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, 2002
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------------- ----------------------
Commission File Number: O-19065
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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 26, 2002,
is 14,513,319 shares.
SANDY SPRING BANCORP, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 2002, and December 31, 2001.............................................. 1
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 2002 and 2001.................................... 2
Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 2002 and 2001.................................... 4
Consolidated Statements of Changes in Stockholders' Equity for the
Six Month Periods Ended June 30, 2002 and 2001.................................... 6
Notes to Consolidated Financial Statements........................................ 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................................16
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................16
SIGNATURES................................................................................17
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands, except per share data) 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 35,253 $ 45,609
Federal funds sold 44,438 10,774
Interest-bearing deposits with banks 842 840
Residential mortgage loans held for sale 8,677 16,682
Investments available-for-sale (at fair value) 665,311 732,629
Investments held-to-maturity -- fair value of $237,031 (2002) and
$165,015 (2001) 232,956 164,921
Other equity securities 17,817 16,929
Total loans and leases 1,057,664 995,919
Less: allowance for credit losses (14,911) (12,653)
----------- -----------
Net loans and leases 1,042,753 983,266
Premises and equipment, net 33,836 32,584
Accrued interest receivable 15,531 15,163
Goodwill 7,642 7,642
Other intangible assets 15,256 16,584
Other assets 38,473 38,211
----------- -----------
Total assets $ 2,158,785 $ 2,081,834
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 289,735 $ 277,592
Interest-bearing deposits 1,120,118 1,109,867
----------- -----------
Total deposits 1,409,853 1,387,459
Short-term borrowings 461,592 411,132
Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 79,184 79,116
Accrued interest payable and other liabilities 9,515 18,454
----------- -----------
Total liabilities 1,995,144 1,931,161
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 50,000,000; shares issued
and outstanding 14,508,451 (2002) and 14,483,564 (2001) 14,508 14,484
Surplus 20,803 20,347
Retained earnings 120,690 111,906
Accumulated other comprehensive income 7,640 3,936
----------- -----------
Total stockholders' equity 163,641 150,673
----------- -----------
Total liabilities and stockholders' equity $ 2,158,785 $ 2,081,834
=========== ===========
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------ -----------------------
Interest income:
Interest and fees on loans and leases $ 18,239 $ 20,305 $ 35,962 $ 41,301
Interest on loans held for sale 154 208 327 340
Interest on deposits with banks 9 35 17 55
Interest and dividends on securities:
Taxable 9,909 9,274 19,168 18,025
Exempt from federal income taxes 2,585 1,975 4,997 3,888
Interest on federal funds sold 136 475 256 782
------------------------ -----------------------
Total interest income 31,032 32,272 60,727 64,391
Interest expense:
Interest on deposits 4,996 9,548 10,320 19,647
Interest on short-term borrowings 3,907 4,409 7,630 8,868
Interest on long-term borrowings 2,047 2,050 4,119 4,070
------------------------ -----------------------
Total interest expense 10,950 16,007 22,069 32,585
------------------------ -----------------------
Net interest income 20,082 16,265 38,658 31,806
Provision for credit losses 985 492 2,170 984
------------------------ -----------------------
Net interest income after provision for credit losses 19,097 15,773 36,488 30,822
Noninterest income:
Securities (losses) gains (3) 0 230 130
Service charges on deposit accounts 1,953 1,807 3,831 3,554
Gains on sales of mortgage loans 741 747 1,479 1,268
Fees on sales of investment products 556 465 1,196 906
Trust department income 605 479 1,174 914
Insurance agency commissions 790 0 1,776 0
Income from bank owned life insurance 432 411 867 798
Other income 1,611 1,564 2,930 2,825
------------------------ -----------------------
Total noninterest income 6,685 5,473 13,483 10,395
Noninterest expenses:
Salaries and employee benefits 9,429 6,833 18,726 13,517
Occupancy expense of premises 1,558 1,224 2,864 2,461
Equipment expenses 956 875 1,765 1,691
Marketing 574 331 976 648
Outside data services 634 669 1,247 1,325
Goodwill amortization 0 166 0 333
Amortization of other intangible assets 664 669 1,329 1,358
Other expenses 2,302 2,448 4,509 4,754
------------------------ -----------------------
Total noninterest expenses 16,117 13,215 31,416 26,087
------------------------ -----------------------
Income before income taxes 9,665 8,031 18,555 15,130
Income tax expense 2,507 2,164 4,841 3,958
------------------------ -----------------------
Net income $ 7,158 $ 5,867 $ 13,714 $ 11,172
======================== =======================
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
1 --------------------------- ---------------------------
(In thousands, except per share data) 2002 2001 2002 2001
- ---------------------------------------------------------------------------- ---------------------------
Basic Net Income Per Share $ 0.50 $ 0.41 $ 0.95 $ 0.78
Diluted Net Income Per Share 0.48 0.41 0.93 0.78
Dividends Declared Per Share 0.17 0.15 0.34 0.29
*Per share data have been adjusted to give retroactive effect to a 3-for-2 stock
split declared on November 28, 2001.
