- ----------------------
Branch Locations
*ATM available
Airpark* Jennifer Road* ADDITIONAL AUTOMATED TELLER
7653 Lindbergh Drive 166 Jennifer Road MACHINE (ATM) SITES
Gaithersburg, Maryland 20879 Annapolis, Maryland 21401
Bethesda-Chevy Chase Shell Station
Annapolis* Laurel Lakes* 8240 Wisconsin Avenue
2024 West Street 14404 Baltimore Avenue Bethesda, Maryland 20814
Annapolis, Maryland 21401 Laurel, Maryland 20707
Germantown Chevron Station
Ashton* Layhill* 20510 Frederick Road
1 Ashton Road 14241 Layhill Road Germantown, Maryland 20874
Ashton, Maryland 20861 Silver Spring, Maryland 20906
Lakeforest Mall
Aspenwood Leisureworld Plaza* 701 Russell Avenue
14400 Homecrest Road 3801 International Drive Gaithersburg, Maryland 20877
Silver Spring, Maryland 20906 Silver Spring, Maryland 20906
Montgomery County Fairgrounds
Bedford Court Lisbon* 16 Chestnut Street
3701 International Drive 710-N Lisbon Centre Drive Gaithersburg, Maryland 20877
Silver Spring, Maryland 20906 Woodbine, Maryland 21797
Washingtonian Chevron Station
Bethesda* Milestone Center* 10003 Fields Road
7126 Wisconsin Avenue 20930 Frederick Avenue Gaithersburg, Maryland 20878
Bethesda, Maryland 20814 Germantown, Maryland 20876
Woodmont Shell Station
Burtonsville* Montgomery General Hospital* 1250 West Montgomery Avenue
3535 Spencerville Road 18101 Prince Phillip Drive Rockville, Maryland 20850
Burtonsville, Maryland 20866 Olney, Maryland 20832
Sandy Spring Mortgage Corporation
Clarksville* Montgomery Village* 12501 Prosperity Drive, Suite 100
12276 Clarksville Pike 9921 Stedwick Road Silver Spring, Maryland 20904
Clarksville, Maryland 21029 Montgomery Village, Maryland 20879 (301) 680-0200
Colesville* Olney* 2024 West Street
13300 New Hampshire Avenue 17801 Georgia Avenue Annapolis, Maryland 21401
Silver Spring, Maryland 20904 Olney, Maryland 20832 (410) 266-3000
Damascus* Rockville 7126 Wisconsin Avenue
26250 Ridge Road 611 Rockville Pike Bethesda, Maryland 20814
Damascus, Maryland 20872 Rockville, Maryland 20852 (301) 951-0800
East Gude Drive* Sandy Spring 10715 Charter Drive, Suite 170
1601 East Gude Drive 908 Olney-Sandy Spring Road Columbia, Maryland 21044
Rockville, Maryland 20850 Sandy Spring, Maryland 20860 (410) 740-8004
Gaithersburg Square* 17801 Georgia Avenue
596 A North Frederick Avenue Olney, Maryland 20832
Gaithersburg, Maryland 20877 (301) 774-8460
8
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Index to Financial Section
Recent Stock Prices and Dividends ......................................... 9
Management's Discussion and Analysis of
Operations and Financial Condition ........................................ 10
Consolidated Financial Statements:
Balance Sheets At December 31, 1998 and 1997: ........................... 26
For the Years Ended December 31, 1998, 1997 and 1996:
Statements of Income .................................................. 27
Statements of Cash Flows .............................................. 28
Statements of Changes in Stockholders' Equity ......................... 29
Notes to the Consolidated Financial Statements ............................ 30
Management's Statement of Responsibility .................................. 48
Report of Independent Auditors ............................................ 48
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RECENT STOCK PRICES AND DIVIDENDS
Shareholders received quarterly cash dividends totaling $6,061,000 in 1998 and
$4,603,000 in 1997. Regular dividends have been declared for ninety-eight
consecutive years. The Company has increased its dividends per share each year
for the past eighteen years. Since 1993, dividends per share have risen at a
compound annual growth rate of 20.8%. The increase in dividends per share was
34.0% in 1998.
The ratio of dividends per share to diluted net income per share was 38.0% in
1998, compared to 35.1% for 1997. The dividend amount is established by the
Board of Directors each quarter. In making its decision on dividends, the Board
considers operating results, financial condition, capital adequacy, regulatory
requirements, shareholder returns and other factors.
Shares issued under the dividend reinvestment and stock purchase plan totaled
76,447 in 1998 and 43,327 during 1997.
The Company initiated a stock repurchase program in 1997 that permits the
repurchase of up to 5% (492,084 shares*) of Bancorp's outstanding common stock.
Repurchases are made in connection with shares expected to be re-issued under
the Company's dividend reinvestment, stock option and benefit plans, as well as
for other corporate purposes. Total shares repurchased were 227,586* in 1998 and
92,300 in 1997. A total of 412,186* shares have been repurchased through
December 1998.
The number of common shareholders of record was approximately 2,400 as of
February 10, 1999 and 1998.
Sandy Spring Bancorp's common stock trades on The Nasdaq Stock Market's National
Market under the trading symbol SASR. The price information provided below
reflects annual high and low sales prices as quoted on The Nasdaq Stock Market.
QUARTERLY STOCK INFORMATION*
1998 1997
Stock Price Range Per Share Stock Price Range Per Share
Quarter Low High Dividend Low High Dividend
1st $25.00 $37.00 $0.13 $15.13 $17.88 $0.10
2nd 30.00 34.88 0.15 16.88 18.63 0.12
3rd 29.31 34.06 0.17 17.88 22.25 0.12
4th 26.75 34.00 0.18 22.00 25.07 0.13
----- -----
Total $0.63 $0.47
===== =====
* Adjusted to give retroactive effect to a 2-for-1 stock split declared on
January 28, 1998.
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9
Management's Discussion and Analysis of Operations and Financial Condition
OVERVIEW
Sandy Spring Bancorp, Inc. (Sandy Spring or the Company) achieved 22.1% growth
in net income for 1998, while also recording significant increases in two key
performance indicators, diluted earnings per share and the return on average
equity. The improvement marks the fifth consecutive year of increased net
income.
. Net income for 1998 was $16,105,000 in 1998, up from $13,195,000 in 1997 and
$11,494,000 in 1996.
. Diluted earnings per share rose to $1.66 in 1998, as compared to $1.34 and
$1.18 in 1997 and 1996.
. The return on average equity increased to 15.02% in 1998, versus 13.25% in
1997 and 12.81% in 1996.
The increased earnings and returns resulted from:
. Interest revenue growth from increased loans and investment securities;
. Noninterest revenue growth, reflecting Management's continued focus on this
area;
. Increased use of leverage and management of capital levels;
. Efficiency; and
. Sustained asset quality.
Net interest income rose $4,444,000 or 10.8% during 1998. Noninterest income
increased 32.8% or $2,991,000 in 1998, following a 39.5% increase in 1997. The
principal reasons for the change in 1998 were increased gains on mortgage sales,
which more than doubled, higher return check charges, and growth in trust and
debit card fees. Noninterest expenses increased $4,611,000 or 15.7%, in 1998.
The Company continues to manage its expenses in relationship to revenue
generation. This approach seeks to maximize earnings, providing flexibility to
pursue new business opportunities. As a result of these factors, the net
overhead ratio, which measures noninterest expense performance against revenues,
improved in 1998. The ratio of net loan charge-offs to average loans for 1998 of
0.04% was the lowest level in the past five years. At year end, nonperforming
assets were 0.29% of loans, and the Company had no foreclosed real estate on its
balance sheet. The provision for credit losses for 1998 was $434,000 or 44% less
than for 1997, while the allowance for credit losses at year end was $7,350,000,
or 1.18% of loans, compared to $7,016,000, or 1.26% of loans at December 31,
1997. The Company's capital position has provided the opportunity to institute a
leverage program whereby available-for-sale securities are purchased with
borrowings from the Federal Home Loan Bank of Atlanta. This and the Company's
share repurchase program have resulted in higher returns on average equity.
Overall balance sheet growth was also positive.
. Total loans grew by 11.7% in 1998, representing an increase of $65,519,000 to
$624,412,000 from $558,893,000 at year-end 1997.
. Total assets increased 19.8% to $1,343,471,000 at December 31, 1998 from
$1,121,333,000 at December 31, 1997.
. Deposits increased 11.9% or $101,560,000 to close the year at $954,571,000, up
from $853,011,000 at year-end 1997. Growth in noninterest-bearing demand
deposits of 23.1%, or $34,943,000, helped the Company maintain its 1998 net
interest margin.
The dividend payout ratio (dividends per share divided by diluted net income per
share) increased to 38% in 1998 from 35% in 1997 and 33% in 1996. The Board of
Directors' desire to return a higher percentage of earnings to the shareholders
has resulted in an increase in per share dividends from $0.39 in 1996 to $0.47
in 1997 and $0.63 in 1998.
CHANGES IN DILUTED NET INCOME PER COMMON SHARE*
1997 to 1998 1996 to 1997
Prior Year Diluted Net Income Per Share $ 1.34 $ 1.18
Change from differences in:
Net interest income 0.34 0.31
Provision for credit losses 0.03 (0.05)
Noninterest income 0.20 0.18
Noninterest expenses (0.31) (0.28)
Income taxes 0.04 0.01
Shares outstanding 0.02 (0.01)
-------- --------
Total 0.32 0.16
-------- --------
DILUTED NET INCOME PER SHARE $ 1.66 $ 1.34
======== ========
* Adjusted to give retroactive effect to a 2-for-1 stock split declared on
January 28, 1998.
