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, 2001 ------------- OR () TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- Commission File Number: O-19065 ------- Sandy Spring Bancorp, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1532952 ------------------------ -------------------------------------- (State of incorporation) (I.R.S. Employer Identification Number) 17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400 - ------------------------------------- ----- ------------ (Address of principal office) (Zip Code) (Telephone Number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES X NO ------- ------- The number of shares of common stock outstanding as of July 31, 2001 is 9,594,152 shares.
SANDY SPRING BANCORP, INC. INDEX <TABLE> <CAPTION> PAGE - ------------------------------------------------------------------------------------ <S> <C> PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at June 30, 2001 and December 31, 2000 .................................. 1 Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2001 and 2000 ........................... 2 Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2001 and 2000 ....................... 3 Consolidated Statements of Changes in Stockholders' Equity for the Six Month Periods Ended June 30, 2001 and 2000 ........................... 5 Notes to Consolidated Financial Statements ........................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................... 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............................................... 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ................. 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................... 15 SIGNATURES .................................................................. 16 </TABLE>
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, December 31, (Dollars in thousands, except per share data) 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 42,028 $ 39,394 Federal funds sold 45,872 6,935 Interest-bearing deposits with banks 588 507 Residential mortgage loans held for sale 9,150 6,371 Investments available-for-sale (at fair value) 564,359 517,861 Investments held-to-maturity -- fair value of $184,604 (2001) and $135,121 (2000) 183,030 134,879 Other equity securities 16,929 14,187 Total Loans and Leases 991,353 967,817 Less: Allowance for credit losses (11,580) (11,530) ----------- ----------- Net loans and Leases 979,773 956,287 Premises and equipment, net 32,194 31,282 Accrued interest receivable 15,776 15,124 Goodwill and other intangible assets, net 21,988 23,648 Other assets 36,053 26,526 ----------- ----------- TOTAL ASSETS $ 1,947,740 $ 1,773,001 =========== =========== LIABILITIES Noninterest-bearing deposits $ 263,487 $ 243,339 Interest-bearing deposits 1,041,169 999,588 ----------- ----------- Total Deposits 1,304,656 1,242,927 Short-term borrowings 378,008 308,314 Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000 Other long-term borrowings 79,097 49,054 Accrued interest and other liabilities 8,511 10,148 ----------- ----------- TOTAL LIABILITIES 1,805,272 1,645,443 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 50,000,000; shares issued and outstanding 9,592,819 (2001) and 9,552,672 (2000) 9,593 9,553 Surplus 23,648 22,511 Retained earnings 104,701 97,641 Accumulated other comprehensive income (loss) 4,526 (2,147) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 142,468 127,558 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,947,740 $ 1,773,001 =========== =========== </TABLE> See Notes to Consolidated Financial Statements 1
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------- ----------------- (In thousands, except per share data) 2001 2000 2001 2000 - ------------------------------------------------------------- ----------------- <S> <C> <C> <C> <C> Interest Income: Interest and fees on loans and leases $ 20,305 $ 18,608 $ 41,301 $ 36,219 Interest on loans held for sale 208 55 340 105 Interest on deposits with banks 35 23 55 71 Interest and dividends on securities: Taxable 9,274 8,495 18,025 16,288 Exempt from federal income taxes 1,975 1,908 3,888 3,800 Interest on federal funds sold 475 192 782 390 -------- -------- -------- -------- TOTAL INTEREST INCOME 32,272 29,281 64,391 56,873 Interest Expense: Interest on deposits 9,548 9,654 19,647 18,756 Interest on short-term borrowings 4,409 3,491 8,868 6,618 Interest on long-term borrowings 2,050 1,448 4,070 2,768 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 16,007 14,593 32,585 28,142 -------- -------- -------- -------- NET INTEREST INCOME 16,265 14,688 31,806 28,731 Provision for Credit Losses 492 990 984 1,290 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 15,773 13,698 30,822 27,441 Noninterest Income: Securities gains 0 55 130 47 Service charges on deposit accounts 1,807 1,468 3,554 2,779 Gains on sales of mortgage loans 747 207 1,268 376 Trust department income 479 436 914 845 Gain on sale of premises 0 (32) 0 1,470 Other income 2,440 1,724 4,529 3,063 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 