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-------------------------
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 13,714 $ 11,172
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization 2,982 3,170
Provision for credit losses 2,170 984
Deferred income taxes 1,163 313
Origination of loans held for sale (106,418) (109,686)
Proceeds from sales of loans held for sale 115,902 108,175
Gains on sales of loans held for sale (1,479) (1,268)
Securities gains (230) (130)
Net increase in accrued interest receivable (368) (652)
Net increase in other assets (1,550) (13,825)
Net decrease in accrued expenses (8,939) (1,638)
Other - net (1,717) (1,753)
--------- ---------
Net cash provided (used) by operating activities 15,230 (5,138)
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (2) (81)
Purchases of investments held-to-maturity (94,999) (44,905)
Purchases of other equity securities (887) (2,742)
Purchases of investments available-for-sale (391,405) (344,520)
Proceeds from sales of investments available-for-sale 220,343 35,468
Proceeds from maturities, calls and principal payments of investments held-to-maturity 27,005 16,345
Proceeds from maturities, calls and principal payments of investments available-for-sale 244,434 254,244
Proceeds from sales of other real estate owned 0 426
Net increase in loans and leases receivable (61,774) (23,568)
Expenditures for premises and equipment (3,109) (2,489)
--------- ---------
Net cash used by investing activities (60,394) (111,822)
Cash Flows from Financing Activities:
Net increase in deposits 22,394 61,729
Net increase in short-term borrowings 50,360 69,594
Proceeds from long-term borrowings 168 30,143
Proceeds from issuance of common stock 480 1,177
Dividends paid (4,930) (4,112)
--------- ---------
Net cash provided by financing activities 68,472 158,531
--------- ---------
Net increase in cash and cash equivalents 23,308 41,571
Cash and cash equivalents at beginning of year 56,383 46,329
--------- ---------
Cash and cash equivalents at end of quarter* $ 79,691 $ 87,900
========= =========
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended
June 30,
----------------------------
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest payments $22,516 $32,193
Income tax payments 6,302 5,415
Noncash Investing Activities:
Transfers from loans to other real estate owned 29 32
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.
5
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum-
ulated
Other
Compre- Total
hensive Stock-
(Dollars in thousands, except per share data) Common Retained Income holders'
Stock Surplus Earnings (loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2002 $ 14,484 $ 20,347 $ 111,906 $ 3,936 $ 150,673
Comprehensive income:
Net income 13,714 13,714
Other comprehensive loss, net of tax and
reclassification adjustment 3,704 3,704
--------
Total comprehensive income 17,418
Cash dividends - $0.34 per share (4,930) (4,930)
Common stock issued pursuant to:
Stock option plan - 17,916 shares 18 269 287
Employee stock purchase plan -- 7,139
shares 6 187 193
-------- -------- --------- -------- ---------
Balances at June 30, 2002 $ 14,508 $ 20,803 $ 120,690 $ 7,640 $ 163,641
======== ======== ========= ======== =========
Balances at January 1, 2001 $ 9,553 $ 22,511 $ 97,641 $ (2,147) $ 127,558
Comprehensive income:
Net income 11,172 11,172
Other comprehensive income, net of tax
and reclassification adjustment 6,673 6,673
---------
Total comprehensive income 17,845
Cash dividends - $0.29 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
======== ======== ========= ======== =========
See Notes to Consolidated Financial Statements.
6
Sandy Spring Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The foregoing financial statements are unaudited; however, in the
opinion of Management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim
periods have been included. These statements should be read in conjunction with
the financial statements and accompanying notes included in Sandy Spring
Bancorp's 2001 Annual Report to Shareholders. The results shown in this interim
report are not necessarily indicative of results to be expected for the full
year 2002.
The accounting and reporting policies of Sandy Spring Bancorp (the
"Company") conform to accounting principles generally accepted in the United
States of America and to general practices within the banking industry. Certain
reclassifications have been made to amounts previously reported to conform with
current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
Note 2 - Per Share Data
The calculations of net income per common share for the 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.
