net (decrease) increase in accrued expenses (6,755) 5,977 Other - net 370 (299) --------- --------- Net cash provided (used) by operating activities 8,504 (5,199) Cash Flows from Investing Activities: Net increase in interest-bearing deposits with banks (2) (13,017) Purchases of investments held-to-maturity (36,516) (3,521) Purchases of other equity securities 0 (2,743) Purchases of investments available-for-sale (136,472) (199,025) Proceeds from sales of investments available-for-sale 117,248 35,468 Proceeds from maturities, calls and principal payments of investments held-to-maturity 0 15,885 Proceeds from maturities, calls and principal payments of investments available-for-sale 101,534 78,917 Net increase in loans and leases receivable (23,671) (19,055) Expenditures for premises and equipment (1,148) (759) --------- --------- Net cash provided (used) by investing activities 20,973 (107,850) Cash Flows from Financing Activities: Net increase in deposits 5,908 23,573 Net increase in short-term borrowings 992 64,374 Proceeds from long-term borrowings 96 30,071 Proceeds from issuance of common stock 203 552 Dividends paid (2,463) (2,006) --------- --------- Net cash provided by financing activities 4,736 116,564 --------- --------- Net increase in cash and cash equivalents 34,213 3,515 Cash and cash equivalents at beginning of year 56,383 46,329 --------- --------- Cash and cash equivalents at end of quarter* $ 90,596 $ 49,844 ========= ========= </TABLE> 4
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------- (Dollars in thousands) 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Supplemental Disclosures: Interest payments $11,617 $16,000 Income tax payments 531 177 Noncash Investing Activities: Reclassification of borrowings from long-term to short-term 100 100 *Cash and cash equivalents include amounts of "Cash and due from banks" and "Federal funds sold" on the Consolidated Balance Sheets. </TABLE> See Notes to Consolidated Financial Statements. 5
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY <TABLE> <CAPTION> Accumulated Other Comprehensive Total Common Retained Income Stockholders' (Dollars in thousands, except per share data) Stock Surplus Earnings (loss) Equity - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Balances at January 1, 2002 $ 14,484 $ 20,347 $111,906 $ 3,936 $150,673 Comprehensive income: Net income 6,556 6,556 Other comprehensive loss, net of tax and reclassification adjustment (3,539) (3,539) -------- Total comprehensive income 3,017 Cash dividends - $0.17 per share (2,463) (2,463) Common stock issued pursuant to: Incentive stock option plan - 7,134 shares 7 106 113 Employee stock purchase plan - 3,420 shares 3 87 90 -------- -------- -------- -------- -------- Balances at March 31, 2002 $ 14,494 $ 20,540 $115,999 $ 397 $151,430 ======== ======== ======== ======== ======== Balances at January 1, 2001 $ 9,553 $ 22,511 $ 97,641 $ (2,147) $127,558 Comprehensive income: Net income 5,305 5,305 Other comprehensive income, net of tax and reclassification adjustment 6,614 6,614 -------- Total comprehensive income 11,919 Cash dividends - $0.14 per share (2,006) (2,006) Common stock issued pursuant to: Incentive stock option plan - 1,833 shares 2 43 45 Dividend reinvestment and stock purchase plan - 16,592 shares 16 491 507 -------- -------- -------- -------- -------- Balances at March 31, 2001 $ 9,571 $ 23,045 $100,940 $ 4,467 $138,023 ======== ======== ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements. 6
Sandy Spring Bancorp and Subsidiaries 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 2001 Annual Report to Shareholders. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2002. The accounting and reporting policies of Sandy Spring Bancorp (the "Company") conform to accounting principles generally accepted in the United States of America 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 - 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. <TABLE> <CAPTION> Three Months Ended March 31, ---------------------- (Dollars and amounts in thousands, except per share data) 2002 2001 ---- ---- <S> <C> <C> Basic: Net income available to common stockholders $ 6,556 $ 5,305 Average common shares outstanding 14,490 14,333 Basic net income per share $ 0.45 $ 0.37 ======= ======= Diluted: Net income available to common stockholders $ 6,556 $ 5,305 Average common shares outstanding 14,490 14,333 Stock option adjustment 219 112 ------- ------- Average common shares outstanding - diluted 14,709 14,445 Diluted net income per share $ 0.45 $ 0.37 ======= ======= </TABLE> 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management's discussion and analysis contains forward-looking statements that are subject to risks and uncertainties. These forward-looking statements include: statements of goals, intentions and expectations; estimates of risks and of future costs, benefits, and liquidity; assessments of potential 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. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate its future results. THE COMPANY The Company is the registered bank holding company for Sandy Spring Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates thirty-one community offices in Montgomery, Howard, Prince George's, Anne Arundel and Frederick 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, 2002, year-to-date average commercial and commercial real estate loans and leases 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%. Based upon the most recent data available, consumer deposits account for approximately 78% 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 $2,082,832,000 at March 31, 2002, compared to $2,081,834,000 at December 31, 2001, increasing $998,000 during the first three months of 2002. Earning assets increased $7,191,000 to $1,945,885,000 at March 31, 2002, from $1,938,694,000 at December 31, 2001. Total loans and leases, excluding loans held for sale, rose 2.4% or $23,671,000 during the first quarter of 2002, to $1,019,590,000. During this period, consumer loans increased by $15,296,000 (up 7.1%) due primarily to home equity products. Commercial loans and leases also increased, by $6,100,000 (up 1.4%), reflecting growth in commercial loans not secured by real estate, accompanied by declines in the other major categories (real estate, construction and leasing). Finally, residential real estate loans rose $2,275,000 (up 0.7%), reflecting higher residential mortgage balances nearly offset by a corresponding decrease in residential construction. Residential mortgage loans held for sale decreased by $5,868,000 from December 31, 2001, to $10,814,000 at March 31, 2002. Management has determined that none of its goodwill or other intangible assets were impaired as of January 1, 2002, the effective date for adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets", in its transitional evaluation, as required by the new standard, completed on May 3, 2002. Table 1 -- Analysis of Loans and Leases The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated: <TABLE> <CAPTION> (In thousands) March 31, 2002 % December 31, 2001 % - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Residential real estate $342,072 34% $339,797 34% Commercial loans and leases 447,640 44 441,540 44 Consumer 229,878 22 214,582 22 --------------------------------------------------------------------------------- Total Loans and Leases $1,019,590 100% 995,919 100% =========== ========= Less: Allowance for credit losses (13,877) (12,653) ---------- --------- Net loans and leases $1,005,713 $983,266 ========== ========= </TABLE> 8
The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, decreased by $51,560,000 or 5.6% from December 31, 2001 to March 31, 2002. Over this period, the small increase in deposits did not keep pace with funding requirements of loan growth. Available-for-sale securities decreased by $88,068,000 or 12.0%, while held-to-maturity securities increased by $36,508,000 or 22.1% during the first quarter of 2002, reflecting significant activity as securities were called or sold and the funds re-invested to take advantage of the market and improve overall yields. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $40,948,000 during the first three months of 2002, reaching $52,562,000 at March 31, 2002. Some of these funds were committed for purchase of securities, but the transactions had not settled at quarter end. Total deposits were $1,393,367,000 at March 31, 2002, increasing $5,908,000 or 0.4% from $1,387,459,000 at December 31, 2001. All types of deposit accounts showed relatively little change during the first quarter of 2002, with the exception of regular savings accounts and time deposits less than $100,000, which moved in opposite directions. Regular savings increased 24.6% or $26,969,000 to comprise 10% of total deposits at first quarter end, compared to 8% at year-end 2001. Over the same period, time deposits less than $100,000 decreased 5.7% or $18,208,000 to 22% of total deposits from 23%. Total borrowings were $526,336,000 at March 31, 2002, which was essentially level with December 31, 2001. The majority of these funds were borrowed for the purpose of investing them in securities under the Company's leverage programs. Table 2 -- Analysis of Deposits The following table presents the trends in the composition of deposits at the dates indicated: <TABLE> <CAPTION> (In thousands) March 