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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1998
Commission File Number 0-19065
SANDY SPRING BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
- ---------------------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) or No.)
17801 Georgia Avenue, Olney, Maryland 20832
- ---------------------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 774-6400.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
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
such filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The registrant's Common Stock is traded on the NASDAQ National Market under
the symbol SASR. The aggregate market value of the 9,171,294 shares of Common
Stock of the registrant issued and outstanding held by nonaffiliates on March
4, 1999, was approximately $250 million based on the closing sales price of
$27.25 per share of the registrant's Common Stock on that date. For purposes
of this calculation, the term "affiliate" refers to all directors and
executive officers of the registrant.
As of the close of business on March 4, 1999, 9,575,492 shares of the
registrant's Common Stock were outstanding.
Documents Incorporated By Reference
Parts I and II: Portions of the Annual Report to Shareholders for the year
ended December 31, 1998 (the "Annual Report").
Part III: Portions of the definitive proxy statement for the Annual Meeting
of Shareholders to be held on April 14, 1999 (the "Proxy
Statement").
FORWARD-LOOKING STATEMENTS
Part I and Part II of this Annual Report on Form 10-K contain 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.
PART I
ITEM 1. BUSINESS
General
Sandy Spring Bancorp, Inc. ("Bancorp") is the one-bank holding company for
Sandy Spring National Bank of Maryland (the "Bank"). Bancorp is registered as
a bank holding company pursuant to the Bank Holding Company Act of 1956, as
amended (the "Holding Company Act"). As such, Bancorp is subject to
supervision and regulation by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). Bancorp began operating in 1988. The Bank
traces its origin to 1868, and is the oldest banking business based in
Montgomery County, Maryland. The Bank is independent, community oriented, and
conducts a full-service commercial banking business through 23 community
offices located in Montgomery, Howard, Prince George's and Anne Arundel
counties in Maryland. The Bank is a national bank subject to supervision and
regulation by the Office of the Comptroller of the Currency (the "OCC"). The
Bank's savings and deposit accounts are insured by the Bank Insurance Fund
("BIF") administered by the Federal Deposit Insurance Corporation (the "FDIC")
to the maximum permitted by law.
The Bank experiences substantial competition both in attracting and
retaining deposits and in making loans. Direct competition for deposits comes
from other commercial banks, savings associations, and credit unions located
in the Bank's primary market area of Montgomery, Howard, Prince George's and
Anne Arundel Counties in Maryland. Additional significant competition for
deposits comes from mutual funds and corporate and government debt securities.
As an alternative to traditional deposit accounts, annuities are offered
through Sandy Spring Insurance Corporation, a wholly owned subsidiary of the
Bank. Residential construction and mortgage loan products are offered by Sandy
Spring Mortgage Corporation, another wholly owned subsidiary of the Bank. The
primary factors in competing for loans are interest rates and loan origination
fees and the range of services offered by lenders. Competitors for loan
originations include other commercial banks, mortgage bankers, mortgage
brokers, savings associations, and insurance companies. Management believes
the Bank is able to compete effectively in its primary market area.
Bancorp's and the Bank's principal executive office is at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is (301) 774-6400.
Regulation, Supervision, and Governmental Policy
Following is a brief summary of certain statutes and regulations that
significantly affect Bancorp and the Bank. This summary does not purport to be
complete and is qualified in its entirety by reference to these statutes and
regulations. A number of other statutes and regulations affect Bancorp and the
Bank but are not summarized below.
Bank Holding Company Regulation. Bancorp is registered as a bank holding
company under the Holding Company Act and, as such, is subject to supervision
and regulation by the Federal Reserve. As a bank holding company, Bancorp is
required to furnish to the Federal Reserve annual and quarterly reports of its
operations and additional information and reports. Bancorp is also subject to
regular examination by the Federal Reserve.
2
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any bank or bank
holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (2) acquiring
all or substantially all of the assets of another bank or bank holding
company; or (3) merging or consolidating with another bank holding company.
Under the Holding Company Act, any company must obtain approval of the
Federal Reserve prior to acquiring control of Bancorp or the Bank. For
purposes of the Holding Company Act, "control" is defined as ownership of more
than 25% of any class of voting securities of Bancorp or the Bank, the ability
to control the election of a majority of the directors, or the exercise of a
controlling influence over management or policies of Bancorp or the Bank.
