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 September 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.
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(Exact name of registrant as specified in its charter)
Maryland 52-1532952
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(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 October 31, 2002
is 14,520,629 shares.
SANDY SPRING BANCORP, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
September 30, 2002 and December 31, 2001........................................... 1
Consolidated Statements of Income for the Three and Nine Month Periods
Ended September 30, 2002 and 2001 ................................................. 2
Consolidated Statements of Cash Flows for the Nine
Month Periods Ended September 30, 2002 and 2001.................................... 4
Consolidated Statements of Changes in Stockholders' Equity for the Nine
Month Periods Ended September 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................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.............................................................18
ITEM 4. CONTROLS AND PROCEDURES...........................................................19
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................19
SIGNATURES................................................................................20
CERTIFICATIONS............................................................................21
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(Dollars in thousands, except per share data) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 39,475 $ 45,609
Federal funds sold 45,241 10,774
Interest-bearing deposits with banks 811 840
Residential mortgage loans held for sale 20,716 16,682
Investments available-for-sale (at fair value) 710,163 732,629
Investments held-to-maturity -- fair value of $263,464 (2002) and
$165,015 (2001) 254,154 164,921
Other equity securities 19,812 16,929
Total loans and leases 1,066,405 995,919
Less: allowance for credit losses (15,220) (12,653)
----------- -----------
Net loans and leases 1,051,185 983,266
Premises and equipment, net 35,534 32,584
Accrued interest receivable 17,038 15,163
Goodwill 7,642 7,642
Other intangible assets 14,591 16,584
Other assets 45,146 38,211
----------- -----------
Total assets $ 2,261,508 $ 2,081,834
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 320,841 $ 277,592
Interest-bearing deposits 1,144,306 1,109,867
----------- -----------
Total deposits 1,465,147 1,387,459
Short-term borrowings 459,325 411,132
Guaranteed preferred beneficial interests in
the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 117,135 79,116
Accrued interest payable and other liabilities 12,014 18,454
----------- -----------
Total liabilities 2,088,621 1,931,161
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 50,000,000; shares
issued and outstanding 14,516,726 (2002) and 14,483,564 (2001) 14,517 14,484
Additional paid in capital 20,960 20,347
Retained earnings 126,479 111,906
Accumulated other comprehensive income 10,931 3,936
----------- -----------
Total stockholders' equity 172,887 150,673
----------- -----------
Total liabilities and stockholders' equity $ 2,261,508 $ 2,081,834
=========== ===========
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans and leases $ 18,342 $ 19,950 $ 54,304 $ 61,251
Interest on loans held for sale 249 175 576 515
Interest on deposits with banks (2) 33 15 88
Interest and dividends on securities:
Taxable 9,378 10,278 28,546 28,303
Exempt from federal income taxes 2,870 2,085 7,867 5,973
Interest on federal funds sold 130 204 386 986
-------------------- -------------------
TOTAL INTEREST INCOME 30,968 32,725 91,694 97,116
Interest Expense:
Interest on deposits 4,893 8,796 15,213 28,443
Interest on short-term borrowings 4,095 4,455 11,725 13,323
Interest on long-term borrowings 2,046 2,051 6,165 6,121
-------------------- -------------------
TOTAL INTEREST EXPENSE 11,034 15,302 33,103 47,887
-------------------- -------------------
NET INTEREST INCOME 19,934 17,423 58,591 49,229
Provision for Credit Losses 395 742 2,565 1,726
--------------------- -------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 19,539 16,681 56,026 47,503
Noninterest Income:
Securities gains 791 147 1,021 277
Service charges on deposit accounts 1,917 1,802 5,748 5,356
Gains on sales of mortgage loans 1,000 567 2,479 1,835
Fees on sales of investment products 425 440 1,621 1,346
Trust department income 652 524 1,826 1,438
Insurance agency commissions 657 0 2,433 0
Income from bank owned life insurance 493 416 1,360 1,214
Other income 1,680 1,355 4,610 4,180
--------------------- -------------------
TOTAL NONINTEREST INCOME 7,615 5,251 21,098 15,646
Noninterest Expenses:
Salaries and employee benefits 9,396 7,664 28,122 21,181
Occupancy expense of premises 1,369 1,348 4,233 3,809
Equipment expenses 949 859 2,714 2,550
Marketing 438 331 1,414 979
Outside data services 594 544 1,841 1,869
Goodwill amortization 0 167 0 500
Amortization of intangible assets 665 570 1,994 1,928
Other expenses 2,436 2,314 6,945 7,068
-------------------- -------------------
TOTAL NONINTEREST EXPENSES 15,847 13,797 47,263 39,884
-------------------- -------------------
Income Before Income Taxes 11,306 8,135 29,861 23,265
Income Tax Expense 3,049 2,183 7,890 6,141
-------------------- -------------------
NET INCOME $ 8,257 $ 5,952 $ 21,971 $ 17,124
==================== ===================
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended Nine Months Ended
September 30, September 30
---------------------- ----------------------
(In thousands, except per share data) 2002 2001 2002 2001
- ------------------------------------------------------------------- ----------------------