31, 2002 % December 31, 2001 % - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Noninterest-bearing deposits $ 280,021 20% $ 277,592 20% Interest-bearing deposits: Demand 170,424 12 166,603 12 Money market savings 390,968 28 396,295 28 Regular savings 136,378 10 109,409 8 Time deposits less than $100,000 298,578 22 316,786 23 Time deposits $100,000 or more 116,998 8 120,774 9 ------------------------------------------------------------------------------ Total interest-bearing 1,113,346 80 1,109,867 80 ------------------------------------------------------------------------------ Total deposits $1,393,367 100% $1,387,459 100% ============================================================================== </TABLE> MARKET RISK MANAGEMENT By employing simulation analysis through use of computer models, the Company intends to effectively manage the potential adverse impacts that changing interest rates 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. At March 31, 2002, as at December 31, 2001, the simulation of a hypothetical, parallel change of plus and minus 200 basis points in U.S. Treasury interest rates was not practical, due to historically low prevailing interest yields and rates. (See Table 3.) Therefore, the Company again chose to apply a plus 200 basis point change and a minus 100 basis point change when evaluating its interest rate risk position. Measured from March 31, 2002, the simulation analysis indicates that net interest income would decline by 4% over a twelve month period given a decrease in interest rates of 100 basis points, compared to a policy limit of 15%. In terms of equity capital on a fair value basis, a 100 basis point decrease in interest rates is estimated to reduce the fair value of capital (as computed) by 12%, as compared to a policy limit of 25%. LIQUIDITY Liquidity is measured using an approach designed to take into account loan and lease payments, maturities, calls and paydowns of securities, earnings, growth, mortgage banking activities, leverage programs, sophistication of investment activities, investment portfolio liquidity, and other factors. Through 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 9
trends developed to measure dependence on purchased funds, leverage limitations and core growth. Resulting projections as of March 31, 2002, show short-term investments exceeding short-term borrowings by $6,099,000 ($2,400,000 at December 31, 2001) over the subsequent 90 days. This excess of liquidity over projected requirements for funds indicates that the Company can continue to increase its loans and other earning assets without incurring additional borrowing. The Company also has external sources of funds, which can be drawn upon when required. The main source of external liquidity is an available line of credit for $621,775,000 with the Federal Home Loan Bank of Atlanta, of which approximately $301,312,000 was outstanding at March 31, 2002. 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 $255,796,000 at March 31, 2002, 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 March 31, 2002. CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 14.61% at March 31, 2002, compared to 14.10% at December 31, 2001; a tier 1 risk-based capital ratio of 13.36%, compared to 12.98%; and a capital leverage ratio of 7.98%, compared to 7.73%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Management believes the level of capital at March 31, 2002, is appropriate. Stockholders' equity for March 31, 2002, totaled $151,430,000, representing an increase of $757,000 or 0.5% from $150,673,000 at December 31, 2001. Accumulated other comprehensive income, a component of stockholders' equity comprised of net unrealized gains and losses on available-for-sale securities, decreased by $3,539,000 from December 31, 2001, to March 31, 2002. This decline reflected the effects of higher interest rates at first quarter-end 2002, compared to year-end 2001, on the market values of these securities. Excluding accumulated other comprehensive income, the increase in total stockholders' equity was 2.9%. Internal capital generation (net income less dividends) was responsible for $4,093,000 of the increase in total stockholders' equity during the first three months of 2002. When internally formed capital is annualized and expressed as a percentage of average total stockholders' equity, the resulting rate was 10.9% for the first quarter of 2002, compared to 10.1% for the year ended December 31, 2001. External capital formation (equity created through the issuance of stock under the employee stock purchase plan and the stock option plan) totaled $203,000 during the first three months of 2002. There were no share repurchases