5,473 3,858 10,395 8,580 Noninterest Expenses: Salaries and employee benefits 6,833 6,090 13,517 11,752 Occupancy expense of premises 1,224 1,210 2,461 2,382 Equipment expenses 875 816 1,691 1,585 Marketing 331 444 648 801 Outside data services 669 580 1,325 1,216 Intangible asset amortization 835 706 1,691 1,412 Other expenses 2,448 2,210 4,754 4,138 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSES 13,215 12,056 26,087 23,286 -------- -------- -------- -------- Income Before Income Taxes 8,031 5,500 15,130 12,735 Income Tax Expense 2,164 1,300 3,958 3,515 -------- -------- -------- -------- NET INCOME $ 5,867 $ 4,200 $ 11,172 $ 9,220 ======== ======== ======== ======== Basic Net Income Per Share $ 0.61 $ 0.44 $ 1.17 $ 0.96 Diluted Net Income Per Share 0.61 0.44 1.16 0.96 Dividends Declared Per Share 0.22 0.20 0.43 0.40 </TABLE> 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, ----------------- 2001 2000 - -------------------------------------------------------------------------------------- ------------- <S> <C> <C> Cash Flows from Operating Activities: Net Income $ 11,172 $ 9,220 Adjustments to reconcile net income to net cash (used) provided by operating activities: Depreciation and amortization 3,170 2,846 Provision for credit losses 984 1,290 Deferred income taxes 313 182 Origination of loans held for sale (109,686) (28,161) Proceeds from sales of loans held for sale 108,175 27,300 Gains on sales of loans held for sale (1,268) (376) Securities gains (130) (47) Gain on sale of premises 0 (1,502) Net increase in accrued interest receivable (652) (1,022) Net increase in other assets (13,825) (991) Net decrease in accrued expenses (1,638) (2,708) Other - net (1,753) (909) --------- --------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (5,138) 5,122 Cash Flows from Investing Activities: Net (increase) decrease in interest-bearing deposits with banks (81) 2,695 Purchases of investments held-to-maturity (44,905) (5,983) Purchases of other equity securities (2,742) (8,813) Purchases of investments available-for-sale (344,520) (55,405) Proceeds from sales of investments available-for-sale 35,468 15,486 Proceeds from maturities, calls and principal payments of investments 16,345 0 held-to-maturity Proceeds from maturities, calls and principal payments of investments 254,244 14,877 available-for-sale Proceeds from sales of other equity securities 0 12,083 Proceeds from sales of other real estate owned 426 330 Net increase in loans and leases (23,568) (64,211) Proceeds from sale of premises 0 2,965 Expenditures for premises and equipment (2,489) (2,585) --------- --------- NET CASH USED BY INVESTING ACTIVITIES (111,822) (88,561) Cash Flows from Financing Activities: Net increase in deposits 61,729 42,413 Net increase in short-term borrowings 69,594 66,059 Proceeds from long-term borrowings 30,143 25,990 Retirement of long-term borrowings 0 (35,000) Common stock purchased and retired 0 (2,731) Proceeds from issuance of common stock 1,177 1,094 Dividends paid (4,112) (3,847) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 158,531 93,978 --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 41,571 10,539 Cash and Cash Equivalents at Beginning of Year 46,329 50,219 --------- --------- CASH AND CASH EQUIVALENTS AT END OF QUARTER* $ 87,900 $ 60,758 ========= ========= </TABLE> 3
Cont'd CONSOLIDATED STATEMENTS OF CASH FLOWS Supplemental Disclosures: Interest payments $32,193 $28,179 Income tax payments 5,415 3,799 Noncash Investing Activities: Transfers from loans to other real estate owned 32 306 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. See Notes to Consolidated Financial Statements. 4
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share data) <TABLE> <CAPTION> Accum- ulated Other Compre- TOTAL hensive STOCK- Common Retained Income HOLDERS' Stock Surplus Earnings (loss) EQUITY - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> $9,553 $22,511 $127,558 BALANCES AT JANUARY 1, 2001 $97,641 $(2,147) Comprehensive Income: Net income 11,172 11,172 Unrealized gain (loss) on investments available-for-sale 6,673 6,673 ------------- Total comprehensive income 17,845 Cash dividends - $0.43 per share (4,112) (4,112) Common stock issued pursuant to: Stock option plan - 7,565 shares 8 162 170 Dividend reinvestment and stock purchase plan - 32,582 shares 32 975 1,007 ---------- ---------- ----------- ----------- ------------- BALANCES AT JUNE 30, 2001 $9,593 $23,648 $104,701 $4,526 $142,468 ========== ========== =========== =========== ============= - ------------------------------------------------------------------------------------------------------------------- $9,648 $24,476 $86,620 $108,720 BALANCES AT JANUARY 1, 2000 $(12,024) Comprehensive Income: Net income 9,220 9,220 Unrealized gain (loss) on investments (1,563) (1,563) available-for-sale ------------- Total comprehensive income 7,657 Cash dividends - $0.40 per share (3,847) (3,847) Common stock issued pursuant to: Dividend reinvestment and stock purchase plan - 51,078 shares 51 1,043 1,094 Stock repurchases - 127,357 shares (2,603) (2,731) (128) ---------- ---------- ----------- ----------- ------------- BALANCES AT JUNE 30, 2000 $9,571 $22,916 $91,993 $(13,587) $110,893 ========== ========== =========== =========== ============= </TABLE> See Notes to Consolidated Financial Statements. 