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10
Historical Trends in Financial Data 1994-1998(1)
(Dollars in thousands, except per share data)
1998 1997 1996 1995 1994
RESULTS OF OPERATIONS:
Interest Income $ 84,272 $ 75,565 $ 66,621 $ 62,115 $ 51,578
Interest Expense 38,749 34,486 30,233 29,342 21,496
Net Interest Income 45,523 41,079 36,388 32,773 30,082
Provision for Credit Losses 552 986 308 180 212
Net Interest Income after Provision
for Credit Losses 44,971 40,093 36,080 32,593 29,870
Noninterest Income 12,123 9,132 6,547 4,478 4,189
Noninterest Expenses 34,053 29,442 25,344 22,424 21,462
Income before Taxes 23,041 19,783 17,283 14,647 12,597
Income Tax Expense 6,936 6,588 5,789 4,653 3,694
Net Income 16,105 13,195 11,494 9,994 8,903
PER SHARE DATA:
Basic Earnings Per Share $ 1.67 $ 1.35 $ 1.18 $ 1.05 $ 0.95
Diluted Earnings Per Share 1.66 1.34 1.18 1.04 0.94
Dividends Declared 0.63 0.47 0.39 0.32 0.27
Book Value (at year end) 11.57 10.77 9.85 9.02 7.86
FINANCIAL CONDITION (at year end):
Assets $1,343,471 $1,121,333 $ 978,595 $ 876,203 $ 830,834
Deposits 954,571 853,011 806,341 743,592 700,340
Loans 624,412 558,893 523,166 492,540 457,052
Securities 613,579 464,734 361,806 290,786 309,622
Stockholders' Equity 110,937 104,675 96,581 86,941 73,766
PERFORMANCE RATIOS (for the year):
Return on Average Assets 1.36% 1.28% 1.27% 1.18% 1.14%
Return of Average Equity 15.02 13.25 12.81 12.37 12.24
Net Interest Margin 4.40 4.42 4.45 4.32 4.31
Net Overhead Ratio(2) 45.70 49.16 47.94 51.20 53.90
Dividends Declared Per Share
to Diluted Net Income Per Share 37.95 35.07 33.05 30.77 28.72
CAPITAL AND CREDIT QUALITY RATIOS:
Average Equity to Average Assets 9.02% 9.65% 9.90% 9.57% 9.28%
Allowance for Credit Losses to Loans 1.18 1.26 1.22 1.34 1.46
Nonperforming Assets to Total Assets 0.13 0.26 0.48 0.11 0.24
Net Charge-offs to Average Loans 0.04 0.07 0.10 0.05 0.06
(1) Adjusted to give retroactive effect to 2-for-1 stock splits declared on
March 29, 1995 and January 28, 1998 and, except with respect to dividends
declared per share because the acquisition of Annapolis Bancshares, Inc. on
August 29, 1996 was accounted for as a pooling of interests.
(2) Net operating expenses (noninterest expenses less noninterest income) as a
percentage of tax-equivalent net interest income. See Operating Expense
Performance on page 16.
11
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Sandy Spring Bancorp and Subsidiaries
Consolidated Average Balances, Yields and Rates(1)
(Dollars in thousands and tax-equivalents)
1998 1997 1996
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Loans:(2)
Real Estate(3) $ 475,999 $42,638 8.96% $ 440,980 $40,239 9.12% $417,161 $37,866 9.08%
Consumer 38,750 3,476 8.97 31,967 2,877 9.00 28,600 2,682 9.38
Commercial 76,867 7,114 9.25 71,191 6,854 9.63 62,999 6,125 9.72
Tax exempt 0 0 0.00 20 2 10.00 169 16 9.65
---------- ------- ---------- ------- -------- -------
Total loans 591,616 53,228 9.00 544,158 49,972 9.18 508,929 46,689 9.17
Securities:
Taxable 403,562 26,434 6.55 329,319 20,931 6.36 250,763 15,062 6.01
Nontaxable 92,168 6,733 7.31 68,198 5,053 7.41 65,847 5,005 7.60
---------- ------- ---------- ------- -------- -------
Total securities 495,730 33,167 6.69 397,517 25,984 6.54 316,610 20,067 6.34
Interest-bearing
deposits with banks 2,088 100 4.79 1,398 74 5.29 3,585 187 5.22
Federal funds sold 22,278 1,181 5.30 22,938 1,196 5.21 25,319 1,342 5.30
---------- ------- ---------- ------- -------- -------
TOTAL EARNING
ASSETS 1,111,712 87,676 7.89 966,011 77,226 7.99 854,443 68,285 7.99
Less: allowance for
credit losses (7,298) (6,478) (6,668)
Cash and due from banks 30,061 28,602 25,923
Premises and equipment,
net 28,326 24,133 20,559
Other assets 25,445 19,277 12,305
---------- ---------- --------
Total Assets $1,188,246 $1,031,545 $906,562
========== ========== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 117,217 $ 2,605 2.22% $ 103,474 $ 2,496 2.41% $ 96,940 $ 2,529 2.61%
Regular savings
deposits 94,900 2,392 2.52 92,911 2,593 2.79 95,636 2,695 2.82
Money market
savings deposits 154,677 4,844 3.13 157,716 5,150 3.27 149,358 4,935 3.30
Time deposits 366,604 19,353 5.28 347,496 18,461 5.31 324,842 17,730 5.46
---------- ------- ---------- ------- -------- -------
Total interest-
bearing deposits 733,398 29,194 3.98 701,597 28,700 4.09 666,776 27,889 4.18
Short-term borrowings 173,354 8,722 5.03 105,544 5,438 5.15 41,963 2,021 4.83
Long-term borrowings 15,140 833 5.50 5,047 348 6.90 4,854 323 6.65
---------- ------- ---------- ------- -------- -------
TOTAL INTEREST-
BEARING
LIABILITIES 921,892 38,749 4.20 812,188 34,486 4.25 713,593 30,233 4.24
------- ---- ------- ---- ------- ----
Net Interest Income
and Spread $48,927 3.69% $42,740 3.74% $38,052 3.75%
======= ==== ======= ==== ======= ====
Noninterest-bearing
demand deposits 154,866 117,148 100,127
Other liabilities 4,254 2,628 3,132
Stockholders' equity 107,234 99,581 89,710
---------- ---------- --------
Total liabilities
and stockholders'
equity $1,188,246 $1,031,545 $906,562
========== ========== ========
Interest income/
earning assets 7.89% 7.99% 7.99%
Interest expense/
earning assets 3.49 3.57 3.54
---- ---- ----
Net Interest Margin 4.40% 4.42% 4.45%
==== ==== ====
(1) Income and yields are presented on a tax-equivalent basis using the
applicable federal income tax rate.
(2) Non-accrual loans are included in the average balances.
(3) Includes residential mortgage loans held for sale.
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12
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Management's Discussion and Analysis
NET INTEREST INCOME
The largest source of operating revenue is net interest income, which is the
difference between the interest earned on earning assets and the interest
expense paid on interest-bearing liabilities.
Net interest income for 1998 was $45,523,000, representing an increase of
$4,444,000 or 10.8% from 1997. A 12.9% rise was achieved in 1997, compared to
1996, resulting in net interest income of $41,079,000.
For purposes of discussion and analysis, the interest earned on tax-exempt
assets is adjusted to an amount comparable to interest subject to normal income
taxes. The result is referred to as tax-equivalent interest income and
tax-equivalent net interest income.
The analysis of net interest income performance presented in the "Consolidated
Average Balances, Yields and Rates" table shows that a slight decline in net
interest margin has been accompanied by the substantial increase in average
earning assets over the three year period. As a result, the Company was able to
achieve tax-equivalent net interest income of $48,927,000 in 1998, representing
a 14.5% annual rise, and $42,740,000 in 1997, representing a 12.3% annual rise,
preceded by $38,052,000 in 1996. The table below shows that the increases in net
interest income during 1998 and 1997, compared to each prior year, were
primarily attributable to increases in the volumes of earning assets.
EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
1998 vs. 1997 1997 vs. 1996
Increase Due to Change Increase Due to Change
or in Average:(1)(2) or in Average:(1)(2)
(In thousands and tax-equivalent) (Decrease) Volume Rate (Decrease) Volume Rate
Interest income from earning assets:
Loans $ 3,256 $ 4,286 $(1,030) $3,283 $3,236 $ 47
Taxable securities 5,503 4,843 660 5,869 4,949 920
Nontaxable securities 1,680 1,752 (72) 48 176 (128)
Other investments 11 2 9 (259) (239) (20)
------- ------
Total Interest Income 10,450 11,500 (1,050) 8,941 8,922 19
Interest expense on funding of earning assets:
Interest-bearing demand deposits 109 315 (206) (33) 164 (197)
Regular savings deposits (201) 55 (256) (102) (76) (26)
Money market savings deposits (306) (98) (208) 215 274 (59)
Time deposits 892 1,010 (118) 731 1,211 (480)
Borrowings 3,769 3,955 (186) 3,442 3,332 110
------- ------
Total Interest Expense 4,263 4,615 (352) 4,253 4,189 64
------- ------- ------- ------ ------ -----
Net Interest Income $ 6,187 $ 6,885 $ (698) $4,688 $4,733 $ (45)
======= ======= ======= ====== ====== =====
(1) Variances are computed on a line-by-line basis and are non-additive.
