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 June 30, 1998 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 July 24, 1998 is 9,639,402 shares.
SANDY SPRING BANCORP, INC. INDEX Page - -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 ................................. 1 Consolidated Statements of Income and Comprehensive Income for the Three and Six Month Periods Ended June 30, 1998 and 1997 .... 2 Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 1998 and 1997 .................. 3 Notes to Consolidated Financial Statements .......................... 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................. 6 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................................................10 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................11 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ...................................11 SIGNATURES .................................................................12
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) <TABLE> <CAPTION> June 30 December 31, 1998 1997 - ------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 29,654 $ 37,644 Federal funds sold 11,279 11,036 Interest-bearing deposits with banks 1,635 387 Residential mortgage loans held for sale 14,983 6,670 Investments available-for-sale (at fair value) 384,045 344,258 Investments held-to-maturity -- fair value of $96,607 (1998) and $110,437 (1997) 95,371 108,991 Other equity securities 10,736 11,485 Total Loans (net of unearned income) 581,611 558,893 Less: Allowance for credit losses (7,534) (7,016) ----------- ----------- Net loans 574,077 551,877 Premises and equipment, net 28,425 28,468 Accrued interest receivable 10,412 9,908 Other real estate owned 639 296 Other assets 9,483 10,313 ----------- ----------- TOTAL ASSETS $ 1,170,739 $ 1,121,333 =========== =========== LIABILITIES Noninterest-bearing deposits $ 166,517 $ 150,957 Interest-bearing deposits 723,060 702,054 ----------- ----------- Total deposits 889,577 853,011 Short-term borrowings 144,330 144,426 Long-term borrowings 25,480 14,592 Accrued interest and other liabilities 3,950 4,629 ----------- ----------- TOTAL LIABILITIES 1,063,337 1,016,658 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 15,000,000; shares issued and outstanding 9,640,377 (1998) and 4,862,574 (1997) 9,640 4,862 Surplus 24,495 31,695 Retained earnings 71,297 66,261 Accumulated other comprehensive income 1,970 1,857 ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 107,402 104,675 =========== =========== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,170,739 $ 1,121,333 =========== =========== </TABLE> See Notes to Consolidated Financial Statements 1
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1998 1997 1998 1997 - -------------------------------------------------------------- -------------------- <S> <C> <C> <C> <C> Interest Income: Interest and fees on loans $ 12,916 $ 12,458 $ 25,767 $ 24,393 Interest on loans held for sale 220 62 354 116 Interest on deposits with banks 30 15 49 42 Interest and dividends on securities: Taxable 5,952 5,005 11,658 9,476 Nontaxable 1,071 832 2,143 1,611 Interest on federal funds sold 309 321 538 647 -------------------- ------------------- TOTAL INTEREST INCOME 20,498 18,693 40,509 36,285 Interest Expense: Interest on deposits 7,139 7,226 14,140 14,212 Interest on short-term borrowings 1,796 1,143 3,556 1,950 Interest on long-term borrowings 353 80 699 160 -------------------- ------------------- TOTAL INTEREST EXPENSE 9,288 8,449 18,395 16,322 -------------------- ------------------- NET INTEREST INCOME 11,210 10,244 22,114 19,963 Provision for Credit Losses 275 125 542 225 -------------------- ------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,935 10,119 21,572 19,738 Noninterest Income: Securities gains 161 112 409 132 Service charges on deposit accounts 994 789 1,928 1,578 Gains on mortgage sales 682 255 1,283 524 Trust income 341 260 696 519 Other income 807 598 1,537 1.090 -------------------- ------------------- TOTAL NONINTEREST INCOME 2,985 2,014 5,853 3,843 Noninterest Expenses: Salaries and employee benefits 4,846 4,147 9,393 7,887 Occupancy expense of premises 696 568 1,376 1,085 Equipment expenses 664 532 1,319 1,051 Marketing 328 378 579 712 FDIC insurance expense 25 25 50 50 Outside data services 376 300 733 597 Other expenses 1,525 1,368 2,905 2,567 -------------------- ------------------- TOTAL NONINTEREST EXPENSES 8,460 7,318 16,355 13,949 -------------------- ------------------- Income Before Income Taxes 5,460 4,815 11,070 9,632 Income Tax Expense 1,585 1,695 3,335 3,309 -------------------- ------------------- NET INCOME 3,875 3,120 7,735 6,323 Other Comprehensive Income, net of tax: Net unrealized gain on investments available-for-sale, net of taxes (388) 1,169 113 658 ==================== =================== COMPREHENSIVE INCOME $ 3,487 $ 4,289 $ 7,848 $ 6,981 ==================== =================== Basic Net Income Per Share* $ 0.40 $ 0.32 $ 0.80 $ 0.65 Diluted Net Income Per Share* 0.40 0.32 0.80 0.65 Dividends Declared Per Share* 0.15 0.11 0.28 0.22 </TABLE> *Per share data have been adjusted to give retroactive effect to a 2-for-1 stock split declared on January 28, 1998. See Notes to Consolidated Financial Statements. 2