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL The foregoing financial statements are unaudited; however, in the opinion of Management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. These statements should be read in conjunction with the financial statements and accompanying notes included in Sandy Spring Bancorp's 2000 Annual Report to Shareholders on Form 10-K. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2001. The accounting and reporting policies of Sandy Spring Bancorp (the "Company") conform to accounting principles generally accepted in the United States and to general practices within the banking industry. Certain reclassifications have been made to amounts previously reported to conform with current classifications. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. NOTE 2 - STOCKHOLDERS' EQUITY On April 18, 2001, the shareholders approved an increase in the number of shares of capital stock authorized to be issued from 15,000,000 to 50,000,000. On April 18, 2001, the shareholders approved the 2001 Employee Stock Purchase Plan ( the "Purchase Plan") to commence on July 1, 2001, with consecutive monthly offering periods thereafter, and reserved 300,000 authorized but unissued shares of common stock for purchase upon the exercise of options granted under the plan. Shares are placed under option to employees, to be purchased at 85% of the fair market value on the exercise date through monthly payroll deductions of not less than 1% or more than 10% of cash compensation paid in the month. The Purchase Plan is administered by a committee of at least three directors appointed by the Board of Directors. NOTE 3 - PER SHARE DATA The calculations of net income per common share for the six month periods ended June 30 are as shown in the following table. Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is derived by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of outstanding stock options. <TABLE> <CAPTION> (Dollars and amounts in thousands, except Three Months Ended Six Months Ended Per share data) June 30, June 30, - ------------------------------------------------------------------------------------------------------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- <S> <C> <C> <C> <C> Basic: Net income available to common stockholders $5,867 $4,200 $11,172 $9,220 Average common shares outstanding 9,577 9,579 9,566 9,607 Basic net income per share $0.61 $0.44 $1.17 $0.96 ============= ============== ============= ================ Diluted: Net income available to common stockholders $5,867 $4,200 $11,172 $9,220 Average common shares outstanding 9,577 9,579 9,566 9,607 Stock option adjustment 94 29 84 28 ------------- -------------- ------------- ---------------- Average common shares outstanding-diluted 9,671 9,608 9,650 9,635 Diluted net income per share $0.61 $0.44 $1.16 $0.96 ============= ============== ============= ================ </TABLE> 6
NOTE 4 - CONTINGENCIES In the normal course of business, the Company entered into an agreement with Diebold Incorporated ("Diebold") for cash replenishment and other services for some of the Company's off-site ATMs. Diebold subcontracted this ATM cash replenishment service to another company, Tri-State Armored Services, Inc. ("Tri-State") that subsequently filed for bankruptcy protection on March 2, 2001. The assets of Tri-State have been seized by the Bankruptcy Trustee, including presumably some of the Company's funds that had been wired to Tri-State as part of the ATM cash replenishment service. The investigation is ongoing and the Company intends to vigorously pursue recovery through all available channels. Pending further proceedings, the Company cannot reasonably estimate the amount of the loss, if any, it may incur as a result of these events. Therefore, no accrual for any potential loss has been reflected in the accompanying financial statements. The maximum exposure to the Company is $628,000. 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, including: statements of goals, intentions and expectations; estimates of risks and of future costs and benefits; assessments of probable loan and lease losses and market risk; and statements of the ability to achieve financial and other goals. These forward looking statements are subject to significant uncertainties because they are based upon or are affected by: management's estimates and projections of future interest rates and other economic conditions; future laws and regulations; and a variety of other matters, which, by their nature, are subject to significant uncertainties. Because of these uncertainties, the actual future results may be materially different from those indicated. In addition, the Company's past results of operations do not necessarily indicate its future results. THE COMPANY The Company is the registered bank holding company