The Change in Bank Control Act and the related regulations of the Federal
Reserve require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the Federal Reserve before the person or persons acquire control
of Bancorp or the Bank. The Change in Bank Control Act defines "control" as
the direct or indirect power to vote 25% or more of any class of voting
securities or to direct the management or policies of a bank holding company
or an insured bank.
The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of a company that is not a bank or a bank holding
company, or from engaging directly or indirectly in activities other than
those of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The activities of Bancorp are
subject to these legal and regulatory limitations under the Holding Company
Act and Federal Reserve regulations. The Federal Reserve also has the power to
order a holding company or its subsidiaries to terminate any activity, or to
terminate its ownership or control of any subsidiary, when it has reasonable
cause to believe that the continuation of such activity or such ownership or
control constitutes a serious risk to the financial safety, soundness, or
stability of any bank subsidiary of that holding company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of
bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-
weighted assets. See "Regulatory Capital Requirements."
The Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve's view that a bank
holding company should pay cash dividends only to the extent that the
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the
company's capital needs, asset quality, and overall financial condition.
Bank Regulation. As a national bank, the Bank is subject to the primary
supervision of the OCC under the National Bank Act. The prior approval of the
OCC is required for a national bank to establish or relocate an additional
branch office or to engage in any merger, consolidation, or significant
purchase or sale of assets.
The OCC regularly examines the operations and condition of the Bank,
including but not limited to its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the
protection of the Bank's depositors and the BIF. In addition, the Bank is
required to furnish quarterly and annual reports to the OCC. The OCC's
enforcement authority includes the power to remove officers and directors and
the authority to issue cease-and-desist orders to prevent a bank from engaging
in unsafe or unsound practices or violating laws or regulations governing its
business.
3
The OCC has adopted regulations regarding the capital adequacy of national
banks, which require national banks to maintain specified minimum ratios of
capital to total assets and capital to risk-weighted assets. See "Regulatory
Capital Requirements."
No national bank may pay dividends from its paid-in capital. All dividends
must be paid out of current or retained net profits, after deducting reserves
for losses and bad debts. The National Bank Act further restricts the payment
of dividends out of net profits by prohibiting a national bank from declaring
a dividend on its shares of common stock until the surplus fund equals the
amount of capital stock or, if the surplus fund does not equal the amount of
capital stock, until one-tenth of a bank's net profits for the preceding half
year in the case of quarterly or semi-annual dividends, or the preceding two
half-year periods in the case of annual dividends, are transferred to the
surplus fund.
The approval of the OCC is required prior to the payment of a dividend if
the total of all dividends declared by a national bank in any calendar year
would exceed the total of its net profits for that year combined with its
retained net profits for the two preceding years, less any required transfers
to surplus or a fund for the retirement of any preferred stock. In addition,
the Bank is prohibited by federal statute from paying dividends or making any
other capital distribution that would cause the Bank to fail to meet its
regulatory capital requirements. Further, the OCC also has authority to
prohibit the payment of dividends by a national bank when it determines that
their payment would be an unsafe and unsound banking practice.
The Bank is a member of the Federal Reserve System and its deposits are
insured by the FDIC to the legal maximum of $100,000 for each insured
depositor. Some of the aspects of the lending and deposit business of the Bank
that are subject to regulation by the Federal Reserve and the FDIC include
reserve requirements and disclosure requirements in connection with personal
and mortgage loans and deposit accounts. In addition, the Bank is subject to
numerous federal and state laws and regulations that include specific
restrictions and procedural requirements with respect to the establishment of
branches, investments, interest rates on loans, credit practices, the
disclosure of credit terms, and discrimination in credit transactions.
The Bank is subject to restrictions imposed by federal law on extensions of
credit to, and certain other transactions with, Bancorp and other affiliates,
and on investments in their stock or other securities. These restrictions
prevent Bancorp and the Bank's other affiliates from borrowing from the Bank
unless the loans are secured by specified collateral, and require those
transactions to have terms comparable to terms of arms-length transactions
with third persons. In addition, secured loans and other transactions and
investments by the Bank are generally limited in amount as to Bancorp and as
to any other affiliate to 10% of the Bank's capital and surplus and as to
Bancorp and all other affiliates together to an aggregate of 20% of the Bank's
capital and surplus. Certain exemptions to these limitations apply to
extensions of credit by, and other transactions between, the Bank to its
subsidiaries. These regulations and restrictions may limit Bancorp's ability
to obtain funds from the Bank for its cash needs, including funds for
acquisitions and for payment of dividends, interest, and operating expenses.