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30, ----------------------- 1998 1997 - ----------------------------------------------------------------------------------------------- <S> <C> <C> Cash Flows from Operating Activities: Net Income $ 7,735 $ 6,323 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,258 1,037 Provision for credit losses 542 225 Deferred income taxes 70 (2) Origination of loans held for sale (106,415) (29,500) Proceeds from sales of loans held for sale 99,385 33,129 Gains on sales of loans held for sale (1,283) (524) Purchases of trading securities (9,376) 0 Proceeds from sales of trading securities 9,388 0 Securities gains (409) (132) Net change in: Accrued interest receivable (504) (928) Accrued income taxes (236) (55) Other accrued expenses (443) (74) Other -- net 658 (4,008) --------- --------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES 370 5,491 Cash Flows from Investing Activities: Net increase in interest-bearing deposits with banks (1,248) (549) Purchases of investments held-to-maturity (3,088) (6,155) Purchases of other equity securities (2,574) (3,938) Purchases of investments available-for-sale (268,706) (145,714) Proceeds from sales of investments available-for-sale 14,981 46,245 Proceeds from maturities, calls and principal payments of investments held-to-maturity 16,786 10,201 Proceeds from maturities, calls and principal payments of investments available-for-sale 214,408 45,258 Redemption of Federal Home Loan Bank of Atlanta stock in other equity securities 3,324 574 Proceeds from sales of other real estate owned 76 0 Net increase in loans receivable (23,111) (24,438) Expenditures for premises and equipment (1,202) (4,642) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (50,354) (82,158) Cash Flows from Financing Activities: Net increase in demand and savings accounts 13,805 17,763 Net increase in time and other deposits 22,761 17,670 Net increase (decrease) in short-term borrowings (196) 43,900 Proceeds from long-term borrowings 11,000 0 Retirement of long-term borrowings (12) (16) Common stock purchased and retired (3,753) (723) Proceeds from issuance of common stock 1,331 970 Dividends paid (2,699) (2,160) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 42,237 77,404 --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,747) 737 Cash and Cash Equivalents at Beginning of Period 48,680 56,177 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD* $ 40,933 $ 56,914 ========= ========= </TABLE> 3
Cont'd CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended June 30, ----------------------- 1998 1997 - ----------------------------------------------------------------------------------------------- <S> <C> <C> Supplemental Disclosures: Interest payments $18,227 $15,272 Income tax payments 3,606 4,140 Noncash Investing Activities: Transfers from loans to other real estate owned 393 565 Reclassification of borrowings from long-term to short-term 100 100 </TABLE> *Cash and cash equivalents include amounts of "Cash and due from banks" and "Federal funds sold" on the Consolidated Balance Sheets. See Notes to Consolidated Financial Statements. 4
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 1997 Annual Report to Shareholders. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 1998. The accounting and reporting policies of Sandy Spring Bancorp (the "Company") conform to generally accepted accounting principles and to general practice within the banking industry. Certain reclassifications have been made to amounts previously reported to conform with current classifications. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. NOTE 2 - NEW ACCOUNTING STANDARD In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FASB 130) was issued and establishes standards for reporting and displaying comprehensive income and its components. FASB 130 requires comprehensive income and its components, as recognized under the accounting standards, to be displayed in the Statement of Income. The Company adopted this disclosure standard, as required, in the first quarter of 1998, including reclassification of the prior period. NOTE 3 - PER SHARE DATA Statement of Financial Accounting Standards No. 128, Earnings per Share" (FASB 128), became effective for the Company at the end of 1997. Under FASB 128, primary and fully diluted earnings per share were replaced with basic and diluted earnings per share. For purposes of comparability, prior period earnings per share have been restated to reflect application of the provisions of this Statement. The calculations of net income per common share for the quarterly and year-to-date periods ended June 30 were as follows. Data in the table has been adjusted to give retroactive effect to a 2 for 1 stock split declared on January 28, 1998. <TABLE> <CAPTION> (Dollars and amounts in thousands, except Three Months Ended Six Months Ended per share data) June 30, June 30, - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Basic: Net income applicable to common stock $3,875 $3,120 $7,735 $6,323 Average common shares outstanding 9,644 9,831 9,656 9,822 Basic net income per share $0.40 $0.32 $0.80 $0.65 ========================================================= Diluted: Net income applicable to common stock $3,875 $3,120 $7,735 $6,323 Average common shares outstanding 9,644 9,831 9,656 9,822 Stock option adjustment 53 20 51 18 Warrant stock adjustment 0 5 2 5 -------------------------------------------------------- Diluted average common shares outstanding 9,697 9,856 9,709 9,845 Diluted net income per share $0.40 $0.32 $0.80 $0.65 ========================================================= </TABLE> 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis contains forward-looking statements, including statements of goals, intentions and expectations regarding or based upon general economic conditions, interest rates, developments in national and local markets, and other matters, and which, by their nature, are subject to significant uncertainties. Because of these uncertainties and the assumptions on which statements in this report are based, the actual future results may differ materially from those indicated in this report. In the following discussion, per share amounts have been adjusted to reflect a 2 for 1 stock split declared on January 28, 1998 (see Note 3). THE COMPANY The Company is the registered bank holding company for Sandy Spring National Bank of Maryland (the "Bank"), headquartered in Olney, Maryland. The Bank operates twenty-two community offices in Montgomery, Howard, Prince George's and Anne Arundel Counties in Maryland, together with a mortgage banking company. The Company has established a strategy of independence, and intends to establish or acquire additional offices or banking organizations as appropriate opportunities may arise. A. FINANCIAL CONDITION The Company's total assets were $1,170,739,000,at June 30, 1998, compared to $1,121,333,000 at December 31, 1997, increasing $49,406,000 or 4.4% during the first six months of 1998. Earning assets increased $57,940,000 or 5.6% to $1,099,660,000 at June 30, 1998, from $1,041,720,000 at December 31, 1997. Total loans rose 4.1% or $22,718,000 during the first six months of 1998 to $581,611,000. Of the major loan categories, commercial loans increased 18.5%, consumer loans increased 9.7% due primarily to growth in student loans, construction loans increased 8.1% due to growth in commercial construction loans, and mortgage loans increased 0.3% including an 8.0% increase in commercial mortgages. Also, residential mortgage loans held for sale increased by $8,313,000 from December 31, 1997 to $14,983,000 at June 30, 1998. The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, increased $25,418,000 or 5.5% from December 31, 1997 to June 30, 1998. During this period, the increases in total loans and residential mortgage loans held for sale required less funding than the growth in total deposits and borrowings. For the first time, the Company had trading securities in the second quarter of 1998, with purchases of $9,376,000, proceeds from sales of $9,388,000 and gains on sales of $12,000 resulting in no trading securities at June 30, 1998. Total deposits were $889,577,000 at June 30, 1998, increasing $36,566,000 or 4.3% from $853,011,000 at December 31, 1997. Growth was achieved for noninterest-bearing demand deposits, up $15,560,000 or 10.3%, attributable primarily to increases in commercial and small business checking balances. Interest-bearing deposits increased $21,006,000 or 3.0%, due primarily to higher time deposits under $100,000. Borrowings increased $10,792,000 or 6.8%, attributable to higher repurchase agreements related primarily to cash management services to commercial clients, and to long-term Federal Home Loan Bank of Atlanta advances in connection with a leverage program funding securities at a favorable interest rate spread. Market Risk Management By employing simulation analysis through use of a computer model, the Bank intends to effectively manage the potential adverse impacts that changing interest rates can have on the institution's short-term earnings, long term value, and liquidity. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As of June 30, 1998, the Bank had the following estimated sensitivity profile for net interest income over a twelve-month horizon and for the fair value of equity: <TABLE> <CAPTION> Immediate Change in Rates ----------------------------------------------- +200 basis points -200 basis points Policy Limit - ----------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> % Change in Net Interest Earnings (6.75)% (3.50)% +/-15% % Change in Fair Value of Equity 1.03% (19.79)% +/-25% </TABLE> 6
Liquidity The Bank's liquidity position is measured monthly, looking forward ninety days. Liquid assets, defined to include cash on hand, federal funds sold, interest-bearing deposits with banks, loans held for sale, investments held-to-maturity maturing within ninety days and investments available-for-sale maturing within one year, net of projected loan growth over the following ninety days, totaled $130,017,000 or 11.1% of total assets at June 30, 1998. This represents a liquidity position, net of estimated potential cash outflows for deposits and borrowings, of $45,438,000 or 3.9% of total assets, which exceeded the minimum level established by management. Capital Management The Company recorded a total risk-based capital ratio of 16.43% at June 30, 1998, compared to 17.07% at December 31, 1997; a tier 1 risk-based capital ratio of 15.33%, compared to 15.97%; and a capital leverage ratio of 9.15%, compared to 9.46%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Stockholders' equity totaled $107,402,000 (including accumulated other comprehensive income of $1,970,000) at June 30, 1998, up 2.6% from $104,675,000 (including accumulated other comprehensive income of $1,857,000) at December 31, 1997. Internal capital generation (net income less dividends) provided $5,036,000 in additional equity during the first six months of 1998, representing an annualized rate (when considered as a percentage of average total stockholders' equity) of 9.6% versus 8.6% for the year ended December 31, 1997. External capital formation from stock issuances under the dividend reinvestment plan, including optional cash purchases, and to a lesser degree, through the exercise of warrants and stock options, totaled $1,331,000 during the first six months of 1998. However, share repurchases amounted to $3,753,000 through June 30, 1998, for a net decrease in stockholders' equity from external sources of $2,422,000. Dividends for the first six months were $0.28 per share in 1998, compared to $0.22 per share in 1997, for dividend payout ratios of dividends declared per share to diluted net income per share of 35.00% and 33.85%, respectively. B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AND 1997 Net income for the first six months of the year rose $1,412,000 or 22.3% in 1998, to $7,735,000 from $6,323,000. Diluted earnings per share for the first six months were $0.80 in 1998 and $0.65 in 1997. The annualized return on average assets for the first six months of the year was 1.38% in 1998, compared to 1.28% in 1997. The annualized returns on average equity for the same six-month periods were 14.83% and 13.03% in 1998 and 1997, respectively. Net Interest Income Net interest income for the first six months of the year was $22,114,000 in 1998, an increase of 10.8% over $19,963,000 in 1997, reflecting a higher volume of average earning assets. For the first six months, tax-equivalent interest income increased $4,472,000 or 12.1% in 1998, compared to the same period in 1997. Average earning assets rose 13.2% over the prior year period while the average yield earned on those assets decreased slightly to 7.94% from 8.02%. Comparing the first six months of 1998 versus 1997, average loans grew 7.1% to $574,790,000 (54.7% of average earning assets), while the average yield on loans decreased slightly to 9.15% from 9.19%. Most major categories increased, with commercial and residential mortgages (including those held for sale) and residential construction loans accounting for a majority of the overall increase. Average total securities increased 24.1% to $455,201,000 (43.3% of average earning assets) and recorded a 5 basis point increase in average yield to 6.54% from 6.49%. Interest expense for the first six months increased $2,073,000 or 12.7%, due to the combined effects of 12.0% higher average interest-bearing liabilities and a slight 2 basis point rise in the average rate paid on those funds to 4.22% from 4.20%. Most of the increase in interest-bearing liabilities was generated by growth in average borrowings, which primarily resulted from Federal Home Loan Bank of Atlanta advances used to invest in securities. 7