Basic Net Income Per Share $0.56 $0.41 $1.51 $1.19
Diluted Net Income Per Share 0.56 0.40 1.49 1.18
Dividends Declared Per Share 0.17 0.15 0.51 0.44
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
September 30,
-----------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 21,971 $ 17,124
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,474 4,685
Provision for credit losses 2,565 1,726
Deferred income taxes 1,163 696
Origination of loans held for sale (195,326) (156,272)
Proceeds from sales of loans held for sale 193,771 153,055
Gains on sales of loans held for sale (2,479) (1,835)
Securities gains (1,021) (277)
Net increase in accrued interest receivable (1,875) (869)
Net increase in other assets (10,358) (15,510)
Net increase in accrued expenses 6,440 5,014
Other - net (1,382) (3,037)
--------- ---------
Net cash provided by operating activities 5,063 4,500
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits with banks 29 (599)
Purchases of investments held-to-maturity (132,242) (58,930)
Purchases of other equity securities (2,882) (2,742)
Purchases of investments available-for-sale (768,586) (605,310)
Proceeds from sales of investments available-for-sale 263,661 60,689
Proceeds from maturities, calls and principal payments of investments 43,053 22,900
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 539,401 416,082
available-for-sale
Proceeds from sales of other real estate owned 40 459
Net increase in loans and leases (70,515) (38,507)
Expenditures for premises and equipment (5,837) (3,040)
--------- ---------
Net cash used by investing activities (133,878) (208,998)
Cash flows from financing activities:
Net increase in deposits 77,688 93,335
Net increase in short-term borrowings 45,973 111,251
Proceeds from long-term borrowings 40,239 30,215
Proceeds from issuance of common stock 646 1,996
Dividends paid (7,398) (6,320)
--------- ---------
Net cash provided (used) by financing activities 157,148 230,477
--------- ---------
Net increase in cash and cash equivalents 28,333 25,979
Cash and cash equivalents at beginning of year 56,383 46,329
--------- ---------
Cash and cash equivalents at end of quarter $ 84,716 $ 72,308
========= =========
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended
September 30,
------------------------------------
(Dollars in thousands) 2002 2001
- -----------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest payments $22,627 $47,249
Income tax payments 9,177 7,049
Noncash Investing Activities:
Transfers from loans to other real estate owned 29 47
Reclassification of borrowings from long-term to short-term 2,220 200
See Notes to Consolidated Financial Statements.
5
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum-
ulated
Other
Compre- Total
Additional hensive Stock-
Common Paid-in Retained Income holders'
(Dollars in thousands, except per share data) Stock Capital Earnings (loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 2002 $ 14,484 $ 20,347 $111,906 $ 3,936 $150,673
Comprehensive income:
Net income 21,971 21,971
Other comprehensive loss, net of tax
and reclassification
adjustment 6,995 6,995
--------
Total comprehensive income 28,966
Cash dividends - $0.51 per share (7,398) (7,398)
Common stock issued pursuant to:
Stock option plan - 22,217 shares 22 320 342
Employee stock purchase plan --
11,216 shares 11 293 304
-------- -------- -------- -------- --------
Balances at September 30, 2002 $ 14,517 $ 20,960 $126,479 $ 10,931 $172,887
======== ======== ======== ======== ========
Balances at January 1, 2001 $ 9,553 $ 22,511 $ 97,641 $ (2,147) $127,558
Comprehensive income:
Net income 17,124 17,124
Other comprehensive income, net of tax
and reclassification adjustment 9,519 9,519
--------
Total comprehensive income 26,643
Cash dividends - $0.44 per share (6,320) (6,320)
Common stock issued pursuant to:
Stock option plan - 17,480 shares 17 411 428
Employee stock purchase plan - 1,782 shares 2 51 53
Dividend reinvestment and stock
purchase plan - 46,068 shares 46 1,469 1,515
-------- -------- -------- -------- --------
Balances at September 30, 2001 $ 9,618 $ 24,442 $108,445 $ 7,372 $149,877
======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
6
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. There have been no significant
changes to the Company's Accounting Policies as disclosed in the 2001 Annual
Report. 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.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and federal funds sold (which have original maturities of three
months or less).
New Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of Certain
Financial Institutions". SFAS No. 147 amends SFAS No. 72 "Accounting for Certain
Acquisitions of Banking or Thrift Institutions". SFAS No. 147 addresses
unidentifiable intangible assets resulting from acquisitions of entire or
less-than-whole financial institutions where the fair value of liabilities
assumed exceeded the fair value of tangible and identifiable intangible assets
acquired. The Statement allows for the recognition of goodwill where the
transaction in which an unidentifiable intangible asset arose was a business
combination. The transitional provisions of SFAS No. 147 allow for the
reclassification of unidentifiable intangible assets that meet certain criteria
to goodwill and the restatement of earnings for any amortization of the
reclassified goodwill that occurred since SFAS No. 142 was adopted. The Company
is currently analyzing the effect, if any, SFAS No. 147 will have on the
financial condition or results of operations.
Note 2 - Goodwill and Intangible Assets
Under the provisions of SFAS No. 142, goodwill was subjected to an initial
assessment for impairment. The Company completed its initial assessment review
and determined that there was no impairment of goodwill as of January 1, 2002.