Under OCC regulations, national banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies
must establish loan portfolio diversification standards; prudent underwriting
standards, including loan-to-value limits, that are clear and measurable; loan
administration procedures; and documentation, approval, and reporting
requirements. A bank's real estate lending policy must reflect consideration
of the Interagency Guidelines for Real Estate Lending Policies (the
"Interagency Guidelines") adopted by the federal bank regulators. The
Interagency Guidelines, among other things, call for internal loan-to-value
limits for real estate loans that are not in excess of the limits specified in
the Guidelines. The Interagency Guidelines state, however, that it may be
appropriate in individual cases to originate or purchase loans with loan-to-
value ratios in excess of the supervisory loan-to-value limits.
The FDIC has established a risk-based deposit insurance premium assessment
system for insured depository institutions. Under the system, the assessment
rate for an insured depository institution depends on the
4
assessment risk classification assigned to the institution by the FDIC, based
upon the institution's capital level and supervisory evaluations. Institutions
are assigned to one of three capital groups -- well-capitalized, adequately
capitalized, or undercapitalized -- based on the data reported to regulators.
Well-capitalized institutions are institutions satisfying the following
capital ratio standards: (i) total risk-based capital ratio of 10.0% or
greater; (ii) Tier 1 risk-based capital ratio of 6.0% or greater; and (iii)
Tier 1 leverage ratio of 5.0% or greater. Adequately capitalized institutions
are institutions that do not meet the standards for well-capitalized
institutions but that satisfy the following capital ratio standards: (i) total
risk-based capital ratio of 8.0% or greater; (ii) Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) Tier 1 leverage ratio of 4.0% or greater.
Institutions that do not qualify as either well-capitalized or adequately
capitalized are deemed to be undercapitalized. Within each capital group,
institutions are assigned to one of three subgroups on the basis of
supervisory evaluations by the institution's primary supervisory authority and
such other information as the FDIC determines to be relevant to the
institution's financial condition and the risk it poses to the deposit
insurance fund. Subgroup A consists of financially sound institutions with
only a few minor weaknesses. Subgroup B consists of institutions with
demonstrated weaknesses that, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The Bank has been informed that it is in the lowest
assessment category for the first assessment period of 1999.
The Bank does not have Savings Association Insurance Fund ("SAIF") assessed
deposits.
Bank Secrecy Act Compliance. In the fourth quarter of 1996, the Bank learned
that it had not fully complied with certain requirements of the federal Bank
Secrecy Act and related regulations, including obligations to monitor and file
reports of certain types of currency transactions. Financial institutions that
fail to comply with the requirements of the Bank Secrecy Act may be subject to
penalties, including civil money penalties. It is not now known whether such
penalties or any other action will be sought against the Bank in connection
with its noncompliance, or, if they are, the amount or nature of such
penalties. Management believes that the Bank is now in compliance with its
current reporting obligations under the Bank Secrecy Act, and is in discussion
with appropriate federal regulatory authorities regarding the steps it has
taken and plans to take to remedy its past noncompliance. See "Note 22--
Contingencies" of the Notes to the Consolidated Financial Statements on
page 47 of the Annual Report.
Regulatory Capital Requirements. The Federal Reserve and the OCC have
established guidelines for maintenance of appropriate levels of capital by
bank holding companies and national banks, respectively. The regulations
impose two sets of capital adequacy requirements: minimum leverage rules,
which require bank holding companies and banks to maintain a specified minimum
ratio of capital to total assets, and risk-based capital rules, which require
the maintenance of specified minimum ratios of capital to "risk-weighted"
assets.