Credit Risk Management During the first six months of the year, the provision for credit losses was $542,000 in 1998, compared to $225,000 in 1997. Net charge-offs of $24,000 were recorded for the six month period ended June 30, 1998, while there were net charge-offs of $185,000 for the same period a year earlier. The Company regularly analyzes the sufficiency of its allowance for credit losses based upon a number of factors, including lending risks associated with growth and entry into new markets, loss allocations for specific problem credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, and changes in the size and character of the loan portfolio. Management establishes the allowance for credit losses in an amount that it determines, based upon these factors, is sufficient to provide for losses inherent in the loan portfolio. The allowance for credit losses was 1.30% of total loans at June 30, 1998 and 1.26% at December 31, 1997. Management believes the allowance for credit losses at June 30, 1998 was adequate. Nonperforming loans rose $332,000 to $3,004,000 and total nonperforming assets rose $675,000 to $3,643,000 from December 31, 1997 to June 30, 1998. Expressed as a percentage of total assets, nonperforming assets were 0.31% at June 30, 1998 and 0.26% at December 31, 1997. The allowance for credit losses represented 251% of nonperforming loans at June 30, 1998, compared to coverage of 263% at December 31, 1997. Significant variation in the coverage ratio may occur from period to period because the amount of nonperforming loans depends largely on the condition of a small number of individual loans and borrowers relative to the total loan portfolio. Other real estate owned totaled $639,000 at June 30, 1998, compared to $296,000 at December 31, 1997. The balance of impaired loans was $1,058,000 at June 30, 1998, and $890,000 at December 31, 1997, and there were no reserves for those loans at either period end. Noninterest Income and Expenses Noninterest income increased 52.3% or $2,010,000 during the six months ended June 30, 1998 versus 1997, primarily from increases in mortgage banking revenues, transaction based service fees, securities gains and fees from trust services. The Bank's mortgage banking subsidiary recorded substantially increased mortgage loan origination volumes and related gains on sales of loans due to the favorable low interest rate environment. The rise in service fees primarily reflected higher return check charges due to volume increases and, to a lesser extent, higher debit card and commercial account fees. Substantial growth was achieved from the Bank's asset and trust management business due to higher levels of assets under management resulting both from new clients and from increases in asset values from favorable stock market performance. For the six months ended June 30, 1998, noninterest expenses increased 17.2%, or $2,406,000, to $16,355,000, from $13,949,000 in 1997. The Company incurs additional costs in order to enter new markets, provide new services, and support the growth of the Company. Management manages its operating expenses, however, with the goal of maximizing profitability over time. The growth in noninterest expenses was due primarily to a 19.1%, or $1,506,000, increase in salaries and employee benefits, mainly related to growth in staff, an expanded branch network and higher incentive compensation and pension plan costs. Average full-time equivalent employees reached 419 during the first six months of 1998 compared to 378 during the first six months of 1997. The ratio of net income per average full-time-equivalent employee increased to $18,500 from $16,700. Occupancy expenses increased 26.8% or $291,000 to $1,376,000 for the six month period ended June 30, 1998 from $1,085,000 for the same period in 1997 due in large part to rental expenses related to new branches. Over the same period, equipment expenses also increased significantly, by 25.5% or $268,000, due primarily to higher depreciation expenses. While marketing expense declined and FDIC insurance expense was unchanged, other noninterest expense categories increased due to overall growth in the Company. Income Taxes The effective tax rate for the first six months of the year was 30.1% in 1998, compared to 34.4% in 1997, reflecting an increase in the percentage of nontaxable income. 8