over the period. Dividends for the first three months of the year were $0.17 per share in 2002, compared to $0.14 per share in 2001, representing, when expressed as a percentage of diluted net income per share, dividend payout ratios of 37.78% and 37.84%, respectively. B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AND 2001 First quarter net income increased $1,251,000 or 23.6% to $6,556,000 in 2002 from $5,305,000 in 2001, representing annualized returns on average equity of 17.41% and 16.41%, respectively. First quarter diluted earnings per share were $0.45 in 2002, compared to $0.37 in 2001. First quarter operating earnings increased $1,074,000 or 18.7% to $6,818,000 in 2002 (which would result in a $0.01 greater diluted earnings per share amount than shown above on a net income basis) from $5,744,000 in 2001 (which would result in a $0.02 greater diluted earnings per share amount). These results exclude securities gains ($233,000 in 2002 versus $130,000 in 2001), goodwill amortization ($167,000 in 2001), and the amortization of intangible assets ($665,000 in 2002 versus $689,000 in 2001). The net interest margin increased by 18 basis points to 4.18% for the three months ended March 31, 2002, from 4.00% for the like period of 2001, while the net interest spread increased by 41 basis points, to 3.77% from 3.36%. First quarter interest rate performance improved in 2002, compared to 2001, as the Company achieved a smaller decline in average earning asset yield than in average funding rate. The net interest margin includes the favorable effects of funding interest-earning assets from noninterest-bearing sources. The level of such funding was essentially the same for the first quarters of 2002 and 2001. 10
Sandy Spring Bancorp and Subsidiaries Table 3 - Consolidated Average Balances, Yields and Rates <TABLE> <CAPTION> Three Months Ended March 31, (Dollars in thousands and tax equivalent) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate --------------------------------------------------------------------------- <S> <C> <C> <C> <C> Assets Total loans and leases $1,012,376 7.14% $ 982,263 8.69% Total securities 882,497 5.96 679,388 7.01 Other earning assets 31,744 1.62 24,048 5.45 ---------- ---------- TOTAL EARNING ASSETS 1,926,617 6.51% 1,685,699 7.97% Non-earning assets 137,519 133,533 ---------- ---------- Total assets $2,064,136 $1,819,232 ========== ========== Liabilities and Stockholders' Equity Interest-bearing demand deposits $ 165,477 0.26% $ 150,085 1.04% Money market savings deposits 392,438 1.13 344,508 4.19 Regular savings deposits 122,262 1.01 101,487 1.74 Time deposits 427,391 3.62 406,233 5.71 ---------- ---------- Total interest-bearing deposits 1,107,568 1.95 1,002,313 4.09 Short-term borrowings 415,658 3.59 335,406 5.34 Long-term borrowings 114,137 7.26 111,382 7.25 ---------- ---------- Total interest-bearing liabilities 1,637,363 2.74 1,449,101 4.61 ---------- --------- Noninterest-bearing demand deposits 260,575 226,135 Other noninterest-bearing liabilities 13,463 12,866 Stockholders' equity 152,735 131,130 ---------- ---------- Total liabilities and stockholders' equity $2,064,136 $1,819,232 ========== ========== Net interest spread 3.77% 3.36% ========== ========= Net interest margin (1) 4.18% 4.00% ========== ========= Ratio of average earning assets to Average interest-bearing liabilities 117.67% 116.13% ========== ========== </TABLE> (1) Net interest margin = net interest income / total interest-earning assets 11
NET INTEREST INCOME First quarter net interest income was $18,576,000 in 2002, an increase of 19.5% from $15,541,000 in 2001, reflecting a higher volume of average earning assets and the smaller effect of an increase in net interest margin. On a tax-equivalent basis, first quarter net interest income also increased by 20.6%, to $20,044,000 in 2002 from $16,619,000 in 2001. The effects of average balances, yields and rates are presented in table 3 above. First quarter tax-equivalent interest income decreased by $2,034,000 or 6.1% in 2002, compared to 2001. Average earning assets rose 14.3% over the prior year period, while the average yield earned on those assets decreased by 146 basis points to 6.51%. Comparing the first three months of 2002 versus 2001, average total loans and leases grew by 3.1% to $1,012,376,000 (52.5% of average earning assets, versus 58.3% a year ago), while recording a 155 basis point decline in average yield to 7.14%. Average residential real estate loans increased by 9.2% (attributable primarily to construction lending), and average consumer loans increased by 2.7% (attributable to home equity products). Average commercial loans and leases decreased by 1.2% (reflecting