(2) Combined rate/volume variances, a third element of the calculation, are
allocated to the volume and rate variances based on their relative size.
Interest Income
The Company's tax-equivalent interest income increased by 13.5% or $10,450,000
in 1998, compared to 1997. The improvement in tax-equivalent interest income was
primarily the result of a 15.1% or $145,701,000 increase in average earning
assets, partially offset by the effect of a small 10 basis point decline in
average yield earned on those funds.
During 1998, average loans, yielding 9.00%, rose 8.7% to $591,616,000. Average
real estate loans, especially commercial mortgages, were responsible for most of
the increase in total loans. As a percentage of average earning assets, average
loans decreased to 53.2% in 1998 from 56.3% in 1997. Average total securities,
yielding 6.69%, increased 24.7% to $495,730,000 in 1998. They represented 44.6%
of average earning assets, as compared to 41.2% in 1997. A large part of the
growth in the investment portfolio during 1998 was funded by Federal Home Loan
Bank of Atlanta advances under a leverage program. The leverage program had the
effect of reducing the net interest margin by 29 basis points while, under
management's plans, increasing the return on average equity. Interest income
earned on the investment portfolio accounted for 30.9% of gross revenue in 1998,
versus 28.7% in 1997.
Tax-equivalent interest income increased by 13.1% or $8,941,000 in 1997,
compared to 1996, due to higher average earning assets.
13
Management's Discussion and Analysis
Interest Expense
Interest expense increased 12.4% or $4,263,000 in 1998, compared to 1997. The
change was attributable to 13.5% or $109,704,000 greater average
interest-bearing liabilities. The average rate paid for those funds declined
slightly, to 4.20% from 4.25%.
Most of the rise in interest-bearing funds was generated by growth of
$67,810,000 in average short-term borrowings. The leverage program, in which the
Company borrows from the Federal Home Loan Bank of Atlanta and invests the funds
in available-for-sale securities at a positive interest rate spread, was the
primary driver behind the increase in short-term borrowings. Average repurchase
agreements, another category of short-term borrowings which is associated
primarily with cash management services to business clients, also increased
significantly. Total interest-bearing deposits rose $31,801,000 or 4.5%. Time
deposits and interest-bearing demand deposits were responsible for most of the
increase.
Interest expense increased 14.1% or $4,253,000 in 1997, as compared to 1996, due
to a 13.8% or $98,595,000 higher average interest-bearing liabilities, while
approximately the same average rate was paid for those funds.
Interest Rate Performance
Consistent interest rate performance has been achieved for the years 1996
through 1998. Over this period, the net interest spread has declined 6 basis
points and the net interest margin has declined 5 basis points. The net interest
margin for 1998 of 4.40% was essentially level with 4.42% achieved in 1997. The
interest rate spread declined 5 basis points to 3.69% in 1998 from 3.74% in
1997.
During 1998, the treasury yield curve was relatively flat. This reflects an
expectation in the market of moderate economic growth with low inflation. There
was also an overall decline in interest rates across the yield curve in 1998, as
compared to 1997. The shape of the yield curve and the overall level of interest
rates were influenced in 1998 by the monetary policies and actions of the
Federal Reserve Board and economic instability abroad. See Market Risk
Management on page 21.
Competitive pricing pressures led to decreased loan spreads in 1998, especially
for commercial loans. The change in mix of earning assets due to the leverage
program, under which securities are purchased at reduced spreads, as discussed
above, also caused some reduction in the interest rate spread during 1998.
The mix of interest-bearing liabilities also changed, as the Company pursued new
deposits in competitive markets. This was achieved primarily through
premium-rate time deposit promotions through part of 1998. Time deposits, with
their relatively high rates, tend to drive up the overall cost of funds.
Management was able to substantially maintain its interest rate performance,
despite the influences discussed above, by:
. Investing in a significantly higher level of state tax exempt securities,
responding aggressively to a change in the state tax laws. This action had the
effect of increasing the tax-equivalent yield on earning assets.
. Altering the mix of overall average deposits through 32.2%, or $37,718,000,
growth in average noninterest-bearing deposits to $154,866,000 in 1998. This
resulted primarily from management's emphasis on growing these deposits
through sales and business development. These deposits increase the net
interest margin by providing zero interest cost funding for interest earning
assets.
. Reducing savings and transaction account rates in 1998 to more closely reflect
market rate conditions.
NONINTEREST INCOME
Total noninterest income was $12,123,000 in 1998, a 32.8% or $2,991,000 rise
from 1997. An increase of 39.5% or $2,585,000 was posted for 1997 versus 1996.
The Company has made it an organizational priority to grow and diversify its
sources of noninterest income and, as a result, has reported significant
increases in revenue from these sources. Increases over the past two years
primarily reflect increased gains on mortgage sales, higher securities gains,
and increases in return check charges, trust revenue, and electronic transaction
fees.
Securities gains were $853,000 in 1998, an increase of $216,000 from the 1997
amount. Securities gains of $637,000 were recorded in 1997. During 1998, the
sale of available-for-sale debt securities generated net losses of $17,000,
while net gains of $419,000 were realized on sales of available-for-sale equity
securities and net gains of $439,000 from securities calls. Also, there were
trading securities gains of $12,000 in 1998.
- --------------------------------------------------------------------------------
14
Management's Discussion and Analysis
Sales of available-for-sale debt securities generated $408,000 in net losses for
1997, compared with $836,000 in net gains on sales of available-for-sale equity
securities and $209,000 in net gains from securities calls.
Service charges on deposit accounts increased 18.8% in 1998 and 14.8% in 1997.
The majority of the change in both years was attributable to increases in return
check charges from higher transaction volume and a larger customer base while
the fee charged remained the same. Commercial and small business account fees
also posted significant increases in 1998 and in 1997.
Gains on mortgage sales increased $1,309,000 or 105.1% for 1998, when compared
to 1997. Sandy Spring Mortgage Corporation, the Company's mortgage banking
subsidiary, made significant strides in volume of business and related gains on
sales while existing in a very fragmented and competitive market. During 1998,
origination volumes and gains on sales increased as a result of the low interest
rate environment. This environment fueled a strong refinance market in 1998 and,
as the year progressed, a strong purchase market. During 1998, Sandy Spring
Mortgage Corporation achieved gains of $2,555,000 for the year from sales of
$196,589,000. These results compare to gains of $1,246,000 achieved on sales of
$80,233,000 for 1997 and gains of $825,000 from sales of $57,282,000 for 1996.
Trust income amounted to $1,412,000 for 1998, an increase of $224,000 or 18.9%
over 1997. Revenues of $1,188,000 for 1997 represented an increase of $245,000
or 26.0% over 1996. These results primarily reflect higher fees attributable to
growth in assets under management.
Other income increased $601,000 or 22.6% to $3,259,000 for 1998, compared to
$2,658,000 for 1997. The largest category of increase during 1998 was debit card
fees, which posted an increase of $195,000 or 61.7%. The majority of the
remainder of the increase in other income was spread among various fee-based
products, such as investment product fees, ATM access fees, and gains on sales
of student loans.
The rise in other income was $873,000 or 48.9% in 1997, compared to 1996,
attributable primarily to higher debit card, investment product, and ATM access
fees.
NONINTEREST EXPENSES
Noninterest expenses increased $4,611,000 or 15.7% in 1998 over 1997 and
$4,098,000 or 16.2% in 1997 over 1996.
Excluding 1998's nonrecurring year 2000 compliance expense of $479,000, the rate
of increase was 14.0% in 1998, as compared to 1997. Excluding 1996's
nonrecurring merger expenses of $724,000, the rate of increase was 19.6% in
1997, as compared to 1996.
The major categories of noninterest expenses include salaries and employee
benefits, occupancy and equipment expenses, marketing expenses, outside data
services costs, and other noninterest expenses associated with the day-to-day
operations of the Company.
Cost containment has been achieved in part through management's ongoing efforts
to reduce costs through investment in technology and competitive bidding.
Electronic banking has been emphasized, as associated technology costs have
decreased significantly. Sandy Spring's electronic banking includes automated
teller machines, Automated Clearing House and electronic fund transfers and home
personal computer banking. These are efficient service delivery channels that
provide time/place convenience to customers for routine business after banking
hours.
Salaries and employee benefits, the largest component of noninterest expenses,
increased $2,998,000 or 17.8% in 1998 and $2,377,000 or 16.5% in 1997. Increases
in both years reflected growth in staff, modest branch expansion, and higher
incentive compensation costs. One new branch opened in 1998 and two in 1997.
Efficient staffing is a goal of management. Staff additions are made carefully
with a view toward achieving gains in financial performance.
Average full-time equivalent employees reached 417 in 1998, representing an
increase of 5.6% from 395 in 1997, which was 14.2% above 346 recorded for 1996.
Despite the increase in staff, the ratio of net income per average full-time
equivalent employee was $39,000 in 1998, representing an improvement from
$33,000 recorded for both 1997 and 1996.
In 1998, occupancy expense rose 17.6% or $414,000. The rate of increase was
13.1% in 1997. Higher occupancy expense in both years primarily reflected
increases in rental expenses related to increases in leased premises and the
opening of a new administrative and training center.