The Company will review goodwill on an annual basis for impairment and as events
occur or circumstances change.
7
The Company adopted SFAS No. 142 effective January 1, 2002. The following
presents the net income that would have been reported (pro-forma) had SFAS No.
142 been implemented January 1, 2001.
(Dollars and amounts in thousands, except Three Months Ended Nine Months Ended
Per share data) September 30, September 30,
- --------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 8,257 $ 5,952 $21,971 $ 17,124
Add back: goodwill amortization, net of tax effect 0 107 0 321
------- --------- ------- ----------
Pro-forma net income 8,257 6,059 21,971 17,445
======= ========= ======= ==========
Basic net income per share
Reported net income $ 0.56 $ 0.41 $ 1.51 $ 1.19
Goodwill amortization 0 0.01 0 0.02
------- --------- ------- ----------
Pro-forma net income per share $ 0.56 $ 0.42 $ 1.51 $ 1.21
======= ========= ======= ==========
Diluted net income per share
Reported net income $ 0.56 $ 0.40 $ 1.49 $ 1.18
Goodwill amortization 0 0.01 0 0.02
------- --------- ------- ----------
Pro-forma net income per share $ 0.56 $ 0.42* $ 1.49 $ 1.20
======= ========= ======= ==========
*Components do not add to pro forma total due to rounding.
Note 3 - Per Share Data
The calculations of net income per common share for the nine month
periods ended September 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 Nine Months Ended
Per share data) September 30, September 30,
- ---------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 8,257 $ 5,952 $21,971 $17,124
Average common shares outstanding 14,515 14,398 14,503 14,366
Basic net income per share $ 0.56 $ 0.41 $ 1.51 $ 1.19
======= ======= ======= =======
Diluted:
Net income available to common stockholders $ 8,257 $ 5,952 $21,971 $17,124
Average common shares outstanding 14,515 14,398 14,503 14,366
Stock option adjustment 213 185 216 148
------- ------- ------- -------
Average common shares outstanding-diluted 14,728 14,583 14,719 14,514
Diluted net income per share $ 0.56 $ 0.40 $ 1.49 $ 1.18
======= ======= ======= =======
Options on 137,000 shares of common stock are not included in computing diluted
net income per share for the three months and nine months ended September 30,
2002 because their effects are antidilutive. There was no antidilutive effect
for the same periods of 2001.
8
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 risk and of future costs, benefits and liquidity; assessments of probable
loan and lease losses and market risk; and statements of the ability to achieve
financial and other goals. Such forward-looking statements are identified by
terminology such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "intend," "likely," "unlikely," "continue," or similar terms.
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,
Sandy Spring Bancorp's actual results may differ materially from the anticipated
results expressed in these forward-looking statements. Investors are cautioned
not to place undue reliance on these forward-looking statements. In addition,
the Company's past results of operations do not necessarily indicate 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
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 September 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 79% of total average deposits while nearly two-thirds of the
Company's revenues are derived from consumer loans, consumer deposits and other
retail 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.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP).
The financial information contained within its statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. GAAP may
change from one previously acceptable method to another method. The Company
makes use of estimates in applying its accounting policies. A change in such
estimates may a have a material impact on the presentation of the Company's
financial condition, changes in financial condition, or results of operations
for a reporting period. The estimates used in Management's assessment of the
adequacy of the allowance for credit losses require that management make
assumptions about matters that are uncertain at the time of estimation.
Differences in these assumptions and differences between the estimated and
actual losses could have such a material effect.
NON-GAAP FINANCIAL MEASURES
Management believes that discussion of operating income, which differs
from income presented under generally accepted accounting principles ("GAAP"),
is useful in comparing the period-to-period performance of the Company's core
business operations. Non-GAAP operating income is different from income shown on
the consolidated statements of income, consolidated statements of cash flows,
and consolidated statements of changes in stockholders' equity included in this
report because it excludes amounts of income and expense that are included in
GAAP net income. Operating income for a period as defined by the Company
excludes securities gains and losses, which often vary widely from period to
period without appreciably affecting operating
9
expenses; the amortization of goodwill and intangible assets; and significant
non-recurring income and expenses. Management uses this non-GAAP financial
measure to help it assess its performance with respect to core earnings.
Operating income reported for other companies may not be comparable to amounts
discussed in this report, because such other companies may define operating
income differently. A reconciliation of net income on a GAAP basis to non-GAAP
operating income is presented below:
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
- -----------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income - GAAP basis $8,257 $5,952 $21,971 $17,124
Less non-GAAP adjustments:
Securities gains (791) (147) (1,021) (277)
Gain on sale of credit card portfolio 0 0 0 (256)
Goodwill amortization 0 167 0 500
Amortization of intangible assets 665 570 1,994 1,928
Income tax effect of adjustments 50 (234) (385) (750)
------------------------------------------------------
Adjustments, net of income tax effect (76) 356 588 1,145
------------------------------------------------------
Operating income (non-GAAP) $8,181 $6,308 $22,559 $18,269
======================================================
A. FINANCIAL CONDITION
The Company's total assets were $2,261,508,000 at September 30, 2002,
compared to $2,081,834,000 at December 31, 2001, increasing $179,674,000 or 8.6%
during the first nine months of 2002. Earning assets increased $178,608,000 or
9.2% to $2,117,302,000 at September 30, 2002, from $1,938,694,000 at December
31, 2001.
