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, 1996 -------------- 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) <TABLE> <S> <C> Maryland 52-1532952 ----------------------- --------------------------------------- (State of incorporation) (I.R.S. Employer Identification Number) </TABLE> 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 23, 1996 is 4,373,752 shares.
SANDY SPRING BANCORP INDEX <TABLE> <CAPTION> PAGE - ------------------------------------------------------------------------------------------ PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <S> <C> Consolidated Balance Sheets at March 31, 1996 and December 31, 1995.............................................. 1 Consolidated Statements of Income for the the Three Month Periods Ended March 31, 1996 and 1995............................. 2 Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 1996 and 1995............................. 3 Notes to Consolidated Financial Statements........................................ 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................ 5 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION............................................................ 9 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................. 9 SIGNATURES........................................................................... 10 </TABLE>
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> March 31, December 31, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Cash and due from banks $ 29,845 $ 30,108 Interest-bearing deposits with banks 5,491 821 Federal funds sold 16,048 24,255 Residential mortgage loans held for sale 3,416 3,975 Investments available-for-sale (at market) 184,201 164,148 Investments held-to-maturity -- market value of $121,018 (1996) and $119,597 (1995) 120,573 118,298 Other equity securities 3,965 3,965 Total Loans 426,140 424,626 Less: Allowance for credit losses (6,060) (5,910) ----------- ----------- Loans, net 420,080 418,716 Premises and equipment 18,111 17,953 Accrued interest receivable 5,827 5,847 Other real estate owned -- 47 Other assets 11,029 6,186 ----------- ----------- TOTAL ASSETS $818,586 $794,319 =========== =========== LIABILITIES Noninterest-bearing deposits $ 92,427 $ 93,893 Interest-bearing deposits 603,664 585,694 ----------- ----------- Total deposits 696,091 679,587 Short-term borrowings 34,232 29,779 Long-term borrowings 5,144 3,151 Accrued interest and other liabilities 3,201 3,711 ----------- ------------ TOTAL LIABILITIES 738,668 716,228 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 6,000,000; shares issued and outstanding 4,373,752 (1996) and 4,329,828 (1995) 4,374 4,330 Surplus 26,796 26,179 Retained earnings 48,868 47,138 Net unrealized loss on investments available-for-sale (120) 444 ----------- ------------ TOTAL STOCKHOLDERS' EQUITY 79,918 78,091 ----------- ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $818,586 $794,319 =========== ============ See Notes to Consolidated Financial Statements. </TABLE> 1
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended March 31, --------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------- <S> <C> <C> Interest income: Interest and fees on loans $9,495 $8,756 Interest on loans held for sale 33 -- Interest on deposits with banks 23 -- Interest and dividends on securities: Taxable 3,469 3,396 Nontaxable 845 902 Interest on federal funds sold 352 89 --------------------------------------- TOTAL INTEREST INCOME 14,217 13,143 Interest expense: Interest on deposits 6,134 5,250 Interest on short-term borrowings 356 787 Interest on long-term borrowings 63 55 --------------------------------------- TOTAL INTEREST EXPENSE 6,553 6,092 --------------------------------------- NET INTEREST INCOME 7,664 7,051 Provision for Credit Losses 150 -- --------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 7,514 7,051 Non-Interest Income: Securities losses (3) (6) Service charges on deposit accounts 638 579 Gains on mortgage sales 153 -- Other income 708 459 --------------------------------------- TOTAL NON-INTEREST INCOME 1,496 1,032 Non-Interest Expenses: Salaries and employee benefits 3,071 2,692 Occupancy expense of premises 549 459 Equipment expenses 503 438 Other expenses 1,200 1,502 --------------------------------------- TOTAL NON-INTEREST EXPENSES 5,323 5,091 --------------------------------------- Income Before Income Taxes 3,687 2,992 Income Tax Expense 1,171 889 --------------------------------------- NET INCOME $2,516 $2,103 ======================================= PER SHARE DATA: Net Income $0.58 $0.49 Dividends Declared 0.18 0.15 </TABLE> See Notes to Consolidated Financial Statements. 2