declines in construction and leasing, largely offset by increases in real estate and other commercial). Over the same period, first quarter average total securities rose by 29.9% to $882,497,000 (45.8% of average earning assets, versus 40.3% a year ago), while the average yield earned on those assets decreased by 105 basis points to 5.96%. Interest expense for the first three months of the year decreased significantly by $5,459,000 or 32.9% in 2002, compared to 2001. Average interest-bearing liabilities rose 13.0% over the prior year period, while the average rate paid on these funds decreased by 187 basis points to 2.74%. All major deposit categories and short-term borrowings grew in conjunction with declines in average rate, while long-term borrowings remained essentially level in both volume and average rate. Most important was the significant decline in deposit rates. This was due primarily to effects of sharply reduced interest rates on adjustable rate products, and of time deposit maturities with run off or repricing, as well as new accounts, at the lower rates. CREDIT RISK MANAGEMENT During the first three months of the year, the provision for credit losses increased to $1,185,000 in 2002 from $492,000 in 2001, primarily as a result of loan growth, the condition of watchlist credits (excluding nonperforming and potential problem loans), and consideration of the effects of recent economic conditions on certain segments of the portfolio. Net recoveries of $39,000 were recorded for the three month period ended March 31, 2002, while there were net charge-offs of $330,000 for the same period a year earlier. 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, which limits 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 credit portfolio. The allowance is based on careful, continuous review and evaluation of the credit 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 methodology utilized to assess the appropriateness of the allowance includes: (1) the formula allowance reflecting historical losses by credit category and credit-risk factors for identified problem credit categories, (2) specific allowances for identified problem credits, and (3) evaluation of other factors relating to the portfolio. Other factors regularly evaluated in the third element, which are included in Comptroller of the Currency guidelines, are: trends in delinquencies and nonaccrual loans and leases, large credits (relative to the allowance), volume trends, concentrations, economic conditions, credit administration and management, and the quality of the risk identification system. Additional factors which also may be considered include changes in underwriting standards, such as acceptance of higher loan to value ratios. Management believes that the allowance is adequate. However, its determination requires significant judgement, 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, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgements of information available at the time of each examination. During the first quarter of 2002, there were no changes in estimation methods or assumptions that affected the allowance methodology. The allowance for credit losses was 1.36% of total loans and leases at March 31, 2002 and 1.27% at December 31, 2001. 12
Table 4 -- Analysis of Credit Risk (Dollars in thousands) Activity in the allowance for credit losses is shown below: <TABLE> <CAPTION> Three Months Ended Twelve Months Ended March 31, 2002 December 31, 2001 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Balance, January 1 $ 12,653 $ 11,530 Provision for credit losses 1,185 2,470 Loan charge-offs: Residential real estate 0 (23) Commercial loans and leases (40) (1,180) Consumer (17) (225) -------- -------- Total charge-offs (57) (1,428) Loan recoveries: Residential real estate 0 0 Commercial loans and leases 89 54 Consumer 7 27 -------- -------- Total recoveries 96 81 -------- -------- Net recoveries (charge-offs) 39 (1,347) -------- -------- Balance, period end $ 13,877 $ 12,653 ======== ======== Net recoveries (charge-offs) to average loans and leases (annual basis) 0.02% (0.14)% Allowance to total loans and leases 1.36% 1.27% </TABLE> The following table presents nonperforming assets at the dates indicated: <TABLE> <CAPTION> March 31 December 31, 2002 2001 - ----------------------------------------------------------------------------------------------------- <S> <C> <C> Non-accrual loans and leases $ 6,039 $ 5,904 Loans and leases 90 days past due 1,872 1,903 -------- -------- Total nonperforming loans and leases* 7,911 7,807 Other real estate owned 50 50 -------- -------- Total nonperforming assets $ 7,961 $ 7,857 ======== ======== Nonperforming assets to total assets 0.38% 0.38% - ----------------------------------------------------------------------------------------------------- </TABLE> * Those performing credits considered potential problem credits, as defined and identified by management, amounted to approximately $6,511,000 at March 31, 2002, compared to $4,126,000 at December 31, 2001. 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. 13