Total loans and leases, excluding loans held for sale, rose 7.1% or
$70,486,000 during the first nine months of 2002, to $1,066,405,000. During this
period, consumer loans increased by $24,550,000 (up 11.4%) due primarily to home
equity products. Commercial loans and leases also increased, by $26,124,000 (up
5.9%), primarily reflecting growth in commercial loans not secured by real
estate. Finally, residential real estate loans rose $19,812,000 (up 5.8%)
attributable to higher residential mortgage loans. Residential mortgage loans
held for sale increased by $4,034,000 from December 31, 2001, to $20,716,000 at
September 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) September 30, 2002 % December 31, 2001
- -----------------------------------------------------------------------------------------------------------
Residential real estate $ 359,609 34% $ 339,797 34%
Commercial loans and leases 467,665 44 441,540 44
Consumer 239,131 22 214,582 22
---------------------------- ------- ----------------------------
Total Loans and Leases 1,066,405 100% 995,919 100%
======= ====
Less: Allowance for credit losses (15,220) (12,653)
---------------------------- ----------------------
Net loans and leases $1,051,185 $983,266
============================ ======================
The total investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities of $984,129,000 showed
approximately the same percentage increase as that for loans, up 7.6 % or
$69,650,000 from December 31, 2001. Held-to-maturity securities increased by
$89,233,000 or 54.1% during the first three quarters of 2002, while
available-for-sale securities decreased by $22,466,000 or 3.1%.
10
The aggregate of federal funds sold and interest-bearing deposits with banks
increased by $34,438,000 during the first nine months of 2002, reaching
$46,052,000 at September 30, 2002.
Total deposits were $1,465,147,000 at September 30, 2002, increasing
$77,688,000 or 5.6% from $1,387,459,000 at December 31, 2001.
Noninterest-bearing demand deposits grew by $43,249,000 or 15.6% over the nine
month period, reaching 22% of total deposits at third quarter-end, compared to
20% at year-end 2001. Regular savings also rose, by $42,151,000 (up 38.5%), to
comprise 10% of total deposits at September 30, 2002 versus 8% at December 31,
2001. Partially offsetting these large increases, money market savings decreased
$15,070,000 (down 3.8%) to 26% of total deposits from 28%. Over this period, the
increase in total deposits more than kept pace with the funding requirements of
loan growth.
Total borrowings were $611,460,000 at September 30, 2002, which was
$86,212,000 above December 31, 2001. Approximately two-thirds of this increase
occurred in borrowings from the Federal Home Loan Bank of Atlanta. Most of these
advances were associated with leverage programs, under which borrowed funds are
invested in securities to enhance the Company's overall earnings performance. At
September 30, 2002, short and long term borrowings under the leverage programs
amounted to $350,000,000, compared to $285,100,000 at December 31, 2001. These
leverage programs achieved net interest margins of approximately 1.00% for the
nine months ended September 30, 2002 and 0.95% for the same period in 2001,
which equated to diluted earnings per share of approximately $0.10 and $0.08 for
the respective periods. The remaining third of the rise in total borrowings was
in the form of repurchase agreements related primarily to commercial cash
management services.
Table 2 -- Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
(In thousands) September 30, 2002 % December 31, 2001 %
- ---------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 320,841 22% $ 277,592 20%
Interest-bearing deposits:
Demand 173,915 12 166,603 12
Money market savings 381,225 26 396,295 28
Regular savings 151,560 10 109,409 8
Time deposits less than $100,000 314,662 22 316,786 23
Time deposits $100,000 or more 122,944 8 120,774 9
--------------------------------------------------------------------
Total interest-bearing 1,144,306 78 1,109,867 80
---------------------------------------------------------------------
Total deposits $ 1,465,147 100% $ 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 September 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 September
30, 2002, the simulation analysis indicates that net interest income would
decline by 3% 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 8%, as compared to a policy
limit of 25%.
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, investment portfolio
liquidity, and other factors. Through this approach, implemented by the funds
11
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 September 30, 2002 show short-term investments
exceeding short-term borrowings by $103,656,000 (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 overall line of
credit for $676,350,000 with the Federal Home Loan Bank of Atlanta, of which
approximately $359,355,000 was outstanding at September 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 $248,668,000 at September 30, 2002, against which there were
outstandings of approximately $50,000,000. Based upon its liquidity analysis,
including external sources of liquidity available, management believes the
liquidity position is appropriate at September 30, 2002.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 14.72% at
September 30, 2002, compared to 14.10% at December 31, 2001; a tier 1 risk-based
capital ratio of 13.45%, compared to 12.98%; and a capital leverage ratio of
8.10%, compared to 7.73%. Capital adequacy, as measured by these ratios, was
well above regulatory requirements. Management believes the level of capital at
September 30, 2002, is appropriate.