The regulations of the Federal Reserve and the OCC require bank holding
companies and national banks, respectively, to maintain a minimum leverage
ratio of "Tier 1 capital" (as defined in the risk-based capital guidelines
discussed in the following paragraphs) to total assets of 3.0%. The capital
regulations state, however, that only the strongest bank holding companies and
banks, with composite examination ratings of 1 under the rating system used by
the federal bank regulators, would be permitted to operate at or near this
minimum level of capital. All other bank holding companies and banks are
expected to maintain a leverage ratio of at least 1% to 2% above the minimum
ratio, depending on the assessment of an individual organization's capital
adequacy by its primary regulator. A bank or bank holding company experiencing
or anticipating significant growth is expected to maintain capital well above
the minimum levels. In addition, the Federal Reserve has indicated that it
also may consider the level of an organization's ratio of tangible Tier 1
capital (after deducting all intangibles) to total assets in making an overall
assessment of capital.
The risk-based capital rules of the Federal Reserve and the OCC require bank
holding companies and national banks to maintain minimum regulatory capital
levels based upon a weighting of their assets and off-
5
balance sheet obligations according to risk. The risk-based capital rules have
two basic components: a core capital (Tier 1) requirement and a supplementary
capital (Tier 2) requirement. Core capital consists primarily of common
stockholders' equity, certain perpetual preferred stock (noncumulative
perpetual preferred stock with respect to banks), and minority interests in
the equity accounts of consolidated subsidiaries; less all intangible assets,
except for certain mortgage servicing rights and purchased credit card
relationships. Supplementary capital elements include, subject to certain
limitations, the allowance for losses on loans and leases; perpetual preferred
stock that does not qualify as Tier 1 capital; long-term preferred stock with
an original maturity of at least 20 years from issuance; hybrid capital
instruments, including perpetual debt and mandatory convertible securities;
subordinated debt, intermediate-term preferred stock, and up to 45% of pre-tax
net unrealized gains on available for sale equity securities.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
The risk-based capital regulations require all banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of
core capital; and (ii) the aggregate amount of certain types of supplementary
capital is limited. In addition, the risk-based capital regulations limit the
allowance for loan losses that may be included in capital to 1.25% of total
risk-weighted assets.
The federal bank regulatory agencies, including the OCC, have established a
joint policy regarding the evaluation of commercial banks' capital adequacy
for interest rate risk. Under the policy, the OCC's assessment of a bank's
capital adequacy includes an assessment of the bank's exposure to adverse
changes in interest rates. The OCC has determined to rely on its examination
process for such evaluations rather than on standardized measurement systems
or formulas. The OCC may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are adequate.
Federal banking regulations also require banks with significant trading
assets or liabilities to maintain supplemental risk-based capital based upon
their levels of market risk. The Bank did not have significant levels of
trading assets or liabilities during 1998, and was not required to maintain
such supplemental capital.
The OCC has established regulations that classify national banks by capital
levels and provide for the OCC to take various "prompt corrective actions" to
resolve the problems of any bank that fails to satisfy the capital standards.
Under these regulations, a well-capitalized bank is one that is not subject to
any regulatory order or directive to meet any specific capital level and that
has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based
capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately
capitalized bank is one that does not qualify as well-capitalized but meets or
exceeds the following capital requirements: a total risk-based capital ratio
of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either
(i) 4% or (ii) 3% if the bank has the highest composite examination rating. A
bank that does not meet these standards is categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized, depending on
its capital levels. A national bank that falls within any of the three
undercapitalized categories established by the prompt corrective action
regulation is subject to severe regulatory sanctions. As of December 31, 1998,
the Bank was well-capitalized as defined in the OCC's regulations.
For information regarding Bancorp's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis -- Capital Management on page 19 of the Annual Report and "Note 20--
Regulatory Matters" of the Notes to the Consolidated Financial Statements on
page 46 of the Annual Report.
6
Supervision and Regulation of Mortgage Banking Operations
Bancorp's mortgage banking business is subject to the rules and regulations
of the U.S. Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration ("FHA"), the Veterans' Administration ("VA"), FMHA and
FNMA with respect to originating, processing, selling and servicing mortgage
loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines which include provisions
for inspections and appraisals, require credit reports on prospective
borrowers, and fix maximum loan amounts. Lenders such as Bancorp are required
annually to submit to FNMA, FHA and VA audited financial statements, and each
regulatory entity has its own financial requirements. Bancorp's affairs are
also subject to examination by the Federal Reserve, FNMA, FHA and VA at all
times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act,
Fair Credit Reporting Act, the National Flood Insurance Act and the Real
Estate Settlement Procedures Act and related regulations that prohibit
discrimination and require the disclosure of certain basic information to
mortgagors concerning credit terms and settlement costs. Bancorp's mortgage
banking operations also are affected by various state and local laws and
regulations and the requirements of various private mortgage investors.