Equipment expenses for 1998 were 26.4% or $583,000 above 1997. The change was
due in large part to higher depreciation expenses, including accelerated
depreciation related to obsolescence of equipment that is not year 2000
compliant. Equipment expenses remained relatively unchanged in 1997, as compared
to 1996.
15
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Management's Discussion and Analysis
Marketing expense declined in 1998 after showing a modest gain in 1997. Name
recognition, image awareness, and market research have been major goals of the
Company's advertising campaigns.
Outside data services costs rose 17.5% or $223,000 in 1998. The increase was
14.8% or $164,000 in 1997, as compared to 1996. Increases in both years
reflected growth in the Company's accounts, related data processing costs and
increased use of products offered.
Other noninterest expenses of $6,164,000 were $636,000 or 11.5% above 1997. The
categories of expenses showing the greatest increase were consulting services,
personal property taxes and correspondent bank service charges, along with
generalized expense increases related to growth of the bank and development of
its services. The rise in other expenses was 25.8% for 1997, due in significant
part to increased amortization of intangibles relating to an acquisition of
deposits, and to higher communications costs and professional fees.
Operating Expense Performance
Management views the net overhead ratio as an important measure of overall
operating expense performance and cost management. The ratio represents the
level of net operating expenses (noninterest expenses less noninterest income)
as a percentage of tax-equivalent net interest income. Lower ratios indicate
improved productivity. The computation excludes significant non-operating items
of noninterest expense and income. These items include year 2000 compliance
costs, merger expenses, and gains and losses on sales of securities and other
real estate owned.
During 1998, the Company's net overhead ratio was 45.7%, as compared to ratios
of 49.2% achieved in 1997 and 47.9% in 1996. Ratios less than 50% are considered
desirable.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $6,936,000 in 1998, compared with $6,588,000 in
1997 and $5,789,000 in 1996. The Company's effective tax rate for 1998 was
30.1%, compared with 33.3% in 1997 and 33.5% in 1996. Improvement in the
effective tax rate for 1998 versus 1997 was due principally to the higher level
of certain U.S. Government obligations that are exempt from state income tax.
Management aggressively altered the mix of securities to take advantage of a
change in state tax laws, which became fully implemented for 1998.
BALANCE SHEET ANALYSIS
The Company's size, as measured by total assets, reached $1,343,471,000
at December 31, 1998 from $1,121,333,000 at December 31, 1997, for an increase
of 19.8% or $222,138,000. By comparison, the growth rate for 1997 was 14.6%, an
increase of $142,738,000.
Earning assets showed a 20.7% rate of increase in 1998, to $1,256,839,000 at
December 31, 1998 from $1,041,720,000 at the prior year end, for a rise of
$215,119,000.
Loans
Real estate mortgage loans rose 7.9% to $424,690,000 in 1998. Included in this
category are commercial mortgages, which increased 15.1% during 1998 and totaled
$210,079,000 at December 31, 1998. The Bank's commercial mortgages consist in
large part of owner occupied properties where an established banking
relationship exists. In addition, there were significant commercial mortgages at
December 31, 1998 on investment properties for warehouse, retail, and office
space. These credits generally involved established properties with a history of
occupancy and cash flow. Home equity lines and home equity loans, types of real
estate mortgages that permit homeowners to access their equity to make purchases
and possibly receive an income tax deduction on the interest, decreased 8.4%
during 1998 to $61,847,000 at year end. The Company has a significant percentage
of equity line customers who pay off their balances each month, resulting in a
moderation of equity line outstandings. One to four family residential loans, up
6.2% in 1998, represented $135,778,000 of the real estate mortgage portfolio at
December 31, 1998. Other real estate mortgages, including primarily residential
lot loans, collectively totaled $16,986,000 at December 31, 1998, an 8.1%
increase from the prior year end.
Real estate construction loans increased 24.7% to $71,948,000 from 1997,
attributable to a substantial rise in commercial construction activity. The
Company conducts its commercial construction lending in the markets it knows and
understands, works selectively with local, top-quality builders and developers,
and requires substantial equity from its borrowers.
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16
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Management's Discussion and Analysis
The Sandy Spring Mortgage Corporation conducts a mortgage banking operation,
originating and selling residential real estate mortgage loans and originating
and servicing residential construction loans. The Bank, in order to build its
own portfolio, is an investor in loans originated by its mortgage banking
subsidiary.
The consumer loan portfolio rose 38.5% to $48,515,000 at December 31, 1998.
Consumer lending is an important component of the full service community banking
business the Company conducts. Most of the increase in consumer loans in 1998
was due to an increase in auto loans resulting from a favorably priced product
offering in the second half of the year. The Company also developed increased
marine loan financings in 1998. Finally, aggregate credit card and consumer line
of credit outstandings increased slightly, reflecting a customer base that tends
to pay off its balances monthly.
The Company places significant emphasis on commercial lending. A majority of the
commercial loan portfolio represents loans to a diverse cross-section of small
and mid-size local businesses, many of which are established customers of the
Company. These types of banking relationships are a natural business for the
Company, which is experienced in serving and lending to this market segment and
has knowledge of the marketplace through its community roots and involvement.
Commercial loans increased 9.3% to $79,259,000 in 1998.
ANALYSIS OF LOANS
The following table presents the trends in the composition of the loan portfolio
over the previous five years. December 31,
(In thousands) 1998 1997 1996 1995 1994
Real estate-mortgage(1) $424,690 $393,661 $376,205 $363,927 $345,547
Real estate-construction(2) 71,948 57,687 47,654 41,725 31,853
Consumer 48,515 35,021 30,813 28,762 28,892
Commercial 79,259 72,511 68,467 57,718 50,224
Tax exempt 0 13 27 408 536
-------- -------- -------- -------- --------
TOTAL LOANS $624,412 $558,893 $523,166 $492,540 $457,052
======== ======== ======== ======== ========
(1) Consists of fixed and adjustable rate first and second home mortgage loans,
residential lot loans, home equity lines of credit and commercial mortgage
loans.
(2) Includes both residential and commercial properties.
Securities
The investment portfolio, consisting of available-for-sale, held-to-maturity and
other equity securities, increased 32.0% or $148,845,000 to $613,579,000 at
December 31, 1998 from $464,734,000 at December 31, 1997. The Company's overall
investment goal is to maximize earnings while maintaining liquidity in
securities having minimal credit risk. The types and maturities of securities
purchased are primarily based on the Company's current and projected liquidity
and interest rate sensitivity positions.
Upon adoption of Statement of Financial Accounting Standards No. 133 on July 1,
1998, as permitted by the Statement, the Bank made a one-time transfer of
$51,515,000 of held-to-maturity securities into the available-for-sale category.
A majority of the growth in available-for-sale (excluding the one-time transfer
from held-to-maturity) and total securities during 1998 was funded by Federal
Home Loan Bank of Atlanta advances under the leverage program. These fundings
designated for the leverage program totaled $184,700,000 in 1998, as compared to
$94,379,000 in 1997. In addition, repurchase agreements, which are short-term
borrowings, increased 28.1% or $16,349,000, providing additional funds for the
purchase of investments. During 1998, funds provided by the growth in total
deposits far exceeded the amount needed to fund growth in total loans and
residential mortgage loans held for sale.
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17
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Management's Discussion and Analysis
ANALYSIS OF SECURITIES
The composition of securities at December 31 for each of the latest three fiscal
years was:
(In thousands) 1998 1997 1996
AVAILABLE-FOR-SALE:(1)
U.S. Treasury $ 0 $ 3,003 $ 26,940
U.S. Agency 441,775 288,901 145,275
State and municipal 60,957 31,818 26,628
Corporate debt obligations 0 1,496 1,483
Mortgage-backed securities(2) 30,547 14,315 31,876
Marketable equity securities 6,363 4,725 2,221
-------- -------- --------
Total 539,642 344,258 234,423
HELD-TO-MATURITY AND OTHER EQUITY:
U.S. Agency 3,346 32,294 42,932
State and municipal 52,111 49,371 37,152
Mortgage-backed securities(2) 0 27,326 42,188
Other equity securities 18,480 11,485 5,111
-------- -------- --------
Total 73,937 120,476 127,383
-------- -------- --------
TOTAL SECURITIES(3) $613,579 $464,734 $361,806
======== ======== ========
(1) At estimated fair value.
(2) Issued by a federal agency or secured by U.S. Agency collateral.
(3) The outstanding balance of no single issuer, except for U.S. Government and
U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1998, 1997 or 1996.
Maturities and weighted average yields for debt securities available-for-sale
and held-to-maturity at December 31, 1998 are shown below:
Years to Maturity
Within Over 1 Over 5 Over
1 through 5 through 10 10
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield TOTAL YIELD
INVESTMENTS AVAILABLE-
FOR-SALE:(1)
U.S. Agency $10,995 4.81% $163,284 5.70% $256,283 6.18% $11,021 5.98% $441,583 5.96%
State and municipal(2) 10,001 6.67 27,956 7.29 9,412 6.87 11,959 7.16 59,328 7.10
Mortgage-backed Securities 9,125 6.19 11,574 6.03 3,818 6.49 5,945 6.40 30,462 6.22
------- -------- -------- ------- --------
Total Debt Securities $30,121 5.85% $202,814 5.94% $269,513 6.21% $28,925 6.55% 531,373 6.10%
======= ======== ======== =======
Marketable equity securities 4,794
--------
TOTAL INVESTMENTS
AVAILABLE-FOR-SALE $536,167
========
INVESTMENTS HELD-
TO-MATURITY:
U.S. Agency $ 347 5.39% $ 2,999 5.84% $ 0 0% $ 0 0% $ 3,346 5.80%
State and municipal(2) 0 0 1,958 7.03 12,921 6.91 37,232 6.78 52,111 6.82
------- -------- -------- ------- --------
TOTAL INVESTMENTS
HELD-TO-MATURITY $ 347 5.39% $ 4,957 6.31% $ 12,921 6.91% $37,232 6.78% $ 55,457 6.76%
======= ======== ======== ======= ========
(1) Amounts shown at amortized cost without market value adjustments.