Stockholders' equity for September 30, 2002, totaled $172,887,000,
representing an increase of $22,214,000 or 14.7% 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 $6,995,000 from December 31, 2001 to September 30,
2002. This increase reflected the effects of lower interest rates at third
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 10.4%.
Internal capital generation (net income less dividends) was responsible
for $14,573,000 of the increase in total stockholders' equity during the first
nine months of 2002. When internally formed capital is annualized and expressed
as a percentage of average total stockholders' equity, the resulting rate was
12.3% for the first nine months 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 $646,000
during the nine month period ended September 30, 2002. There were no share
repurchases over the period.
Dividends for the first nine months of the year were $0.51 per share in
2002, compared to $0.44 per share in 2001, for respective dividend payout ratios
(dividends declared per share to diluted net income per share) of 34.23% versus
37.29%.
B. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2002, AND 2001
Net income for the first nine months of the year increased $4,847,000
or 28.3% to $21,971,000 in 2002 from $17,124,000 in 2001, representing
annualized returns on average equity of 18.54% and 16.58%, respectively. Third
quarter year-to-date diluted earnings per share (EPS) were $1.49 in 2002,
compared to $1.18 in 2001.
For the nine month period ending September 30, 2002, operating
(non-GAAP) net income increased $4,290,000 or 23.5% to $22,559,000 (which would
result in a $0.04 greater diluted EPS amount than shown above on a GAAP net
income basis) from $18,269,000 in 2001 (which would result in a $0.08 greater
diluted EPS amount). In these periods, non-GAAP operating income excludes
securities gains of $1,021,000 in 2002 versus $277,000 in 2001, goodwill
amortization of $500,000 in 2001, amortization of intangible assets of
$1,994,000 in 2002 versus $1,928,000 in 2001, and the non-recurring gain on the
sale of the credit card portfolio of $256,000 in 2001, net of related income tax
effects.
12
Sandy Spring Bancorp and Subsidiaries
TABLE 3 - CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax equivalent)
For the nine months ended September 30,
2002 2001
---------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
---------------------------------------------------------------
Assets
Total loans and leases $1,045,525 7.01% $ 993,963 8.30%
Total securities (1) 912,161 6.04 745,346 6.82
Other earning assets 32,565 1.64 32,364 4.42
---------- ----------
TOTAL EARNING ASSETS 1,990,251 6.48% 1,771,673 7.61%
Nonearning assets 133,528 136,040
---------- ----------
Total assets $2,123,779 $1,907,713
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 172,570 0.30% $ 151,057 0.90%
Money market savings deposits 384,180 1.20 357,203 3.45
Regular savings deposits 140,477 0.94 103,830 1.62
Time deposits 424,271 3.27 420,360 5.39
---------- ----------
Total interest-bearing deposits 1,121,498 1.81 1,032,450 3.68
Short-term borrowings 444,250 3.52 372,073 4.78
Long-term borrowings 114,473 7.18 113,186 7.21
---------- ----------
Total interest-bearing liabilities 1,680,221 2.63 1,517,709 4.22
----- -----
Noninterest-bearing demand deposits 271,826 239,379
Other noninterest-bearing liabilities 13,262 12,563
Stockholders' equity 158,470 138,062
---------- ----------
Total liabilities and stockholders' equity $2,123,779 $1,907,713
========== ==========
Net interest spread 3.85% 3.39%
===== =====
Net interest margin (2) 4.26% 4.00%
===== =====
Ratio of average earning assets to
Average interest-bearing liabilities 118.45% 116.73%
========== ==========
(1) Interest income includes the effects of taxable-equivalent adjustments
(reduced by the nondeductible portion of interest expense) using the
appropriate marginal federal Income tax rate of 35.00% and, where
applicable, the marginal state income tax rate of 7.00% (or a combined
marginal federal and state rate of 39.55%), to increase tax-exempt interest
income to a taxable-equivalent basis. The net taxable-equivalent adjustment
amounts utilized in the above table (on an annual basis) to compute yields
aggregated to $1,923,000 and $1,439,000 in the quarters ended September 30,
2002 and 2001, and $4,799,000 and $3,723,000 for the nine months ended
September 30, 2002 and 2001, respectively.
(2) Net interest margin = annualized net interest income on a tax-equivalent
basis divided by total interest-earning assets.
13
RESULTS OF OPERATIONS - NINE MONTHS ENDED (continued)
The net interest margin increased by 26 basis points to 4.26% for the
nine months ended September 30, 2002, from 4.00% for the like period of 2001,
while the net interest spread increased by 46 basis points, to 3.85% from 3.39%.
Interest rate performance after three quarters 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 nine months of 2002,
compared to the first nine months 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 relatively less expensive.
NET INTEREST INCOME
Net interest income for the first nine months of the year was
$58,591,000 in 2002, an increase of 19.0% over $49,229,000 in 2001, due to a
higher volume of average earning assets and a greater net interest margin. On a
tax-equivalent (non-GAAP) basis, net interest income increased by 19.7% to
$63,390,000 in 2002, from $52,952,000 in 2001. The effects of average balances,
yields and rates are presented in table 3.