(Dollars and amounts in thousands, except Three Months Ended Six Months Ended
Per share data) June 30, June 30,
- ---------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 7,158 $ 5,867 $13,714 $11,172
Average common shares outstanding 14,503 14,366 14,497 14,349
Basic net income per share $ 0.50 $ 0.41 $ 0.95 $ 0.78
==========================================================
Diluted:
Net income available to common stockholders $ 7,158 $ 5,867 $13,714 $11,172
Average common shares outstanding 14,503 14,366 14,497 14,349
Stock option adjustment 222 141 217 126
----------------------------------------------------------
Average common shares outstanding-diluted 14,725 14,507 14,714 14,475
Diluted net income per share $ 0.48 $ 0.41 $ 0.93 $ 0.78
==========================================================
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This management's discussion and analysis contains forward-looking
statements that are subject to risks and uncertainties. These forward-looking
statements include: statements of goals, intentions and expectations; estimates
of risks and of future costs, benefits, and liquidity; assessments of potential
loan and lease losses and market risk; and statements of the ability to achieve
financial and other goals. These forward-looking statements are subject to
significant uncertainties because they are based upon or are affected by:
management's estimates and projections of future interest rates and other
economic conditions; future laws and regulations; and a variety of other
matters. Because of these uncertainties, the actual future results may be
materially different from the results indicated by these forward-looking
statements. In addition, the Company's past results of operations do not
necessarily indicate its future results.
THE COMPANY
The Company is the registered bank holding company for Sandy Spring
Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates
thirty-one community offices in Montgomery, Howard, Prince George's, Anne
Arundel and Frederick Counties in Maryland, together with an insurance
subsidiary and an equipment leasing company.
The Company offers a broad range of financial services to consumers and
businesses in this market area. Through June 30, 2002, year-to-date average
commercial loans and leases and commercial real estate loans accounted for
approximately 44% of the Company's loan and lease portfolio, and year-to-date
average consumer and residential real estate loans accounted for approximately
56%. Based upon the most recent data available, consumer deposits account for
approximately 78% of total average deposits while approximately two-thirds of
the Company's revenues are derived from consumer loans, consumer deposits and
other services. The Company has established a strategy of independence, and
intends to establish or acquire additional offices, banking organizations, and
nonbanking organizations as appropriate opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $2,158,785,000 at June 30, 2002,
compared to $2,081,834,000 at December 31, 2001, increasing $76,951,000 or 3.7%
during the first six months of 2002. Earning assets increased $89,011,000 or
4.6% to $2,027,705,000 at June 30, 2002, from $1,938,694,000 at December 31,
2001.
Total loans and leases, excluding loans held for sale, rose 6.2% or
$61,745,000 during the first six months of 2002, to $1,057,664,000. During this
period, consumer loans increased by $23,844,000 (up 11.1%) due primarily to home
equity products. Commercial loans and leases also increased, by $22,103,000 (up
5.0%), reflecting growth in commercial loans not secured by real estate,
accompanied by essentially level commercial real estate and construction
balances and a small decline in lease receivables. Finally, residential real
estate loans rose $15,798,000 (up 4.6%), reflecting higher residential mortgage
loans partially offset by a small decrease in residential construction.
Residential mortgage loans held for sale decreased by $8,005,000 from December
31, 2001, to $8,677,000 at June 30, 2002.
Table 1 -- Analysis of Loans and Leases
The following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In thousands) June 30, 2002 % December 31, 2001 %
- ---------------------------------------------------------------------------------------------------------------
Residential real estate $ 355,595 34% $ 339,797 34%
Commercial loans and leases 463,643 44 441,540 44
Consumer 238,426 22 214,582 22
--------------------------------------------------------------
Total Loans and Leases 1,057,664 100% 995,919 100%
=== ===
Less: Allowance for credit losses (14,911) (12,653)
----------- ---------
Net loans and leases $ 1,042,753 $ 983,266
=========== =========
8
The total investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities of $916,084,000 increased slightly
from December 31, 2001. Available-for-sale securities decreased by $67,318,000
or 9.2%, while held-to-maturity securities increased by $68,035,000 or 41.3%
during the first two quarters of 2002. The aggregate of federal funds sold and
interest-bearing deposits with banks increased by $33,666,000 during the first
six months of 2002, reaching $45,280,000 at June 30, 2002.