for Sandy Spring National Bank of Maryland (the "Bank"), headquartered in Olney, Maryland. The Bank operates thirty community offices in Montgomery, Howard, Prince George's and Anne Arundel Counties in Maryland, together with an insurance subsidiary and an equipment leasing company. The Company offers a broad range of financial services to consumers and businesses in this market area. Through June 30, 2001, year-to-date average commercial and commercial real estate loans and leases accounted for approximately 45% of the Company's loan and lease portfolio, and year-to-date average consumer and residential real estate loans accounted for approximately 55%. Based upon the most recent data available, consumer deposits account for approximately 80% of total average deposits while approximately two-thirds of the Company's revenues are derived from consumer loans, consumer deposits and other services. The Company has established a strategy of independence, and intends to establish or acquire additional offices, banking organizations and nonbanking organizations as appropriate opportunities may arise. A. FINANCIAL CONDITION The Company's total assets were $1,947,740,000 at June 30, 2001, compared to $1,773,001,000 at December 31, 2000, increasing $174,739,000 or 9.9% during the first six months of 2001. Earning assets increased $162,724,000 or 9.9% to $1,811,281,000 at June 30, 2001, from $1,648,557,000 at December 31, 2000. Total loans and leases rose 2.4% or $23,536,000 during the first half of 2001, to $991,353,000. During this period, commercial loans and leases increased $14,612,000 (up 3.3%), reflecting growth in commercial real estate credits, while residential real estate loans rose $8,901,000 (up 2.9%), reflecting sharply higher residential construction lending, largely offset by a decline in residential mortgages. This decrease in residential mortgages was due in large part to the sale of fixed rate loan production resulting from refinancing in a lower rate environment. Consumer loans remained essentially level over the same period. Residential mortgage loans held for sale increased by $2,779,000 from December 31, 2000 to $9,150,000 at June 30, 2001. Analysis of Loans and Leases The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated: <TABLE> <CAPTION> June 30, 2001 December 31, (In thousands) % 2000 % - --------------------------------------------- -------------------- --------- --------- <S> <C> <C> <C> <C> Residential real estate $ 319,490 32% $ 310,589 32% Commercial loans and leases 457,999 46 443,387 46 Consumer 213,864 22 213,841 22 --------- --------- --------- --------- Total Loans and Leases 991,353 100% 967,817 100% ========= ========= Less: Allowance for credit losses (11,580) (11,530) --------- --------- NET LOANS AND LEASES $ 979,773 $ 956,287 ========= ========= </TABLE> 8
The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, increased by $97,391,000 or 14.6% from December 31, 2000, to June 30, 2001. Most of this change occurred in available-for-sale and held-to-maturity securities, and primarily reflected the investment of increased borrowed funds under the Company's leverage programs. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $39,018,000 during the first six months of 2001, reaching $46,460,000 at June 30, 2001, as the rise in total deposits exceeded the rise in total loans and leases by $38,193,000. Total deposits were $1,304,656,000 at June 30, 2001, increasing $61,729,000 or 5.0% from $1,242,927,000 at December 31, 2000. Growth in money market savings accounts, noninterest-bearing demand deposits and time deposits of $100,000 or more accounted for virtually all of the overall increase. Total borrowings rose 25.4% or $99,737,000 from December 31, 2000, to June 30, 2001, primarily reflective of $70,043,000 higher short-term and long-term advances from the Federal Home Loan Bank of Atlanta, along with a $25,000,000 borrowing in the form of a short-term reverse repurchase agreement. The Company borrowed these funds primarily for the purpose of investing them in securities under its leverage programs. Analysis of Deposits The following table presents the trends in the composition of deposits at the dates indicated: <TABLE> <CAPTION> June 30, 2001 December 31, (In thousands) % 2000 % - ---------------------------------------------- --------------------- -------- ---------- <S> <C> <C> <C> <C> Noninterest-bearing Deposits $ 263,487 20% $ 243,339 20% Interest-bearing Deposits: Demand 144,155 11 156,266 12 Money market savings 363,376 28 337,532 27 Regular savings 104,762 8 98,592 8 Time deposits less than $100,000 317,989 24 311,871 25 Time deposits $100,000 or more 110,887 9 95,327 8 ---------- ---------- ---------- ---------- Total Interest-bearing 1,041,169 80 999,588 80 ---------- ---------- ---------- ---------- TOTAL DEPOSITS $1,304,656 100% $1,242,927 100% ========== ========== ========== ========== </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. Measured at June 30, 2001, the simulation analysis indicates that net interest income would decline by 6% over a twelve month period