(2) The yields on state and municipal securities have been calculated on a
tax-equivalent basis using the applicable federal income tax rate.
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18
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Management's Discussion and Analysis
Other Earning Assets
Residential mortgage loans held for sale increased 92.4% or $6,162,000 in 1998.
Originations and sales of these loans, and the resulting gains on sales,
increased substantially during 1998 under favorable interest rate conditions.
The aggregate of federal funds sold and interest-bearing deposits with banks
decreased 47.3% or $5,407,000 in 1998.
Deposits and Borrowings
Total deposits were $954,571,000 at December 31, 1998, increasing $101,560,000
or 11.9% from $853,011,000 at December 31, 1997. Growth was achieved in
noninterest-bearing demand deposits, up $34,943,000 or 23.1%, attributable to
increases in all types of checking balances: personal, small business and
commercial. Interest-bearing deposits increased $66,617,000 or 9.5%, due in
large part to higher time deposits under $100,000. The increase in time deposits
under $100,000 primarily reflected a special product offering of a 30-month time
deposit with a premium rate. Total borrowings increased by $112,374,000 or 70.7%
to $271,392,000 at December 31, 1998 from $159,018,000 at December 31, 1997. The
increase was attributable in large part to short-term Federal Home Loan Bank of
Atlanta advances in connection with the leverage program and, to a lesser
degree, to increased repurchase agreements related primarily to cash management
services for commercial clients.
CAPITAL MANAGEMENT
Management monitors historical and projected earnings, dividends and asset
growth, as well as risks associated with the various types of on- and
off-balance sheet assets and liabilities, in order to determine the appropriate
capital levels. During 1998, stockholders' equity increased 6.0% or $6,262,000
to $110,937,000 at December 31, 1998, from $104,675,000 at December 31, 1997.
The increase for 1998 was due to internal capital generation, which is net
earnings less dividends, and proceeds from external capital generation.
Repurchases of shares under the Company's repurchase program offset part of
these increases, and maintained capital at levels that management believes are
appropriate. The ratio of average equity to average assets was 9.02% for 1998,
as compared to 9.65% for 1997 and 9.90% for 1996.
As a percentage of average equity, the internal capital generation rate was 9.4%
for 1998, which compares favorably with rates of 8.6% for 1997 and 8.7% for
1996. Internal capital generation contributed $10,044,000 to stockholders'
equity in 1998, $8,592,000 in 1997 and $7,776,000 in 1996. External capital
formation from dividend reinvestment and, to a much lesser degree, the exercise
of options and warrants, totaled $2,556,000 in 1998. The equivalent of 227,586
shares were purchased by the Company under its stock repurchase program during
1998 at an aggregate purchase price of $6,614,000.
Bank holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. The
guidelines are commonly known as Risk-Based Capital Guidelines. On December 31,
1998, the Company exceeded all applicable capital requirements, with a total
risk-based capital ratio of 15.67%, a Tier I risk-based capital ratio of 14.58%,
and a leverage ratio of 8.50%. As of December 31, 1998, the Bank also met the
criteria for classification as a "well-capitalized" institution under the prompt
corrective action rules of the Federal Deposit Insurance Act. Designation as a
well-capitalized institution under these regulations is not a recommendation or
endorsement of the Company or the Bank by federal bank regulators. Additional
information regarding regulatory capital ratios is included in Note 20 of the
Notes to the Consolidated Financial Statements.
CREDIT RISK MANAGEMENT
The allowance for credit losses is a valuation reserve established by management
in an amount it deems adequate to provide for losses in the loan portfolio.
Management assesses the adequacy of the allowance for credit losses based upon a
number of factors including, among others: lending risks associated with growth
and entry into new markets, loss allocations for specific problem credits, the
level of the allowance to nonperforming loans, historical loss experience,
economic conditions, portfolio trends and credit concentrations, the year 2000
issue, changes in the size and character of the loan portfolio, and management's
judgment with respect to current and expected economic conditions and their
impact on the existing loan portfolio.
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19
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Management's Discussion and Analysis
The allowance for credit losses is increased by provisions for credit losses
charged to expense. Charge-offs of loan amounts determined by management to be
uncollectible or impaired decrease the allowance, and recoveries of previous
charge-offs are added to the allowance. The Company makes provisions for credit
losses in amounts necessary to maintain the allowance for credit losses at the
level the Company deems appropriate. The provision was $552,000 in 1998,
compared with $986,000 in 1997, a decrease of $434,000. Net charge-offs of
$218,000, $361,000, and $514,000 were recorded in 1998, 1997 and 1996. The ratio
of net charge-offs to average loans was 0.04% in 1998, compared to 0.07% in
1997. Although the provision exceeded net charge-offs in 1998, the ratio of the
allowance for credit losses to year-end loans decreased over the period. At
December 31, 1998, the allowance for credit losses was $7,350,000, or 1.18% of
total loans, compared to $7,016,000, or 1.26% of total loans, at December 31,
1997.
In establishing the level of the allowance for December 31, 1998, management
considered a number of factors, including the increased risk inherent in
commercial loans, which are viewed as entailing greater risk than certain other
categories of loans, charge-off history, and the growth of the loan portfolio
over the last several years. Management also considered other factors, including
the levels of types of credits, such as residential mortgage loans, deemed to be
of relatively low risk. Management conducted a similar analysis in order to
determine the appropriate allowance as of December 31, 1997.
At December 31, 1998, total nonperforming loans were $1,801,000, or 0.29% of
total loans, compared to $2,672,000, or 0.48% of total loans, at December 31,
1997. All categories of nonperforming loans declined during 1998. The allowance
for credit losses represented 408% of nonperforming loans at December 31, 1998,
compared to coverage of 263% a year earlier, with the change attributable to the
decrease in nonperforming loans. Significant variation in the coverage ratio may
occur from period to period because the amount of nonperforming loans depends
largely on the condition of a small number of individual loans and borrowers
relative to the total loan portfolio. There was no other real estate owned at
December 31, 1998, compared to $296,000 at December 31, 1997. The balance of
impaired loans was $773,000 at December 31, 1998, compared to $890,000 at
December 31, 1997, and there were no reserves against those loans at either year
end.
The Company's borrowers are concentrated in four counties in the State of
Maryland. Real estate secured credits represented 79.5% of total loans at
December 31, 1998 and 80.8% at December 31, 1997. In the past, the Company has
experienced low loss levels, especially in real estate secured loans, through
various economic cycles and conditions. The risk of the Company's real estate
loan concentration is mitigated by the nature of real estate collateral, the
Bank's substantial experience in most of its markets and its lending practices.
ANALYSIS OF CREDIT RISK
Activity in the allowance for credit losses for the five years ended December 31
is shown below:
(Dollars in thousands) 1998 1997 1996 1995 1994
Balance, January 1 $ 7,016 $ 6,391 $ 6,597 $ 6,663 $ 6,681
Provision for credit losses 552 986 308 180 211
Loan charge-offs:
Real estate--mortgage (40) (60) (3) (33) (135)
Real estate--construction 0 (79) 0 0 0
Consumer (176) (167) (143) (209) (32)
Commercial (119) (235) (469) (507) (342)
------- ------- ------- ------- -------
Total charge-offs (335) (541) (615) (749) (509)
Loan recoveries:
Real estate--mortgage 0 0 0 153 16
Real estate--construction 0 0 0 0 0
Consumer 35 39 37 30 40
Commercial 82 141 64 320 224
------- ------- ------- ------- -------
Total recoveries 117 180 101 503 280
------- ------- ------- ------- -------
Net charge-offs (218) (361) (514) (246) (229)
------- ------- ------- ------- -------
BALANCE, DECEMBER 31 $ 7,350 $ 7,016 $ 6,391 $ 6,597 $ 6,663
======= ======= ======= ======= =======
Net charge-offs to average loans 0.04% 0.07% 0.10% 0.05% 0.06%
Allowance to total loans 1.18% 1.26% 1.22% 1.34% 1.46%
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20
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Management's Discussion and Analysis
The following table presents nonperforming assets at year end for the last five
years:
December 31,
(Dollars in thousands) 1998 1997 1996 1995 1994
Non-accrual loans(1) $ 832 $ 890 $1,291 $ 590 $ 866
Loans 90 days past due 965 1,764 3,337 272 832
Restructured loans 4 18 27 36 44
------ ------ ------ ------ ------
Total Nonperforming Loans(2)(3) 1,801 2,672 4,655 898 1,742
Other real estate owned, net 0 296 0 47 277
------ ------ ------ ------ ------
TOTAL NONPERFORMING ASSETS $1,801 $2,968 $4,655 $ 734 $2,019
====== ====== ====== ====== ======
Nonperforming loans to total loans 0.29% 0.48% 0.89% 0.18% 0.38%
Allowance for loan losses to
nonperforming loans 408% 263% 137% 735% 382%
Nonperforming assets to total assets 0.13% 0.26% 0.48% 0.11% 0.24%
(1) Gross interest income that would have been recorded in 1998 if non-accrual
loans had been current and in accordance with their original terms was
$145,000, while interest actually recorded on such loans was $92,000.