Total deposits were $1,409,853,000 at June 30, 2002, increasing
$22,394,000 or 1.6% from $1,387,459,000 at December 31, 2001. Regular savings
rose $43,576,000 (up 39.8%) to comprise 11% of total deposits at second quarter
end, compared to 8% at year-end 2001. Partially offsetting this increase, money
market savings decreased $20,424,000 (down 5.2%) to 26% of total deposits from
28%. In addition, time deposits of $100,000 or more declined $10,359,000 (down
8.6%), while the other major categories of deposits recorded changes of less
than 5%. Over this period, the overall net increase in deposits did not keep
pace with the funding requirements of loan growth.
Total borrowings were $575,776,000 at June 30, 2002, which was
$50,528,000 above December 31, 2001. Virtually all of this increase occurred in
short-term borrowings, most of which were associated with leverage programs,
under which borrowed funds are invested in securities to enhance the Company's
overall earnings performance. At June 30, 2002, short and long term borrowings
under the leverage programs amounted to $335,100,000, compared to $285,100,000
at December 31, 2001. These leverage programs achieved net interest margins of
approximately 0.97% for the six months ended June 30, 2002 and 0.99% for the
same period in 2001, which equated to diluted earnings per share of
approximately $0.06 and $0.05 for the respective periods.
Table 2 -- Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
(In thousands) June 30, 2002 % December 31, 2001 %
- -----------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 289,735 21% $ 277,592 20%
Interest-bearing deposits:
Demand 174,545 12 166,603 12
Money market savings 375,871 26 396,295 28
Regular savings 152,985 11 109,409 8
Time deposits less than $100,000 306,302 22 316,786 23
Time deposits $100,000 or more 110,415 8 120,774 9
--------------------------------------------------------------------
Total interest-bearing 1,120,118 79 1,109,867 80
--------------------------------------------------------------------
Total deposits $1,409,853 100% $1,387,459 100%
====================================================================
MARKET RISK MANAGEMENT
By employing simulation analysis through use of computer models, the
Company intends to effectively manage the potential adverse impacts that
changing interest rates may have on its short-term earnings, long- term value,
and liquidity. The simulation model captures optionality factors such as call
features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. At June 30, 2002, as at December 31, 2001, the simulation
of a hypothetical, parallel change of plus and minus 200 basis points in U.S.
Treasury interest rates was not practical, due to historically low prevailing
interest yields and rates. (See Table 3.) Therefore, the Company again chose to
apply a plus 200 basis point change and a minus 100 basis point change when
evaluating its interest rate risk position. Measured from June 30, 2002, the
simulation analysis indicates that net interest income would decline by 2% over
a twelve month period given a decrease in interest rates of 100 basis points,
compared to a policy limit of 15%. In terms of equity capital on a fair value
basis, a 100 basis point decrease in interest rates is estimated to reduce the
fair value of capital (as computed) by 6%, as compared to a policy limit of 25%.
9
LIQUIDITY
Liquidity is measured using an approach designed to take into account
loan and lease payments, maturities, calls and paydowns of securities, earnings,
growth, mortgage banking activities, leverage programs, sophistication of
investment activities, investment portfolio liquidity, and other factors.
Through this approach, implemented by the funds management committee under
formal policy guidelines, the Company's liquidity position is measured weekly,
looking forward thirty, sixty and ninety days. The measurement is based upon the
asset-liability management model's projection of a funds sold or purchased
position, along with ratios and trends developed to measure dependence on
purchased funds, leverage limitations and core growth. Resulting projections as
of June 30, 2002, show short-term investments exceeding short-term borrowings by
$136,661,000 (substantially above $2,400,000 at December 31, 2001) over the
subsequent 90 days. This excess of liquidity over projected requirements for
funds indicates that the Company can continue to increase its loans and other
earning assets without incurring additional borrowing.
The Company also has external sources of funds, which can be drawn upon
when required. The main source of external liquidity is an available line of
credit for $622,012,000 with the Federal Home Loan Bank of Atlanta, of which
approximately $319,384,000 was outstanding at June 30, 2002. Other external
sources of liquidity available to the Company in the form of lines of credit
granted by the Federal Reserve, correspondent banks and other institutions
totaled $255,796,000 at June 30, 2002, against which there were outstandings of
approximately $75,000,000. Based upon its liquidity analysis, including external
sources of liquidity available, management believes the liquidity position is
appropriate at June 30, 2002.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 14.69% at June
30, 2002, compared to 14.10% at December 31, 2001; a tier 1 risk-based capital
ratio of 13.38%, compared to 12.98%; and a capital leverage ratio of 8.03%,
compared to 7.73%. Capital adequacy, as measured by these ratios, was well above
regulatory requirements. Management believes the level of capital at June 30,
2002, is appropriate.