given a decrease in interest rates of 200 basis points, compared to a policy limit of 15%. In terms of equity capital on a fair value basis, a 200 basis point decrease in interest rates is estimated to reduce the fair value of capital (as computed) by 22%, as compared to a policy limit of 25%. LIQUIDITY Liquidity is measured using an approach designed to take into account the Company's growth, mortgage banking activities and leverage programs. Also considered are the sophistication of investment activities and changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the funds management committee under formal policy guidelines, the Company's liquidity position is measured weekly, looking forward thirty, sixty and ninety days. The measurement is based upon the asset-liability management model's projection of a funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds, leverage limitations and core growth. Resulting projections as of June 30, 2001, show short-term investments exceeding short-term borrowings by $48,444,000 (the figure was $12,369,000 at December 31, 2000) over the next 90 days. This excess of liquidity over projected requirements for funds indicates that the Company can continue to increase its loans and other earning assets without incurring additional borrowing. 9
In addition, the Company has external sources of funds, which can be drawn upon when funds are required. The main source of external liquidity is an available line of credit for $581,635,000 with the Federal Home Loan Bank of Atlanta, of which approximately $301,297,000 was outstanding at June 30, 2001. Other external sources of liquidity available to the Company in the form of lines of credit granted by the Federal Reserve, correspondent banks and other institutions totaled $258,400,000 at June 30, 2001, against which there were outstandings of approximately $25,000,000. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position is appropriate at June 30, 2001. CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 14.16% at June 30, 2001, compared to 13.73% at December 31, 2000; a tier 1 risk-based capital ratio of 13.10%, compared to 12.69%; and a capital leverage ratio of 8.01%, compared to 8.21%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Management believes the level of capital at June 30, 2001, is appropriate. Stockholders' equity for June 30, 2001, totaled $142,468,000 (including $4,526,000 reported for accumulated other comprehensive income), representing an increase of 11.7% from $127,558,000 at December 31, 2000 (net of $2,147,000 reported for accumulated other comprehensive loss). Excluding accumulated other comprehensive income (loss), the increase was 6.4%. The Company's accumulated other comprehensive income (loss) category is comprised of net unrealized gains and losses on available-for-sale securities. Internal capital generation (net income less dividends) added $7,060,000 to equity during the first six months of 2001, representing an annualized rate (when considered as a percentage of average total stockholders' equity) of 10.6% versus 9.9% for the year ended December 31, 2000. External capital formation resulting from stock issuances under the dividend reinvestment and stock purchase plan and, to a lesser degree, from exercises of stock options, totaled $1,177,000 during the first six months of 2001. There were no share repurchases over the period. Dividends for the first six months of the year were $0.43 per share in 2001, compared to $0.40 per share in 2000, for respective dividend payout ratios (dividends declared per share to diluted net income per share) of 37.07% versus 41.67% (46.51% when the nonrecurring after tax gain of $889,000 on the sale of a building during the first quarter of 2000 is excluded from net income). B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2001, AND 2000 Net income for the first six months of the year increased $1,952,000 or 21.2% in 2001 over 2000, to $11,172,000 from $9,220,000. Diluted earnings per share after six months were $1.16 in 2001 compared to $0.96 in 2000. The annualized returns on average equity for the six month periods ended June 30 were 16.72% in 2001 and 17.23% in 2000. The annualized return on average assets for the six month periods were 1.21% and 1.15% in 2001 and 2000, respectively. Excluding nonoperating items of income and expense, net income for the first six months of the year was $11,961,000 ($1.24 per diluted share) or 30.6% above the $9,157,000 ($0.95 per diluted share) earned in 2000, for returns on average equity of 17.90% and 17.11%, respectively, and returns on average assets of 1.29% and 1.13%, respectively. The most significant nonoperating item was the $908,000 after-tax gain on the sale of a building which occurred in the first quarter of 2000. Nonoperating items also included gains on security transactions and the non-cash amortization of intangible assets, and a $155,000 after-tax gain on the sale of the Company's credit card portfolio during the second quarter of 2001. Comparing the six month periods ended June 30, the net interest margin decreased