For the first nine months, tax-equivalent interest income increased
$4,346,000 or 4.3% in 2002, compared to 2001. Average earning assets rose 12.3%
over the prior year period, to $1,990,251,000 from $1,771,673,000, while the
average yield earned on those assets decreased by 113 basis points to 6.48%.
Comparing the first nine months of 2002 versus 2001, average total loans and
leases grew by 5.2% to $1,045,525,000 (52.5% of average earning assets, versus
56.1% a year ago), while recording a 129 basis point decline in average yield to
7.01%. Average residential real estate loans increased by 9.9% (reflecting
increases in both mortgage and construction lending); average consumer loans
increased by 8.3% (attributable to home equity products); and, average
commercial loans and leases grew by 0.3% (due to an increase in the other
commercial category largely offset by declines in real estate, construction, and
leasing). Over the same period, average residential real estate loans increased
by $44,081,000 or 15.5% due primarily to growth in residential construction
lending, and average consumer loans increased by $13,244,000 or 6.6%. Over the
same period, average total securities rose by 22.4% to $912,161,000 (45.8% of
average earning assets, versus 42.1% a year ago), while the average yield earned
on those assets decreased by 78 basis points to 6.04%.
Interest expense for the first nine months of the year decreased
significantly by $14,784,000 or 30.9% in 2002, compared to 2001. Average total
interest-bearing liabilities rose 10.7% over the prior year period, while the
average rate paid on these funds decreased by 159 basis points to 2.63%. All
major deposit categories and both short and long term borrowings grew in
conjunction with declines in average rate. Most important was the significant
decline in deposit rates. This was due primarily to effects of sharply reduced
core deposit interest rates, and of time deposit maturity repricings, as well as
new accounts, at the lower rates.
CREDIT RISK MANAGEMENT
The allowance for credit losses is an estimate of the losses that may
be sustained in the loan and lease portfolio. The allowance is based on two
basic principles of accounting: (1) SFAS No. 5, "Accounting for Contingencies",
which requires that losses be accrued when they are probable of occurring and
estimable, and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", which requires that losses be accrued based on differences between the
loan balance and the value of collateral, the present value of future cash
flows, or values that are observable in the secondary market. Management
determines the appropriate amount of the allowance using the systematic
methodology described below.
The Company's allowance for credit losses has three basic components:
the historical loss allowance, specific allowances, and allowances based upon
evaluation of other factors relating to the portfolio. Each of these components
is based upon estimates that can and do change when the actual events occur.
The historical loss allowance establishes allowances for the major loan
categories based upon their respective historical loss experience over the prior
eight quarters, weighted so that losses in the most recent quarters have the
greatest impact. The use of these factors in the methodology, because of their
relationship to actual results, is intended to narrow differences between
estimated and realized losses.
14
The specific allowance is used to individually allocate an allowance
for internally risk rated commercial loans where significant conditions or
circumstances indicate that a loss may have been incurred. Analysis resulting in
specific allowances, including those on loans identified for evaluation of
impairment, includes consideration of the borrower's overall financial
condition, resources and payment record, support available from financial
guarantors and the sufficiency of collateral. These factors are combined to
estimate the probability and severity of inherent losses. Then a specific
reserve is established based on the Company's calculation of the loss embedded
in the individual loan. Formula allowances are established according to the
application of credit risk factors for other internally risk-rated loans, for
individual consumer and residential loans and commercial leases having reached
nonaccrual or 90 day past due status, and for unfunded commitments. Each
risk-rating category is assigned a credit risk factor based on management's
estimate of the associated risk, complexity, and size of the individual loans
within the category. Credit risk factors increase with the worsening of the
internal risk rating. Additional allowances may also be established in special
circumstances involving a particular group of credits or portfolio within a risk
rating category when management becomes aware that a loss may have been incurred
in addition to that calculated by use of the credit risk factor for that general
risk category.
The third component of the allowance is primarily based upon
management's regular evaluation of the following factors (which are included in
federal bank regulatory guidelines): trends in delinquencies and nonaccruals,
size of credits relative to the allowance, volume trends, concentrations,
economic conditions, credit administration and management, and the quality of
the risk identification system. Additional factors which may also be considered
include changes in underwriting standards, such as acceptance of higher loan to
value ratios. Evaluation of the potential effects of these factors on estimated
losses involves a high degree of uncertainty. The required analysis is regularly
and carefully undertaken by management, and the risk factors are revised as
conditions indicate.
The amount of the allowance is reviewed monthly by the senior loan
committee, and reviewed and approved by the Board of Directors quarterly.
During the first nine months of the year, the provision for credit
losses increased to $2,565,000 in 2002, from $1,726,000 in 2001. The Company has
experienced net recoveries during the first nine months of 2002 of $2,000,
compared to net charge-offs of $1,034,000 for the same period of 2001, but does
not expect this favorable trend to continue.
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 nine months of 2002,
there were no changes in estimation methods that affected the allowance
methodology. The allowance for credit losses was 1.43% of total loans and leases
at September 30, 2002 and 1.27% at December 31, 2001.