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------------- 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Cash Flows from Operating Activities: Net Income $ 2,516 $ 2,103 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 414 391 Provision for credit losses 150 -- Deferred income taxes 102 46 Origination of loans held for sale (10,128) (55) Proceeds from sales of loans held for sale 10,840 55 Gains on sales of loans held for sale (153) -- Securities losses 3 6 Net change in: Accrued interest receivable 20 220 Accrued income taxes 836 844 Other accrued expenses (1,346) (556) Other -- net (4,750) (838) ------------------------------------- NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (1,496) 2,216 Cash Flows from Investing Activities: Net increase in interest-bearing deposits with banks (4,670) (60) Purchases of investments held-to-maturity (16,178) -- Purchases of investments available-for-sale (42,961) (1,450) Proceeds from sales of investments available-for-sale 496 994 Proceeds from maturities and principal payments of investments held-to-maturity 12,996 4,065 Proceeds from maturities and principal payments of investments available-for-sale 22,351 5,392 Proceeds from sales of other real estate owned 250 8 Net increase in loans receivable (1,514) (13,731) Expenditures for premises and equipment (568) (219) ------------------------------------- NET CASH USED BY INVESTING ACTIVITIES (29,798) (5,001) Cash Flows from Financing Activities: Net increase (decrease) in demand and savings accounts 10,815 (35,584) Net increase in time and other deposits 5,689 39,062 Net increase in short-term borrowings 4,453 5,292 Proceeds from long-term borrowings 2,000 -- Retirement of long-term borrowings (7) (7) Proceeds from issuance of common stock 660 441 Dividends paid (786) (643) ------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 22,824 8,561 ------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,470) 5,777 Cash and Cash Equivalents at Beginning of Quarter 54,363 37,924 ------------------------------------- CASH AND CASH EQUIVALENTS AT END OF QUARTER* $45,893 $43,701 ===================================== Supplemental Disclosures: Interest payments $6,468 $5,331 Noncash Investing Activities: Unrealized gain (loss) on investments available-for-sale net of deferred tax effect of $(355) in 1996 and $851 in 1995 $(564) $1,352 </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. 3
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 1995 Annual Report to Shareholders. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 1996. The accounting and reporting policies of Sandy Spring Bancorp 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 - MERGER AGREEMENT On April 16, 1996, Sandy Spring Bancorp, Inc. ("Bancorp") and its wholly owned subsidiary, Sandy Spring National Bank of Maryland, Olney, Maryland (the "Bank") entered into an Agreement and Plan of Reorganization (the "Agreement") with Annapolis Bancshares, Inc. ("ABI") and its wholly owned state trust company subsidiary, Bank of Annapolis, Annapolis, Maryland ("BOA"), pursuant to which: shareholders of ABI would exchange each of their shares of ABI common stock, par value $1.00 per share, for .62585 shares of Bancorp common stock, par value $1.00 per share, subject to adjustment in certain circumstances; ABI would be merged with and into Bancorp; and BOA would be merged into the Bank. No fractional shares of Bancorp common stock would be issued. The Agreement and the transactions contemplated thereby are subject to numerous conditions, including regulatory approval and approval by the shareholders of ABI. Assuming the satisfaction of all conditions to each party's obligation to consummation, it is anticipated that the transactions contemplated by the Agreement will become effective during 1996. At March 31, 1996, ABI had consolidated total assets of approximately $82,000, representing approximately 10% of consolidated total assets of Bancorp. NOTE 3 - PER SHARE DATA Net income per common share is based on the weighted average number of shares outstanding of 4,341,933 in 1996 and 4,285,918 in 1995. 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Consolidated basis, dollars in thousands except per share data) A. FINANCIAL CONDITION The Company's total assets were $818,586 at March 31, 1996, compared to $794,319 at December 31, 1995, increasing $24,267 or 3.1% during the first quarter of 1996. Earning assets increased $19,746 or 2.7% to $759,834 from $740,088. Total loans rose 0.4% or $1,514 during the first quarter of 1996. Mortgage refinancings by customers taking advantage of lower rates adversely affected loan growth during the period. Of the major loan categories, commercial loans grew $3,268 or 6.6%, and consumer loans rose $1,478 or 5.3% reflecting a seasonal increase in student loans, while real estate mortgages decreased $1,916 or 0.6% and construction loans declined $1,178 or 3.8%. The investment portfolio, which consists of investments available-for-sale and held-to-maturity as well as other equity securities, increased $22,328 or 7.8% during the three month period ended March 31, 1996. The substantial rise in investments, expected to be temporary, reflects the placement of deposit growth in the absence of a corresponding increase in loans. Federal funds sold, the other category of earning assets carrying a