Stockholders' equity for June 30, 2002, totaled $163,641,000,
representing an increase of $12,968,000 or 8.6% from $150,673,000 at December
31, 2001. Accumulated other comprehensive income, a component of stockholders'
equity comprised of net unrealized gains and losses on available-for-sale
securities, increased by $3,704,000 from December 31, 2001 to June 30, 2002.
This increase reflected the effects of lower interest rates at second
quarter-end 2002, compared to year-end 2001, on the market values of these
securities. Excluding accumulated other comprehensive income, the increase in
total stockholders' equity was 6.3%.
Internal capital generation (net income less dividends) was responsible
for $8,784,000 of the increase in total stockholders' equity during the first
six months of 2002. When internally formed capital is annualized and expressed
as a percentage of average total stockholders' equity, the resulting rate was
11.5% for the first half of 2002, compared to 10.1% for the year ended December
31, 2001.
External capital formation (equity created through the issuance of
stock under the employee stock purchase and stock option plans) totaled $480,000
during the first six months of 2002. There were no share repurchases over the
period.
Dividends for the first six months of the year were $0.34 per share in
2002, compared to $0.29 per share in 2001, representing, when expressed as a
percentage of diluted net income per share, dividend payout ratios of 36.56% and
37.18%, respectively.
B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Net income for the first six months of the year increased $2,542,000 or
22.8% to $13,714,000 in 2002 from $11,172,000 in 2001, representing annualized
returns on average equity of 17.93% and 16.72%, respectively. Second quarter
year-to-date diluted earnings per share were $0.93 in 2002, compared to $0.78 in
2001.
10
Sandy Spring Bancorp and Subsidiaries
Table 3 - Consolidated Average Balances, Yields and Rates
Six Months Ended June 30,
(Dollars in thousands and tax equivalent) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------------------------------------------
Assets
Total loans and leases $ 1,028,393 7.10% $ 988,013 8.48%
Total securities 896,444 6.09 707,058 6.91
Other earning assets 32,297 1.68 35,410 4.73
----------- -----------
TOTAL EARNING ASSETS 1,957,134 6.55% 1,730,481 7.76%
Non-earning assets 135,005 135,257
----------- -----------
Total assets $ 2,092,139 $ 1,865,738
=========== ===========
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 170,944 0.27% $ 151,528 0.98%
Money market savings deposits 387,347 1.18 350,463 3.81
Regular savings deposits 134,246 1.01 103,140 1.69
Time deposits 422,963 3.41 413,157 5.58
----------- -----------
Total interest-bearing deposits 1,115,500 1.87 1,018,288 3.89
Short-term borrowings 430,782 3.55 354,094 5.02
Long-term borrowings 114,138 7.22 112,725 7.22
----------- -----------
Total interest-bearing liabilities 1,660,420 2.67 1,485,107 4.41
---- ----
Noninterest-bearing demand deposits 265,172 233,149
Other noninterest-bearing liabilities 12,335 12,766
Stockholders' equity 154,212 134,716
----------- -----------
Total liabilities and stockholders' equity $ 2,092,139 $ 1,865,738
=========== ===========
Net interest spread 3.88% 3.35%
==== ====
Net interest margin (1) 4.28% 3.97%
==== ====
Ratio of average earning assets to
Average interest-bearing liabilities 117.87% 116.52%
=========== ===========
(1) Net interest margin = net interest income / total interest-earning assets
11
RESULTS OF OPERATIONS (continued)
For the six month period ending June 30, operating (non-GAAP) net income
increased $2,417,000 or 20.2% to $14,378,000 in 2002 (which would result in a
$0.05 greater diluted earnings per share amount than shown above on a GAAP net
income basis) from $11,961,000 in 2001 (which would result in a $0.01 greater
diluted earnings per share amount). These results exclude securities gains
($230,000 in 2002 versus $130,000 in 2001), the gain on the sale of the credit
card portfolio ($256,000 in 2001), goodwill amortization ($333,000 in 2001), and
the amortization of intangible assets ($1,329,000 in 2002 versus $1,358,000 in
2001).
The net interest margin increased by 31 basis points to 4.28% for the
six months ended June 30, 2002, from 3.97% for the like period of 2001, while
the net interest spread increased by 53 basis points, to 3.88% from 3.35%. First
half interest rate performance improved in 2002, compared to 2001, as the
Company achieved a smaller decline in average earning asset yield than in
average funding rate. The net interest margin includes the favorable effects of
funding interest-earning assets from noninterest-bearing sources. The level of
such funding was slightly greater for the first half of 2002, compared to the
first half of 2001. However, the benefit derived from zero interest rate funding
of earning assets is not as great when interest rates fall, since then, as in
2002, alternative funding with interest-bearing liabilities becomes less
expensive.