(2) Performing loans considered potential problem loans, as defined and
identified by management, amounted to $9,894,000 at December 31, 1998.
Although these are loans where known information about the borrowers'
possible credit problems causes management to have doubts as to the
borrowers' ability to comply with the present loan repayment terms, most are
well collateralized and are not believed to present significant risk of
loss. Loans classified for regulatory purposes not included in nonperforming
loans consist only of "other loans especially mentioned" and do not, in
management's opinion, represent or result from trends or uncertainties
reasonably expected to materially impact future operating results, liquidity
or capital resources or represent material credits where known information
about the borrowers' possible credit problems causes management to have
doubts as to the borrowers' ability to comply with the loan repayment terms.
(3) Installment loans past due by 90 days or more are included in the totals for
the "Loans 90 days past due" line in the table above and were not
significant in amount at December 31, 1998 and 1997.
MARKET RISK MANAGEMENT
The Company's net income is largely dependent on the Bank's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders' equity.
The Bank's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 1998, is presented in
the following table. As indicated in the note to the table, the data was based
in part on assumptions that are regularly reviewed for propriety. The
accompanying analysis indicates a moderate level of interest rate risk based on
the Bank's having approximately equal amounts of rate sensitive assets and rate
sensitive liabilities subject to maturity or repricing within a one-year period
from December 31, 1998 (termed GAP analysis). By managing to approximately match
the dollar amount of assets and liabilities whose interest rates are subject to
change, the Bank seeks to control the risk of a pronounced adverse impact on its
revenues (net interest income) occurring due to a decline in the net interest
margin. While the Bank's senior management, through its Asset Liability
Management Committee (ALCO), has a preference for maintaining a moderate level
of interest rate risk as measured by the repricing GAP, the Company's interest
rate risk policies are guided by results of simulation analysis which takes into
account more factors than does GAP analysis. The ALCO analyzes balance sheet,
income statement, and margin trends monthly. A detailed quarterly interest rate
risk profile is performed for ALCO and is reviewed with the Board of Directors.
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21
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Management's Discussion and Analysis
The following GAP analysis schedule sets out the time frames from December 31,
1998, in which the Bank's assets and liabilities are subject to repricing:
0-90 91-365 Over 1-3 Over 3-5 Over 5
(Dollars in thousands) Days Days Years Years Years
RATE SENSITIVE ASSETS (RSA):
Loans $198,153 $ 95,537 $187,110 $ 66,448 $ 77,164
Taxable securities 181,391 107,788 112,332 68,816 31,813
Nontaxable securities 3,570 8,805 22,105 14,345 62,614
Other investments 18,281 0 0 0 0
-------- -------- -------- -------- --------
Total RSA 401,395 212,130 321,547 149,609 171,591
RATE SENSITIVE LIABILITIES (RSL):
Interest-bearing demand deposits 4,000 12,000 32,002 30,668 49,336
Regular savings deposits 4,929 14,785 39,397 37,697 1,639
Money market savings deposits 12,771 38,312 98,990 0 0
Time deposits 92,085 152,179 125,700 17,061 5,120
Short-term borrowings and other RSL 228,145 21,022 11,018 12,020 0
-------- -------- -------- -------- --------
Total RSL 341,930 238,298 307,107 97,446 56,095
-------- -------- -------- -------- --------
CUMULATIVE GAP* $ 59,465 $ 33,297 $ 47,737 $ 99,900 $215,396
======== ======== ======== ======== ========
As a Percent of Total Assets 4.43% 2.48% 3.55% 7.44% 16.03%
CUMULATIVE RSA TO RSL 1.17 1.06 1.05 1.10 1.21
* This analysis is based upon a number of significant assumptions including the
following: Loans are repaid/rescheduled by contractual maturity and
repricings. Securities, except mortgage-backed securities, are repaid
according to contractual maturity adjusted for call features. Mortgage-backed
security repricing is adjusted for estimated early paydowns. Interest-bearing
demand, regular savings, and money market savings deposits are estimated to
exhibit some rate sensitivity based on management's analysis of deposit
withdrawals. Time deposits are shown in the table based on contractual
maturity.
The Bank's Board of Directors has established a comprehensive interest rate risk
management policy, which is administered by ALCO. The policy establishes limits
of risk, which are quantitative measures of the percentage change in net
interest income and equity capital resulting from a hypothetical change of plus
or minus 200 basis points in U.S. Treasury interest rates for maturities from
one day to thirty years. By employing simulation analysis through use of a
computer model, the Bank intends to effectively manage the potential adverse
impacts that changing interest rates can have on the institution's 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. As of December 31, 1998,
the Bank had the following estimated sensitivity profile for net interest income
and the fair value of equity:
Immediate Change in Rates
+200 basis points -200 basis points Policy Limit
% Change in Net Interest Income (5.08)% (4.14)% +/-(15)%
% Change in Fair Value of Equity (0.73)% (24.33)% +/-(25)%
As with any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by the Company. When
interest rates change, actual movements in different categories of
interest-earning assets and interest-bearing liabilities, loan prepayments, and
withdrawals of time and other deposits, may deviate significantly from
assumptions used in the model. Finally, the methodology does not measure or
reflect the impact that higher rates may have on adjustable-rate loan customers'
ability to service their debts, or the impact of rate changes on demand for loan
or deposit products.
In addition to the potential adverse impact that changing interest rates may
have on the Bank's net interest margin and operating results, potential adverse
impacts on liquidity can occur as a result of changes in the estimated cash
flows from investment, loan and deposit portfolios. The Bank manages this
inherent risk by maintaining a large portfolio of available-for-sale investments
as well as secondary sources of liquidity from Federal Home Loan Bank of Atlanta
advances and other bank borrowing arrangements.
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22
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Management's Discussion and Analysis
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital, or the sale of highly marketable
assets such as residential mortgage loans. The Company's liquidity position,
considering both internal and external sources available, exceeded anticipated
short- and long-term needs at December 31, 1998. Core deposits, considered to be
stable funding sources and defined to include all deposits except time deposits
of $100,000 or more, equaled 69.8% of total earning assets at December 31, 1998.
In addition, substantial amortizing residential mortgage loans, maturities,
calls and paydowns of securities, deposit growth and earnings contribute a flow
of funds available to meet liquidity requirements. In assessing liquidity,
management considers operating requirements, the seasonality of deposit flows,
investment, loan and deposit maturities, expected fundings of loans and deposit
withdrawals, and the market values of available-for-sale investments, so that
sufficient funds are available on short notice to meet obligations as they arise
and to ensure that the Company is able to pursue new business opportunities.
The Bank's liquidity position is measured monthly, looking forward ninety days.
Liquid assets, defined to include cash on hand, federal funds sold,
interest-bearing deposits with banks, loans held for sale, investments
held-to-maturity maturing within ninety days and investments available-for-sale
maturing within one year, net of projected loan growth over the following ninety
days, totaled $259,994,000 or 19.4% of total assets at December 31, 1998. This
represents a liquidity position, net of estimated potential cash outflows for
deposits and borrowings, of $180,722,000 or 13.5% of total assets, which
exceeded management's target range.
The primary external source of liquidity available is a line of credit for
$247,300,000 with the Federal Home Loan Bank of Atlanta, of which $196,020,000
was outstanding at December 31, 1998. Other external sources of liquidity
available to the Company in the form of lines of credit granted by correspondent
banks totaled $26,000,000 at December 31, 1998 against which there were no
outstandings. Core deposits increased by $87,615,000 during 1998, while loans
grew by $65,519,000, so that borrowed funds were not required to support loan
growth. As disclosed previously in the discussion of securities, Federal Home
Loan Bank of Atlanta advances increased in 1998 due to management's desire to
leverage the balance sheet to enhance the return on stockholders' equity.
The Company's time deposits of $100,000 or more represented 8.1% of total
deposits at December 31, 1998 and are shown by maturity in the table below.
Months to Maturity
3 or Over 3 Over 6 Over
(In thousands) less to 6 to 12 12 TOTAL
Time deposits--$100,000 or more $20,186 $14,330 $10,846 $31,550 $76,912
YEAR 2000 ISSUE
Many computer programs now in use have not been designed to properly recognize
years after 1999. If not corrected, these programs could fail or create
erroneous results. This Year 2000 ("Y2K") issue affects the entire banking
industry because of its reliance on computers and other equipment that use
computer chips. This problem is not limited to computer systems. Y2K issues may
affect every system that has an embedded microchip, such as automated teller
machines, elevators, vaults, heating, air conditioning, and security systems.
Y2K issues may also affect the operation of third parties with whom the Company
does business such as vendors, suppliers, utility companies, and customers.
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23
Management's Discussion and Analysis
Risks Related To Year 2000
The Y2K issue poses certain risks to the Company and its operations. Some of
these risks are present because the Company purchases technology and information
system applications from other parties who also face Y2K challenges.
Other risks are specific to the banking industry.