The allowance increased by $2,567,000 or 20.3% during the first nine
months of 2002, from $12,653,000 at December 31, 2001 to $15,220,000 at
September 30, 2002. Most of this change was attributable to higher reserves for
commercial loans, comprised of commercial real estate and construction loans,
leases and other commercial loans. The commercial loan portfolio grew by 5.9%
over the period. The allowance for this category increased by 40.7% or
$2,479,000. The increase was due, in part, to the growth in commercial loans as
well as higher levels of specific allowances and allowances based upon other
factors
15
relating to the portfolio. The specific allowance for commercial loans nearly
doubled, increasing by $1,670,000, due primarily to a specific reserve for a
single borrower. Bancorp does not have significant exposure to other borrowers
in that borrower's industry. In addition, other risk rated credits giving rise
to reserves within the specific allowance, based upon the application of credit
risk factors, increased by $3,963,000 or 23.6%. This change was largely
attributable to the addition of an existing loan to the watch list. A number of
other factors also contributed to higher reserves, none of which was especially
significant by itself, including trends in delinquencies and nonaccrual loans,
and evaluation of portfolio concentrations, economic conditions, and credit
administration and risk identification systems. Management believes that the
commercial portfolio carries with it a higher level of credit risk during
economic slowdowns.
With respect to residential real estate loans, the allowance decreased
19.0% during the nine-month period ended September 30, 2002. Residential real
estate loans increased 5.9% year-to-date September 30, 2002. The decline in the
related allowance was due primarily to smaller effects of historical losses on
the historical loss allowance, and other factors such as lower reserve
requirements computed against growth trends over the past eighteen months as the
rate of increase in the size of the portfolio has continued to fall. The
allowance arising from consumer loans rose 28.0% or $644,000 during the first
nine months of 2002. The consumer portfolio grew 11.4%. The change in allowance
reflected an increase in the specific allowance on an existing portfolio of
manufactured housing credits (comprising 0.7% of outstanding loans) affected
adversely by economic conditions, and higher risk factors related to evaluation
of portfolio concentrations and economic conditions.
Nonperforming loans and leases decreased by $676,000 to $7,131,000
while nonperforming assets decreased by $682,000 to $7,175,000 from December 31,
2001 to September 30, 2002. Expressed as a percentage of total assets,
nonperforming assets decreased to 0.32% at September 30, 2002 from 0.38% at
December 31, 2001. The allowance for credit losses represented 213% of
nonperforming loans and leases at September 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 $44,000 at September 30, 2002, compared to $50,000 at December 31,
2001. The balance of impaired loans and leases was $5,612,000 at September 30,
2002, with specific reserves against those loans of $88,000, compared to
$5,589,000 at December 31, 2001, with reserves of $91,000. Nonperforming and
impaired loans and leases at September 30, 2002, and at December 31, 2001,
included a problem credit of a single borrower in the amount of approximately
$5,125,000 that has been fully repaid since September 30, 2002.
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $21,098,000 for the nine-month period
ended September 30, 2001, a 34.8% or $5,452,000 increase from the same period of
2001. Excluding non-recurring securities gains ($1,021,000 in 2002 versus
$277,000 in 2001) and the sale of the credit card portfolio ($256,000 in 2001),
the increase in operating noninterest income was 32.8% or $4,965,000.
Approximately 50% of this change was due to $2,433,000 of insurance agency
commissions generated by an insurance agency acquired in December 2001. Other
contributors to the increase included mortgage banking revenues (up $644,000),
service charges on deposit accounts (up $392,000), income from trust operations
(up $388,000), and revenues from the sales of investment products (up $275,000).
Noninterest income performance reported above reflects management's desire to
both increase and diversify its sources of noninterest income.
Total noninterest expenses were $47,263,000 for the nine-month period
ended September 30, 2002, an 18.5% or $7,379,000 increase from the same period
of 2002. 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 $500,000 in 2001) and
intangible asset amortization ($1,994,000 in 2002 versus $1,928,000 in 2001).
Excluding these items, the increase in operating noninterest expenses was 20.9%
or $7,814,000. The Company incurs additional costs in order to enter new
markets, provide new services, and support the growth of the Company. Management
controls its operating expenses, however, with the goal of maximizing
profitability over time. Most of the rise in operating expenses during the first
three quarters of the year occurred in salaries and benefits (up 32.8% or
$6,941,000), attributable in part
16
Table 4 -- Analysis of Credit Risk
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
Nine Months Ended Twelve Months Ended
September 30, 2002 December 31, 2001
- -------------------------------------------------------------------------------------------
Balance, January 1 $ 12,653 $ 11,530
Provision for credit losses 2,565 2,470
Loan charge-offs:
Residential real estate (57) (23)
Commercial loans and leases (142) (1,180)
Consumer (97) (225)
-------- --------
Total charge-offs (296) (1,428)
Loan recoveries:
Residential real estate 0 0
Commercial loans and leases 274 54
Consumer 24 27
-------- --------
Total recoveries 298 81
-------- --------
Net recoveries (charge-offs) 2 (1,347)
Balance, period end $ 15,220 $ 12,653
-------- --------
Net charge-offs to average loans and
Leases (annual basis) 0.00% 0.14%
Allowance to total loans and leases 1.43% 1.27%
The following table presents nonperforming assets at the dates indicated:
September 30 December 31,
2002 2001
- -----------------------------------------------------------------------------------------
Non-accrual loans and leases $ 6,109 $ 5,904
Loans and leases 90 days past due 1,022 1,903
-------- --------
Total nonperforming loans and leases* 7,131 7,807
Other real estate owned 44 50
Total nonperforming assets $ 7,175 $ 7,857
======== ========
Nonperforming assets to total assets 0.32% 0.38%
- -----------------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which Bancorp
classifies as substandard), as defined and identified by management, amounted to
approximately $6,401,000 at September 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.