NET INTEREST INCOME
Net interest income for the first six months of the year was
$38,658,000 in 2002, an increase of 21.5% from $31,806,000 in 2001, due to a
higher volume of average earning assets and a greater net interest margin. On a
tax-equivalent basis, net interest income increased by 22.6%, to $41,796,000 in
2002 from $34,104,000 in 2001. The effects of average balances, yields and rates
are presented in table 3 above.
For the first six months, tax-equivalent interest income decreased by
$2,824,000 or 4.2% in 2002, compared to 2001. Average earning assets rose 13.1%
over the prior year period, while the average yield earned on those assets
decreased by 121 basis points to 6.55%. Comparing the first six months of 2002
versus 2001, average total loans and leases grew by 4.1% to $1,028,393,000
(52.5% of average earning assets, versus 57.1% a year ago), while recording a
138 basis point decline in average yield to 7.10%. Average residential real
estate loans increased by 8.7% (attributable primarily to construction lending),
and average consumer loans increased by 5.9% (attributable to home equity
products). Average commercial loans and leases decreased by 0.2% (reflecting
declines in construction and leasing, largely offset by increases in real estate
and other commercial). Over the same period, average total securities rose by
26.8% to $896,444,000 (45.8% of average earning assets, versus 40.9% a year
ago), while the average yield earned on those assets decreased by 82 basis
points to 6.09%.
Interest expense for the first six months of the year decreased
significantly by $10,516,000 or 32.3% in 2002, compared to 2001. Average
interest-bearing liabilities rose 11.8% over the prior year period, while the
average rate paid on these funds decreased by 174 basis points to 2.67%. All
major deposit categories and short-term borrowings grew in conjunction with
declines in average rate, while long-term borrowings remained essentially level
in both volume and average rate. Most important was the significant decline in
deposit rates. This was due primarily to effects of sharply reduced core deposit
interest rates on adjustable rate products, and of time deposit maturities with
run off or repricing, as well as new accounts, at the lower rates.
CREDIT RISK MANAGEMENT
During the first six months of the year, the provision for credit
losses increased to $2,170,000 in 2002 from $984,000 in 2001. The provision
reflects the impact of continued growth in loans, increases in watch listed
credits, the seasoning of substantial loan growth over the past eighteen months,
considerations associated with the general economic environment, and other
factors considered in Bancorp's allowance methodology. Recognition of the
downturn in economic activity resulted in increased need for reserves to allow
for a higher level of adversely risk rated credits and adverse effects of
economic conditions on certain segments of the loan and lease portfolio. While
the Company's level of nonperforming loans and net credit losses in the table
below shows a stable trend, overall trends in watch listed credits have seen
increases as measured at June 30, 2002 compared to December 31, 2001.
Substandard and special mention loans have potential or well-defined weaknesses,
respectively, which cause some concerns about collectibility, although they may
continue to perform according to their terms.
12
Table 4 -- 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, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 12,653 $ 11,530
Provision for credit losses 2,170 2,470
Loan charge-offs:
Residential real estate (3) (23)
Commercial loans and leases (134) (1,180)
Consumer (33) (225)
-------- --------
Total charge-offs (170) (1,428)
Loan recoveries:
Residential real estate 0 0
Commercial loans and leases 247 54
Consumer 11 27
-------- --------
Total recoveries 258 81
-------- --------
Net recoveries (charge-offs) 88 (1,347)
-------- --------
Balance, period end $ 14,911 $ 12,653
======== ========
Net recoveries (charge-offs) to average loans and
leases (annual basis) 0.02% (0.14)%
Allowance to total loans and leases 1.41% 1.27%
The following table presents nonperforming assets at the dates indicated:
June 30 December 31,
2002 2001
- --------------------------------------------------------------------------------------------------------
Non-accrual loans and leases $ 5,730 $ 5,904
Loans and leases 90 days past due 1,761 1,903
-------- --------
Total nonperforming loans and leases* 7,491 7,807
Other real estate owned 79 50
-------- --------
Total nonperforming assets $ 7,570 $ 7,857
======== ========
Nonperforming assets to total assets 0.35% 0.38%
- --------------------------------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which Bancorp
classifies as substandard), as defined and identified by management, amounted to
approximately $5,927,000 at June 30, 2002, compared to $4,126,000 at December
31, 2001. 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, which could result in their
reclassification as nonperforming credits in the future.