Commercial banks may experience a deposit base reduction if customers withdraw
significant amounts of cash in anticipation of Y2K. Such a deposit contraction
could cause an increase in interest rates, require the Company to locate
alternative sources of funding or sell investment securities or other liquid
assets to meet liquidity needs, and may reduce future earnings. To reduce
customer concerns regarding Y2K noncompliance, a customer awareness plan has
been implemented which is directed towards making deposit customers
knowledgeable about the Company's Y2K compliance efforts.
The Company lends significant amounts to businesses and individuals in its
marketing areas. If these borrowers are adversely affected by Y2K problems, they
may not be able to repay their loans in a timely manner. This increased credit
risk could adversely affect the Company's financial performance. In an effort to
identify any potential loan loss risk because of borrower Y2K noncompliance, all
loan customers with loans or commitments exceeding $500,000 were surveyed using
a Y2K questionnaire. The Company is in the process of analyzing the results and
any risks identified. The Company has also modified its loan underwriting
controls to ensure that potential borrowers are carefully evaluated for Y2K
compliance before any new loan is approved. The Company's operations, like those
of many other companies, can be adversely affected by Y2K triggered failures
which may be experienced by third parties upon whom the Company relies for
processing transactions. The Company has identified all critical third-party
service providers and vendors and is monitoring their Y2K compliance programs.
The Company's primary supplier of data processing services has adopted a Y2K
compliance plan which includes a timetable for making changes necessary to be
able to provide services in the Y2K. That supplier has provided written
assurances to the Company regarding its progress toward Y2K compliance and has
been examined for Y2K readiness by federal bank examiners.
The Company's operations may also be adversely affected by Y2K related failures
of third party providers of electricity, telecommunications services and other
utility services. Failures in these areas could impact the Company's ability to
conduct business. The Y2K compliance of these providers is largely beyond the
control of the Company.
The Company's State of Readiness
The Company has created a task force to establish a Y2K plan to prevent or
mitigate the adverse effects of the Y2K issue on the Company and its customers.
Goals of the Y2K plan include identifying Y2K risks of information systems and
equipment used by the Company, informing customers of Y2K issues and risks,
establishing a contingency plan for operating if Y2K issues cause important
systems or equipment to fail, implementing changes necessary to achieve Y2K
compliance, and verifying that these changes are effective. The Comptroller of
Currency has examined the Company's Y2K compliance plan and the Company's
progress in implementation. In addition, the Board of Directors is carefully
monitoring progress under the plan on a monthly basis.
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24
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Management's Discussion and Analysis
The Company's plan to address the Y2K issues involves several phases, described
below:
. Awareness--In this phase, the Company's Y2K plan and project team were
established, the overall Y2K approach was identified, compliance standards
were defined, and responsibility for corrective action was assigned. This
phase has been completed.
. Assessment--During this phase, the Company gathered and analyzed
information to determine the size and the impact of the Y2K problem and
then made decisions to modify, reengineer, or replace existing systems and
programs. This phase has been completed.
. Renovation--This phase involves obtaining and implementing upgraded
software applications provided by the Company's vendors, modifying system
codes, reengineering Y2K vulnerable systems and programs, developing
bridges for systems which cannot be reengineered, and changing files and
databases as necessary. The tasks to be performed in this phase are 70%
complete. All system renovations are expected to be completed by March 31,
1999.
. Validation--During the validation phase, the Company is testing systems and
software for Y2K compliance in an effort to identify and correct any errors
that may be identified in the renovation phase. Thirty-five percent of
system validation has been performed and the remainder is expected to be
completed by June 30, 1999.
. Implementation--In this phase all new and revised systems will be
implemented, data exchange issues will be resolved, and back up and
recovery plans will be developed. This phase is in process and will be
completed by June 30, 1999.
Based on information developed to date, Company management believes that the
cost of remediation will not be material to the Company's business, operations,
liquidity, capital resources, or financial condition. The Company expects that
its total cash outlay for Y2K compliance in 1998 and future years will be less
than $1.1 million. This amount includes approximately $675,000 in costs of
software and equipment upgrades or replacements and approximately $400,000 in
consulting, legal and temporary staffing costs. Approximately $250,000 of these
costs were incurred in 1998. The Company expects that the total effect on net
income, after tax deductions, of these Y2K expenditures and the accelerated
write-off of replaced software and equipment will be less than $800,000, and
that the effect on net income through December 31, 1998 of these costs was
approximately $300,000 or 2% of net income for the year. These amounts do not
include allocations of the salary and other costs of the Bank's regular
personnel. The Company is funding Y2K expenditures through continuing
operations.
In the event that some or all systems experience failure, the Company has
developed a detailed contingency plan. This plan calls for manual processing of
bank transactions at designated locations supported by backup power systems.
Delays in processing transactions would result in the event that the Company is
forced to process transactions manually. These delays could disrupt normal
business activities of the Company and its customers.
Forward Looking Statements
The discussion above regarding issues associated with Y2K includes certain
"forward looking statements." The Company's ability to predict results or
effects of issues related to the Y2K issue is inherently uncertain and is
subject to factors that may cause actual results to differ materially from those
projected. Factors that could affect the actual results include the following:
. The possibility that protection procedures, contingency plans, and remediation
efforts will not operate as intended;
. The Company's failure to timely or completely identify all software or
hardware applications requiring remediation;
. Unexpected costs;
. The uncertainty associated with the impact of Y2K issues on the banking
industry and the Company's customers, vendors, and others with whom it
conducts business;
. The general economy.
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25
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Sandy Spring Bancorp and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
1998 1997
ASSETS
Cash and due from banks $ 43,616 $ 37,644
Federal funds sold 4,582 11,036
Interest-bearing deposits with banks 1,434 387
Residential mortgage loans held for sale 12,832 6,670
Investments available-for-sale (at fair value) 539,642 344,258
Investments held-to-maturity--fair value
of $55,764 (1998) and $110,437 (1997) 55,457 108,991
Other equity securities 18,480 11,485
Total loans (net of unearned income) 624,412 558,893
Less: Allowance for credit losses (7,350) (7,016)
---------- ----------
Net loans 617,062 551,877
Premises and equipment, net 27,920 28,468
Accrued interest receivable 11,719 9,908
Other real estate owned 0 296
Other assets 10,727 10,313
---------- ----------
TOTAL ASSETS $1,343,471 $1,121,333
========== ==========
LIABILITIES
Noninterest-bearing deposits $ 185,900 $ 150,957
Interest-bearing deposits 768,671 702,054
---------- ----------
Total deposits 954,571 853,011
Short-term borrowings 257,026 144,426
Long-term borrowings 14,366 14,592
Accrued interest and other liabilities 6,571 4,629
---------- ----------
TOTAL LIABILITIES 1,232,534 1,016,658
STOCKHOLDERS' EQUITY
Common stock--par value $1.00; shares
authorized 15,000,000; shares issued
and outstanding 9,586,021 (1998) and
4,862,574 (1997) 9,586 4,862
Surplus 22,913 31,695
Retained earnings 76,305 66,261
Accumulated other comprehensive income 2,133 1,857
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 110,937 104,675
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,343,471 $1,121,333
========== ==========
See Notes to Consolidated Financial Statements.
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26
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Sandy Spring Bancorp and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
Years Ended December 31,
1998 1997 1996
Interest income:
Interest and fees on loans $52,538 $49,658 $46,491
Interest on loans held for sale 690 320 196
Interest on deposits with banks 100 74 187
Interest and dividends on securities:
Taxable 25,355 20,931 15,062
Exempt from federal income taxes 4,408 3,386 3,343
Interest on federal funds sold 1,181 1,196 1,342
------- ------- -------
TOTAL INTEREST INCOME 84,272 75,565 66,621
Interest expense:
Interest on deposits 29,194 28,700 27,889
Interest on short-term borrowings 8,722 5,438 2,021
Interest on long-term borrowings 833 348 323
------- ------- -------
TOTAL INTEREST EXPENSE 38,749 34,486 30,233
------- ------- -------
NET INTEREST INCOME 45,523 41,079 36,388
Provision for Credit Losses 552 986 308
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 44,971 40,093 36,080
Noninterest Income:
Securities gains 853 637 30
Service charges on deposit accounts 4,044 3,403 2,964
Gains on mortgage sales 2,555 1,246 825
Trust income 1,412 1,188 943
Other income 3,259 2,658 1,785
------- ------- -------
TOTAL NONINTEREST INCOME 12,123 9,132 6,547
Noninterest Expenses:
Salaries and employee benefits 19,822 16,824 14,447
Occupancy expense of premises 2,769 2,355 2,082
Equipment expenses 2,791 2,208 2,165
Marketing 1,011 1,254 1,145
Outside data services 1,496 1,273 1,109
Other expenses 6,164 5,528 4,396
------- ------- -------
TOTAL NONINTEREST EXPENSES 34,053 29,442 25,344
------- ------- -------
Income before income taxes 23,041 19,783 17,283
Income tax expense 6,936 6,588 5,789
------- ------- -------
NET INCOME $16,105 $13,195 $11,494
======= ======= =======
BASIC NET INCOME PER COMMON SHARE* $ 1.67 $ 1.35 $ 1.18
DILUTED NET INCOME PER COMMON SHARE* $ 1.66 $ 1.34 $ 1.18
* Per share data have been adjusted to give retroactive effect to a 2-for-1
stock split declared on January 28, 1998.
See Notes to Consolidated Financial Statements.