significant balance, was down $8,207 or 33.8% over the same period. The increase in other assets in 1996 primarily reflects amounts receivable on investment "calls" recorded in the portfolio as of quarter end. Total deposits were $696,091 at March 31, 1996, increasing $16,504 or 2.4% from $679,587 at December 31, 1995. All major deposit categories advanced except noninterest-bearing demand deposits, which declined slightly. The level of these interest free deposits has been impacted by the greater use of cash management by businesses through sweep accounts and repurchase agreements in place of traditional checking accounts. Repurchase agreements related to cash management services were largely responsible for the $4,453 or 15.0% increase in short-term borrowings, while advances from the Federal Home Loan Bank of Atlanta caused the $1,993 or 63.2% rise in long-term borrowings. LIQUIDITY AND INTEREST RATIO SENSITIVITY The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short and long term funding needs at March 31, 1996. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities, expected fundings of loans, deposit withdrawals, and the market values of available-for- sale investments. Core deposits (total deposits less CD's of $100,000 or more) increased $14,711 during the first quarter of 1996, while the funding of loan production during the period required only $1,514. During the first quarter of 1996, the Bank recorded an asset sensitive position cumulative to one year of $44,114 or 5.5% of total assets, indicating the assumption of relatively low interest rate risk. 5
CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 18.30% at March 31, 1996, compared to 18.16% at December 31, 1995; a tier 1 risk-based capital ratio of 17.05%, compared to 16.91%; and a capital leverage ratio of 10.00%, compared to 9.89%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Stockholders' equity totaled $79,918 (including a net unrealized loss of $120 on investments available-for-sale) at March 31, 1996, an increase of 2.3% from $78,091 (including a net unrealized gain of $444) at December 31, 1995. Internal capital generation (net income less dividends) provided $1,730 in additional equity during the first three months of 1996, representing an annualized rate of 9.0% versus 8.5% for the year ended December 31, 1995. External capital formation amounted to $660 for the quarter ended March 31, 1996, resulting from issuance of 8,468 shares under the Company's dividend reinvestment plan and 35,450 shares through employee related programs including 24,430 shares issued from the exercise of stock options and 11,020 shares from employee purchases through 401K benefit plans. First quarter dividends were $786 or $0.18 per share in 1996, compared to $643 or $0.15 per share in 1995, resulting in payout ratios of 31.24% and 30.58%, respectively. B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1996 AND 1995 Net income for the first three months of the year rose $413 or 19.6% in 1996, to $2,516 ($0.58 per share) from year earlier $2,103 ($0.49 per share). Net income equates to an annualized first quarter return on average assets of 1.27% in 1996, compared to 1.12% in 1995, and returns on average equity of 13.02% and 12.21%, respectively. NET INTEREST INCOME First quarter net interest income was $7,664 in 1996, an increase of 8.7% over $7,051 in 1995, reflecting a higher volume of average earning assets and a 13 basis point increase in net interest spread to 3.65% from 3.52%. First quarter tax-equivalent interest income increased $1,105 or 8.2% in 1996, compared to 1995. Average earning assets rose 4.5% over the period while the average yield earned on those assets increased 20 basis points. Comparing the first quarter of 1996 versus 1995, average loans grew 3.9% to $423,752 (56.5% of average earning assets) while experiencing a 33 basis point increase in average yield. Commercial credits were responsible for 44.1% of the change, while commercial construction lending contributed another 29.6%. Average total securities decreased 3.2% to $293,485 (39.2% of average earning assets) and recorded an 18 basis point increase in average yield. 6
First quarter interest expense increased $461 or 7.6%, as a net result of 4.8% higher average interest-bearing liabilities and a 7 basis point increase in average rate paid. CREDIT RISK MANAGEMENT The first quarter provision for credit losses was $150 in 1996, compared to no provision in 1995. There were no net charge-offs recorded for the three month period in 1996 versus net recoveries of $11 a year earlier. At March 31, 1996, commercial construction and development credits, considered to be a higher risk category of loans, comprised only 4.3% of total loans, while traditional home construction and mortgages loans, generally considered to be a lower risk category, amounted to 34.1%, both consistent with levels shown at December 31, 1995. Nonperforming assets, expressed as a percentage of total loans plus other real estate owned, were 0.31% at March 