by 20 basis points, to 3.97% in 2001 from 4.17% in 2000, while the net interest spread decreased by 24 basis points, to 3.35% from 3.59%. These results are similar to those shown in the first quarter comparisons and are indicative of the intense competition in the financial services sector of the economy and the effects of rapid decreases in interest rates stimulated by the Federal Reserve Board during 2001. NET INTEREST INCOME Net interest income for the first six months of the year was $31,806,000 in 2001, an increase of 10.7% over $28,731,000 in 2000, reflecting a higher volume of average earning assets. On a tax-equivalent basis, net interest income increased 9.4% to $34,101,000 in 2001, from $31,161,000 in 2000. The effects of average balances, yields and rates are presented in the table on page 11. 10
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands and tax equivalent) <TABLE> <CAPTION> For the six months ended June 30, 2001 2000 --------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate --------------------------------------------------------- <S> <C> <C> <C> <C> ASSETS Total loans and leases $ 988,013 8.48% $ 856,207 8.52% Total securities 707,058 6.91 632,697 7.16 Other earning assets 35,410 4.73 14,506 6.37 --------------- ----------------- TOTAL EARNING ASSETS 1,730,481 7.76% 1,503,410 7.93% Nonearning assets 135,257 121,592 --------------- ----------------- Total Assets $1,865,738 $1,625,002 =============== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing demand deposits $ 151,528 0.98% $ 157,360 1.10% Money market savings deposits 350,463 3.81 286,824 3.93 Regular savings deposits 103,140 1.69 107,790 2.01 Time deposits 413,157 5.58 432,518 5.22 --------------- ----------------- Total interest-bearing deposits 1,018,288 3.89 984,492 3.83 Short-term borrowings 354,094 5.02 249,282 5.32 Long-term borrowings 112,725 7.22 69,109 8.01 --------------- ----------------- Total interest-bearing liabilities 1,485,107 4.41 1,302,883 4.34 -------------- -------------- Noninterest-bearing demand deposits 233,149 209,603 Other noninterest-bearing liabilities 12,766 4,882 Stockholders' equity 134,716 107,634 --------------- ----------------- Total Liabilities & Stockholders' Equity $1,865,738 $1,625,002 =============== ================= Interest Rate Spread 3.35% 3.59% ============== ============== Net Interest Margin (1) 3.97% 4.17% ============== ============== Ratio of average earning assets to Average interest-bearing liabilities 116.52% 115.39% =============== ================= </TABLE> (1) Net interest margin = annualized net interest income on a tax-equivalent basis / total interest-earning assets 11
NET INTEREST INCOME (CONTINUED) For the first six months, tax-equivalent interest income increased $7,384,000 or 12.5% in 2001, compared to 2000. Average earning assets rose 15.1% over the prior year period, to $1,730,481,000 from $1,503,410,000, while the average yield earned on those assets decreased by 17 basis points to 7.76% from 7.93%. Comparing the first six months of 2001, versus 2000, average loans grew 15.4% to $988,013,000 (57.1% of average earning assets, versus 57.1% a year ago), while the average yield on loans and leases decreased 4 basis points to 8.48% from 8.52%. The average loan and lease yield for the first six months of 2001, compared to the like period of 2000, was favorably impacted by $31,304,000 of relatively high yielding leases acquired in December, 2000, as average commercial loans increased by $67,416,000 or 17.7%. Over the same period, average residential real estate loans increased by $46,574,000 or 16.7%, and average consumer loans increased by $17,816,000 or 9.1%. Average total securities rose 11.8% to $707,058,000 (40.9% of average earning assets, versus 42.1% a year ago), while the average yield declined by 25 basis points to 6.91% versus 7.16% for the first half-years of 2001 and 2000, respectively. Interest expense for the first six months of the year increased by $4,443,000 or 15.8% in 2001, over 2000, produced by the combined effects of 14.0% or $182,224,000 higher average interest-bearing liabilities and a 7 basis point increase in the average rate paid for those funds to 4.41% from 4.34% due to increases in rates paid on average time deposits during the current year. Average total interest-bearing deposits rose $33,796,000 or 3.4% and contributed $891,000 to the rise in interest expense year-to-date June 30, 2001, compared to the same period of 2000. Over this time frame, average time, regular savings and interest-bearing demand deposits declined, while average money market savings deposits grew by $63,639,000 or 22.2% and accounted for $1,017,000 of the overall increase in interest expense. The half-year rise in average borrowings from 2000 to 2001 was $148,428,000 or 46.6%, with most of the change reflected in the Company's leverage programs, resulting in $3,552,000 greater interest expense. CREDIT RISK MANAGEMENT During the first six months of the year, the provision for credit losses was $984,000 in 2001, compared to $1,290,000 in 2000. Net charge-offs of $934,000 were recorded for the six month period ended June 30, 2001, while there were net charge-offs of $337,000 for the same period a year earlier. The Company regularly analyzes the sufficiency of its allowance for credit losses through a methodology consisting of several key elements, which include the formula allowance, based upon historical loss experience, specific allowances for problem graded credits, and the unallocated allowance, based upon management's quarterly review of various conditions. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan and lease volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan and lease categories, duration of the current business cycle, bank regulatory examination results, findings of internal credit examiners, and management's judgment with respect to various other conditions including credit administration and management, and the quality of risk identification systems. During the first half of 2001, there were no changes in estimation methods or assumptions that affected the allowance methodology. The allowance for credit losses was 1.17% of total loans and leases at June 30, 2001, and 0.98% at December 31, 2000. Management believes that the allowance for credit losses is adequate. Nonperforming loans and leases increased by $130,000 to $2,623,000 while nonperforming assets declined by $218,000 to $2,655,000 from December 31, 2000, to June 30, 2001. Expressed as a percentage of total assets, nonperforming assets fell to 0.14% at June 30, 2001, from 0.16% at December 31, 2000. The allowance for credit losses represented 441% of nonperforming loans and leases at June 30, 2001, compared to similar coverage of 462% at December 31, 2000. Significant variation in this coverage ratio may occur from period to period because the amount of nonperforming loans and leases depends largely on the condition of a small number of individual credits and borrowers relative to the total loan and lease portfolio. Other real estate owned totaled approximately $32,000 at June 30, 2001, compared to $380,000 at December 31, 2000. The balance of impaired loans at June 30, 2001 was $181,000, with reserves against those loans and leases totaling $108,000, versus a balance at December 31, 2000 of $613,000, with reserves of $100,000. 12
ANALYSIS OF CREDIT RISK (Dollars in thousands) Activity in the allowance for credit losses is shown below: Six Months Ended Twelve Months Ended June 30, 2001 December 31, 2000 - -------------------------------------------------------------------------------- Balance, January 1 $ 11,530 $ 8,231 Provision for credit losses 984 2,690 Allowance acquired 0 1,300 Loan charge-offs: Residential real estate (18) (220) Commercial loans and leases (808) (246) Consumer (133) (303) -------- -------- Total charge-offs (959) (769) Loan recoveries: Residential real estate 0 0 Commercial loans and leases 16 36 Consumer 9 42 -------- -------- Total recoveries 25 78 -------- -------- Net charge-offs (934) (691) -------- -------- BALANCE, PERIOD END $ 11,580 $ 11,530 ======== ======== Net charge-offs to average loans and leases (annual basis) 0.19% 0.08% Allowance to total loans and leases 1.17% 1.19% The following table presents nonperforming assets at the dates indicated: June 30, December 31, 2001 2000 - ------------------------------------------------------------------------------- Non-accrual loans and leases $ 395 $ 684 Loans and leases 90 days past due 2,228 1,809 Restructured loans and leases 0 0 ------ ------ Total Nonperforming Loans and leases* 2,623 2,493 Other real estate owned 32 380 ------ ------ TOTAL NONPERFORMING ASSETS $2,655 $2,873 ====== ====== Nonperforming assets to total assets 0.14% 0.16% - --------------------------------------------------------- ---- ---------------- * Those performing credits considered potential problem credits, as defined and identified by management, amounted to approximately $9,390,000 at June 30, 2001 compared to $9,576,000 at December 31, 2000. Although these are credits where known information about the borrowers' possible credit problems causes management to have doubts as to their ability to comply with the present repayment terms, most are well collateralized and are not believed to present significant risk of loss. 13
NONINTEREST INCOME AND EXPENSES Noninterest income increased by 21.2% or $1,815,000 during the six months ended June 30, 2001, versus the same period of 2000. Significant non-operating items affecting this comparison were gains of $256,000 on the sale of the Company's credit card portfolio in 2001, and $1,470,000 on the sale of a building in 2000. Excluding such items, the increase in noninterest income was 41.7% or $2,946,000. Most of this change was due to higher gains on sales of mortgage loans, growth in return check charges, a component of service charges on deposit accounts, and increases in various types of other noninterest income, including those recorded for transaction based service fees, bank owned life insurance investments, and the Equipment Leasing Company acquired in December, 2000. For the six months ended June 