ANALYSIS OF CREDIT RISK (Dollars in thousands) Activity in the allowance for credit losses is shown below: <TABLE> <CAPTION> 6 Months Ended 12 Months Ended June 30, 1998 December 31, 1997 - ------------------------------------------------------------------------------------- <S> <C> <C> <C> Balance, January 1 $ 7,016 $ 6,391 Provision for credit losses 542 986 Loan charge-offs: Real estate-mortgage (20) (60) Real estate-construction 0 (79) Consumer (79) (167) Commercial (15) (235) ------- ------- Total charge-offs (114) (541) Loan recoveries: Real estate-mortgage 0 0 Real estate-construction 0 0 Consumer 16 39 Commercial 74 141 ------- ------- Total recoveries 90 180 ------- ------- Net charge-offs (24) (361) ------- ------- BALANCE, PERIOD END $ 7,534 $ 7,016 ======= ======= Net charge-offs to average loans (annual basis) 0.01% 0.07% Allowance to total loans 1.30% 1.26% </TABLE> Balance sheet risk inherent in the lending function is presented as follows at the dates indicated: <TABLE> <CAPTION> June 30, December 31, 1998 1997 - ------------------------------------------------------------------------------------- <S> <C> <C> Non-accrual loans $1,088 $ 890 Loans 90 days past due 1,916 1,764 Restructured loans 0 18 ------ ------ Total Nonperforming Loans* 3,004 2,672 Other real estate owned 639 296 ------ ------ TOTAL NONPERFORMING ASSETS $3,643 $2,968 ------ ------ Nonperforming assets to total assets 0.31% 0.26% - ----------------------------------------------------------------------------------- </TABLE> * Those performing loans considered potential problem loans, as defined and identified by management, amounted to approximately $7,510,000 at June 30, 1998, compared to $7,890,000 at December 31, 1997. Although these are loans where known information about the borrowers' possible credit problems causes management to have doubts as to their ability to comply with the present loan repayment terms, most are well collateralized and are not believed to present significant risk of loss. 9
C. RESULTS OF OPERATIONS - SECOND QUARTER 1998 AND 1997 Second quarter net income of $3,875,000 ($0.40 per share-diluted) in 1998 was $755,000 or 24.2% above net income of $3,120,000 ($0.32 per share-diluted) shown for the same quarter of 1997. Tax-equivalent net interest income rose 10.3% during the second quarter of 1998 compared to the like three month period of 1997, showing the net effects of a 12.1% increase in the average earning asset base and a 14 basis point decline in net interest spread. The provision for credit losses was $275,000 for the quarter ended June 30, 1998, versus $125,000 for 1997's second quarter. Net recoveries of $29,000 were recorded for the second quarter of 1998, compared to net charge-offs of $81,000 for the second quarter of 1997. Noninterest income for the second quarter increased $971,000 or 48.2% in 1998, compared to 1997, with the largest contributors being, in order of importance, increases in mortgage banking revenues, transaction based service fees, especially return check charges, and fees from trust services. Noninterest expenses rose 15.6%, attributable largely to the same factors as discussed above for the six-month periods. The second quarter effective tax rate was 29.0% in 1998 versus 35.2% shown in 1997, as in the year-to-date comparison reflecting an increase in the percentage of nontaxable income. 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, 1997. 10
PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual shareholders' meeting held on April 15, 1998, the shareholders of the Company elected Solomon Graham, Gilbert L. Hardesty, Charles F. Mess, Lewis R. Schumann and W. Drew Stabler as directors for three year terms. There were no solicitations in opposition to management's nominees and all such nominees were elected. All of these nominees were incumbent directors except Gilbert L. Hardesty. Other directors continuing in office are John Chirtea, Joyce R. Hawkins, Hunter R. Hollar, Thomas O. Keech, Susan D. Goff, Robert L. Mitchell, Robert L. Orndorff, Jr. and David E. Rippeon. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q: No. Exhibit ---- ------- 27 Financial Data Schedule (b) Reports on Form 8-K. None. 11
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized. SANDY SPRING BANCORP, INC. (Registrant) By: HUNTER R. HOLLAR --------------------------------------------- Hunter R. Hollar President and Chief Executive Officer Date: August 7, 1998 By: JAMES H. LANGMEAD --------------------------------------------- James H. Langmead Vice President and Treasurer Date: August 4, 1998 12