13
CREDIT RISK MANAGEMENT (CONTINUED)
The Company has experienced net recoveries during the first six months of 2002
of $88,000, compared to net charge-offs of $934,000 for the same period of 2001,
but does not expect this favorable trend to continue, as indicated above.
The Company's loan and lease portfolio (the "credit portfolio") is
subject to varying degrees of credit risk. Credit risk is mitigated through
portfolio diversification, which limits exposure to any single customer,
industry or collateral type. The Company maintains an allowance for credit
losses (the "allowance") to absorb losses inherent in the credit portfolio. The
allowance is based on careful, continuous review and evaluation of the credit
portfolio, along with ongoing, quarterly assessments of the probable losses
inherent in that portfolio, and, to a lesser extent, in unused commitments to
provide financing.
Management believes that the allowance is adequate. However, its
determination requires significant judgement, and estimates of probable losses
inherent in the credit portfolio can vary significantly from the amounts
actually observed. While management uses available information to recognize
probable losses, future additions to the allowance may be necessary based on
changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, and independent consultants engaged by the Sandy Spring
Bank, periodically review the credit portfolio and the allowance. Such review
may result in additional provisions based on their judgements of information
available at the time of each examination. During the first six months of 2002,
there were no changes in estimation methods or assumptions that affected the
allowance methodology. The allowance for credit losses was 1.41% of total loans
and leases at June 30, 2002 and 1.27% at December 31, 2001.
Nonperforming loans and leases decreased by $316,000 to $7,491,000
while nonperforming assets decreased by $287,000 to $7,570,000 from December 31,
2001 to June 30, 2002. Expressed as a percentage of total assets, nonperforming
assets decreased to 0.35% at June 30, 2002 from 0.38% at December 31, 2001. The
allowance for credit losses represented 199% of nonperforming loans and leases
at June 30, 2002, compared to coverage of 162% at December 31, 2001. Significant
variation in this coverage ratio may occur from period to period because the
amount of nonperforming loans and leases depends largely on the condition of a
small number of individual credits and borrowers relative to the total loan and
lease portfolio. Other real estate owned totaled $79,000 at June 30, 2002,
compared to $50,000 at December 31, 2001. The balance of impaired loans and
leases was $5,231,000 at June 30, 2002, with specific reserves against those
loans of $41,000, compared to $5,589,000 at December 31, 2001, with reserves of
$91,000. Nonperforming and impaired loans and leases at June 30, 2002, and at
December 31, 2001, included a problem credit of a single borrower in the amount
of approximately $5,125,000 which is well collateralized, with no loss expected.
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $13,483,000 for the six-month period ended
June 30, 2002, a 29.7% or $3,088,000 increase from the same period in 2001.
Excluding non-recurring securities gains ($230,000 in 2002 versus $130,000 in
2001) and the sale of the credit card portfolio ($256,000 in 2001), the increase
in operating noninterest income was 32.4% or $3,244,000. Most of this change was
due to similar amounts of growth in service charges on deposit accounts,
mortgage banking revenues, income from trust operations and revenues from the
sales of investment products, along with $1,776,000 of insurance agency
commissions generated by the insurance subsidiary acquired in December 2001.
Noninterest income performance reported above reflects management's desire to
both grow and diversify its sources of noninterest income.
Total noninterest expenses were $31,416,000 for the six-month period
ended June 30, 2002, a 20.4% or $5,329,000 increase from the same period of
2001. These results include goodwill amortization (none in 2002 due to adoption
of Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" effective January 1, 2002, versus $333,000 in 2001) and
intangible asset amortization ($1,329,000 in 2002 versus $1,358,000 in 2001).
Excluding these items, the increase in operating noninterest expenses was 23.3%
or $5,691,000. The Company incurs additional costs in order to enter new
markets, provide new
14
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 rise in operating expenses during the first half of the year
occurred in salaries and benefits (up 38.5% or $5,209,000), reflecting increases
in staff, merit raises and higher incentive compensation. Since June 30, 2001,
the Company has opened three new branches (including its first branch in
Frederick County), consolidated two branches into one, and added an insurance
subsidiary. As a result, average full-time equivalent employees increased by 76
persons (representing a 16.6% increase), to 534 during the first six months of
2002, from 458 during the like period in 2001. With the exclusion of
non-operating items of income and expense from earnings, the ratio of net income
per average full-time-equivalent employee after completion of the first six
months of the year was $27,000 in 2002 and $26,000 in 2001.
INCOME TAXES
The effective tax rate for the six-month period ended June 30 was 26.1%
in 2002, which was essentially unchanged from 2001.