17
NONINTEREST INCOME AND EXPENSES (continued)
to increases in staff, merit raises and higher incentive compensation. The
Company has opened a new branch (its first in Frederick County) and added an
insurance agency since September 30, 2001. Additionally, two new branch openings
and a branch consolidation occurred in the third quarter of 2001. The net result
of these changes was an increase of 69 average full-time equivalent employees
(representing a 14.8% increase), to 536 during the first nine months of 2002,
from 467 during the like period in 2001. There was a significant 44.4% or
$435,000 rise in third quarter year-to-date marketing expenses in 2002, compared
to 2001, to $1,414,000 due primarily to higher advertising expenses. 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 nine months of the year was $42,000 in 2002 and $39,000 in 2001.
INCOME TAXES
The effective tax rate was 26.4% for the nine month periods ended
September 30, 2002 and 2001.
C. RESULTS OF OPERATIONS - THIRD QUARTER 2002 AND 2001
Third quarter net income of $8,257,000 ($0.56 per share-diluted) in
2002 was $2,305,000 or 38.7% above net income of $5,952,000 ($0.40 per
share-diluted) shown for the same quarter of 2001. Annualized returns on average
equity for these periods were 19.64% in 2002 versus 16.33% in 2001.
Excluding nonoperating items, non-GAAP operating net income for the
third quarter of 2002 was $8,181,000 (which would result in no change in the
diluted earnings per share amount shown above on a GAAP net income basis),
compared to $6,308,000 for the third quarter of 2001 (which would result in a
$0.03 greater diluted earnings per share amount), representing an increase of
29.7%. These results exclude securities gains ($791,000 in 2002 versus $147,000
in 2001), goodwill amortization ($167,000 in 2001), and the amortization of
intangible assets ($665,000 in 2002 versus $570,000 in 2001).
Tax-equivalent net interest income rose 15.9% during the third quarter
of 2002, versus the comparable period in 2001, to $21,856,000 from $18,862,000.
The size of this change was determined by the combined effects of 11.1% higher
average earning assets and a 19 basis point widening of the net interest margin.
The third quarter provision for credit losses decreased to $395,000 in
2002 from $742,000 in 2001. Net charge-offs of $86,000 were recorded for the
third quarter of 2002, compared to net charge-offs of $100,000 for the third
quarter of 2001.
Noninterest income for the third quarter increased $2,364,000 or 45.0%
in 2002, compared to 2001. On an operating basis, which primarily reflects the
exclusion of securities gains ($791,000 in 2002 versus $147,000 in 2001), the
increase in non-GAAP noninterest income was 33.7%. This change primarily
reflects $657,000 in insurance agency commissions generated by the insurance
subsidiary acquired in December 2001, along with growth in gains on sales of
mortgage loans.
Third quarter noninterest expenses increased 14.9% or $2,050,000 to
$15,847,000 in 2002 from $13,797,000 in 2001. Excluding goodwill ($167,000 in
2001) and the amortization of intangible assets ($665,000 in 2002 versus
$570,000 in 2001), operating (non-GAAP) noninterest expenses rose 16.2%, with
the majority attributable, as in the year-to-date comparison, to higher salaries
and benefits.
The third quarter effective tax rate was 27.0% in 2002, similar to
26.8% recorded in 2001.
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.
18
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the Company's
management, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures,
as defined in Rule 13a-14 under the Securities Exchange Act of 1934. Based on
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were adequate.
There were no significant changes (including corrective actions with regard to
significant or material weaknesses) in the Company's internal controls or in
other factors subsequent to the date of the evaluation that could significantly
affect those controls.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification of Principal Executive Officer pursuant to
18 U.S.C. Section 1350
99.2 Certification of Principal Financial Officer pursuant to
18 U.S.C. Section 1350
(b) Reports on Form 8-K. None
19
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: November 14, 2002
By: /S/ JAMES H. LANGMEAD
-----------------------
James H. Langmead
Executive Vice President and Chief Financial Officer
Date: November 14, 2002
20
CERTIFICATION
I, Hunter R, Hollar, President and Chief Executive Officer of Sandy Spring
Bancorp, Inc. ("Bancorp"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Hunter R. Hollar
----------------- --------------------------
Hunter R. Hollar
President and
Chief Executive Officer
21
CERTIFICATION
I, James H. Langmead, Executive Vice President and Chief Financial Officer of
Sandy Spring Bancorp, Inc. ("Bancorp"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ James H, Langmead
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James H. Langmead
Executive Vice President and
Chief Financial Officer
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