30, noninterest expenses increased 12.0% or $2,801,000 to $26,087,000 in 2001, from $23,286,000 in 2000. Exclusive of the nonoperating amortization of acquisition intangibles, the rise was 11.5%. The Company incurs additional costs in order to enter new markets, provide new services, and support the growth of the Company. Management controls its operating expenses, however, with the goal of maximizing profitability over time. Most of the year-to-date increase in operating expenses from second quarter 2000, to second quarter 2001, was due to higher salaries and benefits related primarily to merit increases, incentive compensation, health insurance costs, and expenses for a 401(K) match of employee contributions by the Company which began in 2001. A significant increase was also reported for consulting services costs which was largely attributable to an efficiency study completed in 2000. Average full-time equivalent employees decreased by 10 persons (representing a 2.1% reduction), to 458 during the first six months of 2001, compared to 468 during the first six months of 2000. With the exclusion of nonoperating items of income and expense from earnings, the year-to-date June 30 ratio of net income per average full-time-equivalent employee increased in 2001, to $26,000 from $20,000 in 2000. INCOME TAXES The effective tax rates for the six month periods ended June 30 were 26.2% in 2001, compared to 27.6% in 2000. C. RESULTS OF OPERATIONS - SECOND QUARTER 2001 AND 2000 Second quarter net income of $5,867,000 ($0.61 per share-diluted) in 2001 was $1,667,000 or 39.7% above net income of $4,200,000 ($0.44 per share-diluted) shown for the same quarter of 2000. Excluding nonoperating items, earnings for the second quarter were $6,217,000 ($0.64 per share-diluted) in 2001, compared to $4,613,000 ($0.48 per share-diluted) in 2000, representing an increase of 34.8%. The most significant nonoperating item was a $155,000 after-tax gain on the sale of the Company's credit card portfolio during the second quarter of 2001. Tax-equivalent net interest income rose 9.9% during the second quarter of 2001, versus the comparable period in 2000, to $17,485,000 from $15,909,000. The size of this change was determined by the conflicting effects of 16.2% higher average earning assets coupled with a 24 basis point narrowing of the net interest margin. The provision for credit losses was $492,000 for the quarter ended June 30, 2001, compared to a provision of $990,000 for the same three-month period of 2000. Net charge-offs of $604,000 were recorded for the second quarter of 2001, compared to net charge-offs of $206,000 for the second quarter of 2000. Noninterest income for the second quarter increased $1,615,000 or 41.9% in 2001, compared to 2000. On an operating basis, which primarily reflects the exclusion of a $256,000 gain on the sale of the credit card portfolio in June, 2001, the increase in noninterest income was 36.0%. Most of this rise was due to higher gains on sales of mortgage loans, return check charges, revenue from bank owned life insurance investments and equipment leasing revenues. For the three months ended June 30, noninterest expenses increased 9.6% or $1,159,000 to $13,215,000 in 2001, from $12,056,000 in 2000. Excluding the non-operating amortization of intangible assets, noninterest expenses rose 9.1%, with the majority attributable, as in the year-to-date comparison, to higher salaries and benefits. The second quarter effective tax rate was 26.9% in 2001, as compared to 23.6% in 2000, in part reflecting a decline in the ratio of nontaxable income to income before taxes. 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Financial Condition - Market Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations, above. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2000. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual shareholders' meeting held on April 18, 2001, the shareholders of the Company elected Solomon Graham, Gilbert L. Hardesty, Charles F. Mess, M.D., 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. 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. Proposal II to amend Bancorp's Articles of Incorporation to increase the number of shares of capital stock authorized to be issued from 15,000,000 to 50,000,000 was adopted by the shareholders at the annual meeting by a vote of 6,771,899 shares in favor and 712,242 shares against, with 92,644 shares abstaining. Proposal III to approve the Sandy Spring Bancorp, Inc. 2001 Employee Stock Purchase Plan and the issuance of shares under the plan (see discussion in Note 2 to the Consolidated Financial Statements above on page 6) was adopted by the shareholders at the annual meeting by a vote of 7,212,642 shares in favor and 230,688 shares against, with 160,442 shares abstaining. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None (b) Reports on Form 8-K. None 15
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 10, 2001 By: JAMES H. LANGMEAD ------------------- James H. Langmead Executive Vice President and Chief Financial Officer Date: August 10, 2001 16