Competition
The Bank's principal competitors for deposits are other financial
institutions, including other banks, credit unions, and savings institutions.
Competition among these institutions is based primarily on interest rates and
other terms offered, service charges imposed on deposit accounts, the quality
of services rendered, and the convenience of banking facilities. Additional
competition for depositors' funds comes from U.S. Government securities,
private issuers of debt obligations and suppliers of other investment
alternatives for depositors, such as securities firms. Competition from credit
unions has intensified in recent years as historical federal limits on
membership have been relaxed. Because federal law subsidizes credit unions by
giving them a general exemption from federal income taxes, credit unions have
a significant cost advantage over banks and savings associations, which are
fully subject to federal income taxes. Credit unions may use this advantage to
offer rates that are highly competitive with those offered by banks and
thrifts.
The banking business in Maryland generally, and the Bank's primary service
areas specifically, are highly competitive with respect to both loans and
deposits. As noted above, the Bank competes with many larger banking
organizations that have offices over a wide geographic area. These larger
institutions have certain inherent advantages, such as the ability to finance
wide-ranging advertising campaigns and promotions and to allocate their
investment assets to regions offering the highest yield and demand. They also
offer services, such as international banking, that are not offered directly
by the Bank (but are available indirectly through correspondent institutions),
and, by virtue of their larger total capitalization, such banks have
substantially higher legal lending limits, which are based on bank capital,
than does the Bank. The Bank can arrange loans in excess of its lending limit,
or in excess of the level of risk it desires to take, by arranging
participations with other banks. Other entities, both governmental and in
private industry, raise capital through the issuance and sale of debt and
equity securities and indirectly compete with the Bank in the acquisition of
deposits.
In addition to competing with other commercial banks, credit unions and
savings associations, commercial banks such as the Bank compete with nonbank
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and
hold deposits. Commercial banks also compete for available funds with mutual
funds. These mutual funds have provided substantial competition to banks for
deposits, and it is anticipated they will continue to do so in the future.
The Holding Company Act permits the Federal Reserve to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than that holding company's home
state. The Federal Reserve may not approve the acquisition of a bank that has
not been in existence for the minimum time period (not
7
exceeding five years) specified by the statutory law of the host state. The
Holding Company Act also prohibits the Federal Reserve from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in
any state in which the target bank maintains a branch. The Holding Company Act
does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or
bank holding company to the extent such limitation does not discriminate
against out-of-state banks or bank holding companies. The effect of these
provisions of the Holding Company Act may be to increase competition within
the State of Maryland among banking and savings associations located in
Maryland and from banking companies located anywhere in the country.
Federal banking laws also authorized the federal banking agencies, effective
June 1, 1997, to approve interstate merger transactions without regard to
whether such transactions are prohibited by the law of any state, unless the
home state of one of the banks adopts a law after the date of enactment of
such Act and prior to June 1, 1997 that applies equally to all out-of-state
banks and expressly prohibits merger transactions involving out-of-state
banks. In 1995, however, the State of Maryland acted to authorize interstate
mergers by enacting legislation that allows out-of-state financial
institutions to merge with Maryland banks and to establish branches in
Maryland, subject to certain limitations. Maryland previously had enacted
reciprocal interstate banking statutes that authorized interstate bank and
savings association acquisitions. The effect of the federal and Maryland law
may be to increase competition within the State of Maryland among banking and
thrift institutions located in Maryland and from the major regional and
national bank holding companies that acquire institutions in Maryland, many of
which are larger than the Bank.
Employees
As of January 31, 1999, Bancorp and the Bank employed 458 persons, including
executive officers, loan and other banking and trust officers, branch
personnel, and others. None of Bancorp's or the Bank's employees is
represented by a union or covered under a collective bargaining agreement.
Management of Bancorp and the Bank consider their employee relations to be
excellent.
Executive Officers
The following table sets forth information regarding the executive officers
of Bancorp and the Bank who are not directors.