CREDIT RISK MANAGEMENT (CONTINUED) Nonperforming loans and leases, and nonperforming assets each increased by $104,000, to $7,911,000 and $7,961,000, respectively, from December 31, 2001, to March 31, 2002. Expressed as a percentage of total assets, nonperforming assets were 0.38% at both March 31, 2002, and December 31, 2001. The allowance for credit losses represented 175% of nonperforming loans and leases at March 31, 2002, compared to coverage of 162% at December 31, 2001. 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 $50,000 at March 31, 2002, and at December 31, 2001. The balance of impaired loans was $5,526,000 at March 31, 2002, with reserves against those loans of $88,000, compared to $5,589,000 at December 31, 2001, with reserves of $91,000. Nonperforming and impaired loans and leases at March 31, 2002, and at December 31, 2001, included a problem credit of a single borrower in the amount of approximately $5,130,000 which is well collateralized, with no loss expected. The increase in the allowance from December 31, 2001 to March 31, 2002 reflects, among other things, the increase in potential problem loans (see Table 4), the condition of other watchlist credits (excluding nonperforming loans and leases), portfolio growth, including increases in categories of loans and leases subject to higher credit risk, and consideration of the effects of recent economic conditions on certain segments of the portfolio. NONINTEREST INCOME AND EXPENSES Total noninterest income was $6,798,000 for the three-month period ended March 31, 2002, a 38.1% or $1,876,000 increase from the same period in 2001. Excluding non-recurring securities gains ($233,000 in 2002 versus $130,000 in 2001), the increase in operating noninterest income was 37.0% or $1,773,000. Most of this change was due to growth in mortgage banking revenues, income from trust operations and revenues from the sales of investment products, along with insurance agency commissions generated by the insurance subsidiary acquired in December 2001. Noninterest income performance reported above reflects management's desire to both grow and diversify its sources of noninterest income. Total noninterest expenses were $15,299,000 for the three-month period ended March 31, 2002, a 18.9% or $2,427,000 increase from the same period of 2001. These results include goodwill amortization (none in 2002 due to adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" effective January 1, 2002, versus $167,000 in 2001) and intangible asset amortization ($665,000 in 2002 versus $689,000 in 2001). Excluding these items, the increase in operating noninterest expenses was 21.8% or $2,618,000. 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 first quarter rise in operating expenses occurred in salaries and benefits (up 39.1% or $2,613,000), reflecting increases in staff, merit raises and higher incentive compensation. Since the first quarter of 2001, the Company has opened three new branches (including its first branch in Frederick County, opened at the end of March 2002), consolidated two branches into one, and added an insurance subsidiary. As a result, average full-time equivalent employees increased by 79 persons (representing a 17.8% increase), to 524 during the first three months of 2002, from 445 during the like period in 2001. With the exclusion of non-operating items of income and expense from earnings, the first quarter ratio of net income per average full-time-equivalent employee was $13,000 in 2002, which was stable compared to 2001. INCOME TAXES The effective tax rates for the three-month periods ended March 31, 2002, and March 31, 2001, were 26.3% and 25.3%, respectively. 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, 2001. 14
PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None 10 Sandy Spring National Bank of Maryland Executive Health Insurance Plan, as amended (Compensatory Plan or Arrangement). (b) Reports on Form 8-K. None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized. SANDY SPRING BANCORP, INC. (Registrant) By: /S/ HUNTER R. HOLLAR ---------------------- Hunter R. Hollar President and Chief Executive Officer Date: May 8, 2002 By: /S/ JAMES H. LANGMEAD ----------------------- James H. Langmead Executive Vice President and Chief Financial Officer Date: May 8, 2002 15