C. RESULTS OF OPERATIONS - SECOND QUARTER 2002 AND 2001
Second quarter net income of $7,158,000 ($0.48 per share-diluted) in
2002 was $1,291,000 or 22.0% above net income of $5,867,000 ($0.41 per
share-diluted) shown for the same quarter of 2001. Annualized returns on average
equity for these periods were 18.45% in 2002 versus 17.02% in 2001.
Excluding nonoperating items, non-GAAP net income for the second
quarter of 2002 was $7,560,000 (which would result in a $0.04 greater diluted
earnings per share amount than shown above on a GAAP net income basis), compared
to $6,217,000 for the second quarter of 2001 (which would result in a $0.03
greater diluted earnings per share amount), representing an increase of 21.6%.
These results exclude securities losses ($3,000 in 2002), the gain on the sale
of the credit card portfolio ($256,000 in 2001), goodwill amortization ($166,000
in 2001), and the amortization of intangible assets ($664,000 in 2002 versus
$669,000 in 2001).
Tax-equivalent net interest income rose 24.4% during the second quarter
of 2002, versus the comparable period in 2001, to $21,752,000 from $17,485,000.
The size of this change was determined by the combined effects of 11.9% higher
average earning assets and a 44 basis point widening of the net interest margin.
The second quarter provision for credit losses increased to $985,000 in
2002 from $492,000 in 2001. Reasons for the increase are discussed above in
Credit Risk Management for the year-to-date. Concerns over the economic impact
on the portfolios and increases in adversely risk rated credits contributed to
the additions. Net recoveries of $49,000 were recorded for the second quarter of
2002, compared to net charge-offs of $604,000 for the second quarter of 2001.
Noninterest income for the second quarter increased $1,212,000 or 22.1%
in 2002, compared to 2001. On an operating basis, which primarily reflects the
exclusion of securities losses ($3,000 in 2002) and the gain on the sale of the
credit card portfolio ($256,000 in 2001), the increase in non-GAAP noninterest
income was 28.2%. This change primarily reflected growth in service charges on
deposit accounts, income from trust operations and revenues from the sales of
investment products, along with $790,000 of insurance agency commissions
generated by the insurance subsidiary acquired in December 2001.
Second quarter noninterest expenses increased 22.0% or $2,902,000 to
$16,117,000 in 2002 from $13,215,000 in 2001. Excluding goodwill ($166,000 in
2001) and the amortization of intangible assets ($664,000 in 2002 and $669,000
in 2001), operating (non-GAAP) noninterest expenses rose 24.8%, with the
majority attributable, as in the year-to-date comparison, to higher salaries and
benefits.
The second quarter effective tax rate declined to 25.9% in 2002 from
26.9% in 2001, in part reflecting an increase in tax-advantaged investment
securities.
15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Condition - Market Risk Management" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" above.
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
2001.
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 17, 2002,
the shareholders of the Company elected John Chirtea (with 11,761,157 votes for
and 201,593 withheld), Joyce R. Hawkins (with 11,705,268 votes for and 257,482
withheld), Hunter R. Hollar (with 11,335,188 votes for and 627,562 withheld),
and Craig A. Ruppert (with 11,734,879 votes for and 227,871 withheld) as
directors for three year terms (Proposal I). There were no solicitations in
opposition to management's nominees and all such nominees were elected. Mr.
Ruppert was elected as a director at the January 2002 meeting of the Board of
Directors, while the other three director-nominees were incumbent directors
previously elected by the shareholders to three-year terms. Directors continuing
in office are Susan D. Goff, Robert L. Mitchell, Robert L. Orndorff, Jr., David
E. Rippeon, Solomon Graham, Gilbert L. Hardesty, Charles F. Mess, Lewis R.
Schumann, and W. Drew Stabler. Director Thomas O. Keech chose not to stand for
re-election and retired effective at the conclusion of the 2002 Annual Meeting.
Proposal II to amend Bancorp's 1999 stock option plan to increase the
number of shares of common stock reserved for issuance under the plan from
600,000 to 1,600,000 shares was adopted by the shareholders at the annual
meeting by a vote of 7,705,391 shares in favor and 1,925,292 shares against,
with 2,116,199 broker non-votes and 215,868 shares abstaining.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 99.1 Certification of Principal Executive Officer pursuant to
18 U.S.C. Section 1350
Exhibit 99.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350
(b) Reports on Form 8-K. None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /S/ HUNTER R. HOLLAR
----------------------------------------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: August 12, 2002
By: /S/ JAMES H. LANGMEAD
----------------------------------------------------
James H. Langmead
Executive Vice President and Chief Financial Officer
Date: August 9, 2002
17