Name Age (1) Principal Position(s)
---- ------ --------------------
James R. Farmer 47 Senior Vice President of the Bank
Vice President and Treasurer of Bancorp and
Executive Vice President and Chief Financial Officer
James H. Langmead 49 of the Bank
Lawrence T. Lewis 50 Executive Vice President of the Bank
President, Sandy Spring Mortgage Corporation and
Stanley L. Merson 42 Senior Vice President of the Bank
Frank H. Small 52 Executive Vice President of the Bank
Sara E. Watkins 42 Senior Vice President of the Bank
- --------
(1) At March 25, 1999
The principal occupation(s) and business experience of each executive
officer who is not a director for the last five years are set forth below.
James R. Farmer became a Senior Vice President of the Bank in 1994. Prior to
that, Mr. Farmer was Vice President of the Bank. Mr. Farmer has been employed
by the Bank since 1979.
James H. Langmead, CPA, became Vice President and Treasurer of Bancorp,
Senior Vice President and Chief Financial Officer of the Bank in 1995, and
Executive Vice President in 1997. Prior to that, Mr. Langmead
8
was a Senior Vice President of the Bank (from January 1994), and Vice
President and Controller of the Bank. Prior to joining the Bank in 1992, Mr.
Langmead was Executive Vice President of the Bank of Baltimore.
Lawrence T. Lewis began his employment with the Bank in 1996 as Senior Vice
President, and became Executive Vice President in 1997. From January 1984 to
December 1995, Mr. Lewis was a managing director of Clark Melvin Securities
Corporation.
Stanley L. Merson has been a Senior Vice President of the Bank since 1991
and was Vice President of the Commercial Loan Department prior to becoming
Senior Vice President. He became President of Sandy Spring Mortgage
Corporation upon its formation in 1997. Mr. Merson has been employed by the
Bank since 1982.
Frank H. Small became a Senior Vice President of the Bank in 1994, and
Executive Vice President in 1997. Prior to that, Mr. Small was Vice President
of the Bank. Before joining the Bank in 1990, Mr. Small was Vice President in
charge of branch operations at Equitable Bank, N.A.
Sara E. Watkins became a Senior Vice President of the Bank in 1997. Prior to
that, Ms. Watkins was Vice President and Branch Administrator of the Bank
(from June 1994) and Vice President and Region Manager of the Bank (from April
1992).
Tabular Financial Information
Loan Maturity Table. The following table sets forth information as of
December 31, 1998, regarding the loan maturities and interest rate sensitivity
for real estate-construction and commercial loans (dollars in thousands).
Years
------------------------------------------------------------------------------------------------------------
1 or Over 1-
Less 5 Over 5 Total
-------- ------- ------ --------
Real Estate
Construction..... $ 61,697 $ 1,872 $8,379 $ 71,948
Commercial........ 53,348 24,473 1,438 79,259
-------- ------- ------ --------
Total........... $115,045 $26,345 $9,817 $151,207
======== ======= ====== ========
Rate Terms:
Fixed............ $ 17,168 $24,789 $1,438 $ 43,395
Variable or
adjustable...... 97,877 1,556 8,379 107,812
-------- ------- ------ --------
Total........... $115,045 $26,345 $9,817 $151,207
======== ======= ====== ========
Real Estate
Construction.....
Commercial........
Total...........
Rate Terms:
Fixed............
Variable or
adjustable......
Total...........
December 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Loan Loan Loan Loan Loan
Amount Mix Amount Mix Amount Mix Amount Mix Amount Mix
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Amount applicable to:
Real estate--mortgage.. $1,095 68% $1,213 71% $ 425 72% $ 512 74% $1,581 76%
Real estate--
construction.......... 210 11 224 10 745 9 10 8 41 7
Consumer............... 201 8 215 6 193 6 181 6 136 6
Commercial............. 706 13 774 13 1,015 13 907 12 832 11
Unallocated............ 5,138 4,590 4,013 4,987 4,073
------ ------ ------ ------ ------
Total allowance for
Credit losses........ $7,350 $7,016 $6,391 $6,597 $6,663
====== ====== ====== ====== ======
Credit Loss Allowance Table. The following table presents the allocation of
the allowance for credit losses for the past five years, along with the
percentage of total loans in each category (dollars in thousands).