31, 1996 versus 0.17% at December 31, 1995. At March 31, 1996, the allowance for credit losses was 1.42% of total loans versus 1.39% at December 31, 1995. The allowance for credit losses covered nonperforming loans approximately 4.5 times at March 31, 1996 and March 31, 1995. The allowance for credit losses covered nonperforming loans 8.6 times at December 31, 1995. NON-INTEREST INCOME AND EXPENSES First quarter non-interest income rose $464 or 45.0% to $1,496 in 1996 from $1,032 in 1995. The primary causes for the change were a $153 rise in gains on mortgage sales, in part the result of greater corporate emphasis on mortgage banking, $52 in increased fees for trust services and $50 derived from higher fees realized on sales of mutual funds and tax deferred annuity products. The Company also benefitted from a $155 nonrecurring gain on sale of other real estate owned during the first quarter of 1996. Service charges on deposit accounts rose largely because of higher return check charges. First quarter non-interest expenses increased $232 or 4.6% to $5,323 in 1996 from $5,091 in 1995. Salary increases related both to a larger staff and to merit salary increases, together with the recognition of quarterly profit sharing payments to employees in 1996 under a new incentive program, were responsible for a large part of the overall rise in non-interest expenses. An industrywide reduction in FDIC insurance premiums contributed to a $360 lower cost in this category than for the same period in 1995. The ratio of net income to average full-time-equivalent (FTE) employees was $8 for the three month period ended March 31, 1996 compared to $7 during the first three months of 1995, as the number of average FTE employees rose to 307 from 290. INCOME TAXES The first quarter effective tax rate was 31.8% in 1996 compared to 29.7% in 1995, reflecting primarily a lower level of tax exempt income in 1996 than in 1995. ANNUAL MEETING The Annual Meeting of Shareholders of Bancorp was held on April 17, 1996. At the annual meeting, each of the nominees for director of Bancorp was elected to a three-year term, and shareholders approved an amendment to Bancorp's Articles of Incorporation to increase the number of shares of capital stock authorized to be issued from 6,000,000 shares to 15,000,000 shares. 7
ANALYSIS OF CREDIT RISK (Dollars in thousands) Activity in the allowance for credit losses is shown below: <TABLE> <CAPTION> Three Months Ended March 31, 1996 December 31, 1995 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Balance, January 1 $5,910 $6,108 Provision for credit losses 150 -- Loan charge-offs: Real estate-mortgage -- (33) Real estate-construction -- -- Consumer (13) (209) Commercial (9) (190) ------------------- ----------------- Total charge-offs (22) (432) Loan recoveries: Real estate-mortgage -- 153 Real estate-construction -- -- Consumer 1 30 Commercial 21 51 ------------------- ----------------- Total recoveries 22 234 ------------------- ----------------- Net recoveries (charge-offs) -- (198) ------------------- ----------------- BALANCE, PERIOD END $6,060 $5,910 =================== ================= Net charge-offs to average loans (annual basis) * (0.05)% Allowance to total loans 1.42% 1.39% </TABLE> * The Company reported small net recoveries for the period. Balance sheet risk inherent in the lending function is presented as follows at the dates indicated: <TABLE> <CAPTION> March 31, December 31, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Non-accrual loans $725 $590 Loans 90 days past due 563 61 Restructured loans 33 36 ------------------ ----------------- Total Nonperforming Loans* 1,321 687 Other real estate owned -- 47 ------------------ ----------------- TOTAL NONPERFORMING ASSETS $1,321 $734 ================== ================= Nonperforming assets to total assets 0.16% 0.09% - -------------------------------------------------------------------------------------------------------------------------- </TABLE> * Those performing loans considered potential problem loans, as defined and identified by management, amounted to approximately $3,760 at March 31, 1996, compared to $3,867 at December 31, 1995. 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. 8
PART II - OTHER INFORMATION Item 5. OTHER INFORMATION Commencing on April 17, 1996, Bancorp's stock began trading on the NASDAQ national market. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27. Financial Data Schedule (b) On May 2, 1996, Bancorp filed a Current Report of Form 8-K, reporting, under item 5 of such form, the Agreement and Plan of Reorganization entered as of April 16, 1996 by and among Bancorp, the Bank, Annapolis Bancshares, Inc., and Bank of Annapolis. 9
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) /s/ Hunter R. Hollar By:________________________________________ Hunter R. Hollar President and Chief Executive Officer Date: May 3, 1996 /s/ James H. Langmead By:________________________________________ James H. Langmead Vice President and Treasurer Date: May 3, 1996 10