9
The Company's policies and practices regarding the allowance for credit
losses, including factors regularly analyzed by management in evaluating the
sufficiency of the allowance, are disclosed in the discussion of Credit Risk
Management on pages 19 through 21 and in Notes 1 and 5 of the Notes to the
Consolidated Financial Statements beginning on page 30 of the Annual Report.
(See also the discussion of loan portfolio composition and trends on pages 16
and 17 of the Annual Report.) The amount of unallocated allowance for credit
losses increased to 69.9% of the total allowance at December 31, 1998, from
65.4% a year earlier. The percentage was 62.8% at December 31, 1995. The size
of the unallocated reserve at December 31, 1998 reflects management's
assessment of actual loss residing in the loan portfolio which has not been
specifically attributed to any category of loans.
The tabular financial information set forth on pages 9 through 25 of the
Annual Report is incorporated herein by reference.
ITEM 2. DESCRIPTION OF PROPERTY
Page 8 of the Annual Report (listing executive and community offices) is
hereby incorporated by reference.
ITEM 3. LEGAL PROCEEDINGS
Note 17 on page 43 of the Annual Report ("Litigation") is hereby
incorporated by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of 1998, through solicitation of proxies or otherwise.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The sections titled "Recent Stock Prices and Dividends" and "Quarterly Stock
Information" on page 9 of the Annual Report is hereby incorporated by
reference.
For information regarding regulatory restrictions on the Bank's and,
therefore, Bancorp's payment of dividends, see Note 10 -- "Stockholders'
Equity" on page 38 of the Annual Report, which is hereby incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The table titled "Historical Trends in Financial Data 1994--1998" on page 11
of the Annual Report is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Pages 10 through 25 of the Annual Report are hereby incorporated by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The section titled "Market Risk Management" on pages 21 and 22 of the Annual
Report is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 26 through 48 of the Annual Report are hereby incorporated by
reference. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and nominees for directors of Bancorp and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is
included under the captions titled "Election of Directors -- Information as to
Nominees and Continuing Directors" on pages 3 through 6 of the Proxy
Statement, and "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" on page 18 of the Proxy Statement, and is hereby incorporated by
reference.
Information concerning the executive officers of Bancorp is included under
the caption titled "Item 1. Business -- Executive Officers" of this report and
is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the compensation of Bancorp's directors and executive
officers is included under the captions "Corporate Governance and Other
Matters," "Executive Compensation," "Report of the Human Resources Committee,"
and "Stock Performance Comparisons" on pages 5 through 13 of the Proxy
Statement, and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding beneficial ownership of Bancorp's common stock by
certain beneficial owners and directors and executive officers of Bancorp is
included under the caption "Stock Ownership of Management" on page 2 of the
Proxy Statement and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions with
management is included under the caption "Transactions and Relationships with
Management" on page 14 of the Proxy Statement and is hereby incorporated by
reference.
12
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following consolidated financial statements of Bancorp included in the
Annual Report to Shareholders for the year ended December 31, 1998, are
incorporated herein by reference in Item 8 of this Report. The remaining
information appearing in the Annual Report to Shareholders is not deemed
to be filed as part of this Report, except as expressly provided herein.
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 1997 and 1998
Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998
Notes to the Consolidated Financial Statements
Report of Independent Auditors
All financial statement schedules have been omitted as the required
information is either inapplicable or included in the consolidated financial
statements or related notes.
13
The following exhibits are filed as a part of this report: [PENDING]
Exhibit No. Description Incorporated by Reference to:
----------- -------------------------------------- ----------------------------------------
3(a) Articles of Incorporation of Sandy Exhibit 3.1 to Form 10-Q for the Quarter
Spring Bancorp, Inc., as Amended ended June 30, 1996, SEC File No. 0-
19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 to Form 8-K dated May 13,
1992, SEC File No. 0-19065.
10(a)* Amended and Restated Sandy Spring Exhibit 10(a) to Form 10-Q for the
Bancorp, Inc., Cash and Deferred Quarter ended September 30, 1997, SEC
Profit Sharing Plan and Trust File No. 0-19065.
10(b)* Sandy Spring Bancorp, Inc. 1982 Exhibit 10(c) to Form 10-Q for the
Incentive Stock Option Plan quarter ended June 30, 1990, SEC File
No. 0-19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Exhibit 10(i) to Form 10-K for the year
Option Plan ended December 31, 1991, SEC File No. 0-
19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Exhibit 4 to Registration Statement on
Restated Stock Option Plan for Form S-8, Registration Statement No.
Employees of Annapolis Bancshares, 333-11-049.
Inc.
10(e)* Sandy Spring National Bank of Maryland Exhibit 10(g) to Form 10-K for the year
Executive Health Insurance Plan ended December 31, 1991, SEC File No. 0-
19065.
10(f)* Sandy Spring National Bank of Maryland Exhibit 10(k) to Form 10-K for the year
Executive Health Expense Reimbursement ended December 31, 1991, SEC File No. 0-
Plan 19065.
10(g)* Form of Director Fee Deferral Exhibit 10(b) to Form 10-Q for the
Agreement, August 26, 1997 Quarter ended September 30, 1997, SEC
File No. 0-19065.
10(h)* Supplemental Executive Retirement Exhibit 10(c) to Form 10-Q for the
Agreement by and Between Sandy Spring Quarter ended September 30, 1997, SEC
National Bank of Maryland and Hunter File No. 0-19065.
R. Hollar
10(i)* Form of Supplemental Executive Exhibit 10(d) to Form 10-Q for the
Retirement Agreement by and between Quarter ended September 30, 1997, SEC
Sandy Spring National Bank of Maryland File No. 0-19065.
and each of James H. Langmead,
Lawrence T. Lewis, Stanley L. Merson,
Frank H. Small, and Sara E. Watkins
10(j)* Employment Agreement by and among Exhibit 10(e) to Form 10-Q for the
Sandy Spring Bancorp, Inc., Sandy Quarter ended September 30, 1997, SEC
Spring National Bank of Maryland, and File No. 0-19065.
Hunter H. Hollar
10(k)* Employment Agreement by and among Exhibit 10(f) to Form 10-Q for the
Sandy Spring Bancorp, Inc., Sandy Quarter ended September 30, 1997, SEC
Spring National Bank of Maryland, and File No. 0-19065.
James H. Langmead
10(l)* Employment Agreement by and among Exhibit 10(g) to Form 10-Q for the
Sandy Spring Bancorp, Inc., Sandy Quarter ended September 30, 1997, SEC
Spring National Bank of Maryland, and File No. 0-19065.
Lawrence T. Lewis
10(m)* Employment Agreement by and among Exhibit 10(h) to Form 10-Q for the
Sandy Spring Bancorp, Inc., Sandy Quarter ended September 30, 1997, SEC
Spring National Bank of Maryland, and File No. 0-19065.
Stanley L. Merson
14
Exhibit No. Description Incorporated by Reference to:
----------- -------------------------------------- ----------------------------------------
10(n)* Employment Agreement by and among Exhibit 10(i) to Form 10-Q for the
Sandy Spring Bancorp, Inc., Sandy Quarter ended September 30, 1997, SEC
Spring National Bank of Maryland, and File No. 0-19065.
Frank H. Small
10(o) Employment Agreement by and among
Sandy Spring Bancorp, Inc., Sandy
Spring National Bank of Maryland, and
Sara E. Watkins
13 1998 Annual Report to Shareholders
21 Subsidiaries
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
* Management Contract or Compensatory Plan or Arrangement filed pursuant to
Item 14(c) of this Report.
(b) No Current Reports on Form 8-K were filed during the three month period
ended December 31, 1998.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) None.
15
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /s/ Hunter R. Hollar
Hunter R. Hollar
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of March 25, 1998.
Principal Executive Officer and Director: Principal Financial and Accounting Officer:
s/ Hunter R. Holla___________________r /s/ James H. Langmea______________________d
Hunter R. Hollar James H. Langmead
President and
Chief Executive
Officer Vice President and Treasurer
A majority of the directors of Bancorp executed a power of attorney
appointing Marjorie S. Holsinger as their attorney-in-fact, empowering her to
sign this report on their behalf. This power of attorney has been filed with
the Securities and Exchange Commission under Part IV, Exhibit 24 of this Form
10-K for the year ended December 31, 1998. This report has been signed below
by such attorney-in-fact as of March 22, 1999.
By: /s/ Marjorie S. Holsinger .
Marjorie S. Holsinger
Attorney-in-Fact for Majority of
the
Directors of Bancorp
16