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27
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Sandy Spring Bancorp and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
1998 1997 1996
Cash Flows from Operating Activities:
Net Income $ 16,105 $ 13,195 $ 11,494
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,709 2,197 1,791
Provision for credit losses 552 986 308
Deferred income taxes (126) 105 152
Origination of loans held for sale (200,196) (77,672) (59,717)
Proceeds from sales of loans held for sale 196,589 80,233 57,282
Gains on sales of loans held for sale (2,555) (1,246) (825)
Purchases of trading securities (9,376) 0 0
Proceeds from sales of trading securities 9,388 0 0
Securities gains (853) (637) (30)
Net change in:
Accrued interest receivable (1,811) (1,991) (1,423)
Accrued income taxes (1,092) (469) 202
Other accrued expenses 3,033 1,012 (1,457)
Other assets (651) (3,927) (72)
Other--net (106) (515) 2,409
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,610 11,271 10,114
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing
deposits with banks (1,047) 474 (13)
Purchases of investments held-to-maturity (27,215) (22,897) (36,941)
Purchases of other equity securities (10,318) (7,622) (304)
Purchases of investments available-for-sale (758,292) (456,306) (159,085)
Proceeds from sales of investments available-for-sale 20,933 86,005 19,392
Proceeds from maturities, calls and principal payments
of investments held-to-maturity 29,313 36,380 28,815
Proceeds from maturities, calls and principal payments
of investments available-for-sale 594,352 262,918 76,935
Redemption of Federal Home Loan Bank of Atlanta stock 3,324 1,248 140
Proceeds from sales of loans 0 0 291
Proceeds from sales of other real estate owned 745 500 442
Net increase in loans receivable (65,912) (36,457) (31,127)
Net funds received in branch purchase 0 0 17,181
Expenditures for premises and equipment (1,790) (10,689) (2,031)
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (215,907) (146,446) (86,305)
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 53,759 40,224 25,484
Net increase in time and other deposits 47,801 6,446 18,571
Net increase in short-term borrowings 101,400 77,458 29,864
Proceeds from long-term borrowings 11,000 10,000 1,800
Retirement of long-term borrowings (26) (28) (31)
Net decrease in balance due to banks 0 0 (1,733)
Common stock purchased and retired (6,614) (3,857) 0
Proceeds from issuance of common stock 2,556 2,038 1,741
Dividends paid (6,061) (4,603) (3,763)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 203,815 127,678 71,933
--------- --------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (482) (7,497) (4,258)
Cash and Cash Equivalents at Beginning of Year 48,680 56,177 60,435
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR* $ 48,198 $ 48,680 $ 56,177
========= ========= =========
Supplemental Disclosures:
Interest payments $ 38,277 $ 33,421 $ 31,157
Income tax payments 7,819 7,491 5,441
Noncash Investing Activities:
Transfers from loans to other real estate owned 393 730 210
Reclassification of borrowings from long-term to
short-term 11,200 200 2,100
Investment transfers from held-to-maturity to
available-for-sale 51,515 0 0
* Cash and cash equivalents include those amounts under the captions "Cash and
due from banks" and "Federal funds sold" on the Consolidated Balance Sheets.
See Notes to Consolidated Financial Statements.
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28
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Sandy Spring Bancorp and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share data)
Accumulated Other Total
Common Retained Comprehensive Stockholders'
Stock Surplus Earnings Income Equity
BALANCES AT JANUARY 1, 1996 $ 4,821 $31,814 $49,893 $ 413 $ 86,941
Comprehensive Income:
Net income 11,494 11,494
Other comprehensive income, net of tax
(unrealized gains on securities of $12, net
of reclassification adjustment for losses of $111) 123 123
--------
Total comprehensive income 11,617
Cash dividends*--$0.39 per share (3,620) (3,620)
Cash dividends by pooled bank prior to acquisition (98) (98)
Common stock issued pursuant to:
Profit sharing plan--11,020 shares 11 353 364
Incentive stock option plan--31,565 shares 31 67 98
Dividend reinvestment and stock
purchase plan--35,273 shares 35 1,194 1,229
Exercise of warrants of pooled bank--3,755 shares 4 46 50
------- ------- ------- ------ --------
BALANCES AT DECEMBER 31, 1996 4,902 33,474 57,669 536 96,581
Comprehensive Income:
Net income 13,195 13,195
Other comprehensive income, net of tax
(unrealized gains on securities of $615, net
of reclassification adjustment for losses of $706) 1,321 1,321
--------
Total comprehensive income 14,516
Cash dividends*--$0.47 per share (4,603) (4,603)
Common stock issued pursuant to:
Profit sharing plan--9,358 shares 9 283 292
Dividend reinvestment and stock purchase
plan--43,327 shares 43 1,703 1,746
Stock repurchases--92,300 shares (92) (3,765) (3,857)
------- ------- ------- ------ --------
BALANCES AT DECEMBER 31, 1997 4,862 31,695 66,261 1,857 104,675
Increase in beginning shares as a result of 2-for-1
stock split in the form of a stock dividend 4,863 (4,863) 0
Comprehensive Income:
Net income 16,105 16,105
Other comprehensive income, net of tax
(unrealized gains on securities of $162, net
of reclassification adjustment for losses of $114) 276 276
--------
Total comprehensive income 16,381
Cash dividends*--$0.63 per share (6,061) (6,061)
Common stock issued pursuant to:
Incentive stock option plan--4,502 shares 5 43 48
Dividend reinvestment and stock purchase
plan--76,447 shares 76 2,382 2,458
Stock repurchases--227,586 shares (228) (6,386) (6,614)
Exercise of warrants of pooled bank--7,510 shares 8 42 50
------- ------- ------- ------ --------
BALANCES AT DECEMBER 31, 1998 $ 9,586 $22,913 $76,305 $2,133 $110,937
======= ======= ======= ====== ========
* Per share data have been adjusted to give retroactive effect to a 2-for-1
stock split declared on January 28, 1998.
See Notes to Consolidated Financial Statements.
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29
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Sandy Sprung Bancorp and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company, which includes Sandy
Spring Bancorp, its wholly owned subsidiary, Sandy Spring National Bank of
Maryland (the Bank) and its subsidiaries, Sandy Spring Insurance Corporation and
Sandy Spring Mortgage Corporation, conform to generally accepted accounting
principles and to general practice within the banking industry. Certain
reclassifications have been made to amounts previously reported to conform with
the classifications made in 1998. The following is a summary of the more
significant accounting policies:
Nature of Operations
Through its subsidiary, the Company conducts a full-service commercial banking,
mortgage banking and trust business. Services to individuals and businesses
include accepting deposits, extending real estate, consumer and commercial loans
and lines of credit, safe deposit boxes, and personal trust services. The
Company operates in four Maryland counties, Montgomery, Howard, Prince George's
and Anne Arundel, and continues to show a concentration in loans secured by
residential and commercial real estate. The Company has a small presence, based
on revenue, in the annuity business through an insurance agency subsidiary.
Policy for Consolidation
The consolidated financial statements include the accounts of Sandy Spring
Bancorp and its subsidiaries. Consolidation has resulted in the elimination of
all significant intercompany balances and transactions.
The financial statements of Sandy Spring Bancorp (Parent Only) include its
investment in the Bank under the equity method of accounting.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Residential Mortgage Loans Held for Sale
The Company engages in sales of residential mortgage loans. Those loans are
originated and sold by Sandy Spring Mortgage Corporation. Loans held for sale
are carried at the lower of aggregate cost or fair value. Gains and losses on
sales of these loans are recorded as a component of noninterest income in the
Consolidated Statements of Income.
When the Company retains the servicing rights to collect and remit principal and
interest payments, manage escrow account matters and handle borrower
relationships on mortgage loans sold, resulting service fee income is included
in noninterest income. The Company's current practices are to sell all loans
servicing released and, therefore, it has no intangible asset recorded for the
value of such servicing.
Trading Securities
Trading securities are carried at market value. Changes in fair value, as well
as realized gains and losses, are recorded as securities gains or losses.
Investments Available-for-Sale
Marketable equity securities and debt securities not classified as
held-to-maturity or trading are classified as available-for-sale. Securities
available-for-sale are acquired as part of the Company's asset/liability
management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities
available-for-sale are carried at fair value, with unrealized gains or losses
based on the difference between amortized cost and fair value reported as a
separate component of stockholders' equity, net of deferred tax. Realized gains
and losses, using the specific identification method, are included as a separate
component of noninterest income. Related interest and dividends are included in
interest income. Premiums on covered call options are deferred and included in
income upon option expiration or included in the computation of realized gains
upon option exercise.
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30
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Investments Held-to-Maturity and Other Equity Securities
Investments held-to-maturity are those securities which the Company has the
ability and positive intent to hold until maturity. Securities so classified at
time of purchase are recorded at cost. The carrying values of securities
held-to-maturity are adjusted for premium amortization and discount accretion.
Other equity securities represent Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock, which are considered restricted as to marketability.
Loans
Loans are stated at their principal balance outstanding net of any deferred fees
and costs. Interest income on loans is accrued at the contractual rate based on
the principal outstanding. The Company places loans, except for consumer loans,
on non-accrual when any portion of the principal or interest is ninety days past
due and collateral is insufficient to discharge the debt in full. Interest
accrual may also be discontinued earlier if, in management's opinion, collection
is unlikely. Generally, installment loans are not placed on non-accrual, but are
charged off when they are five months past due.
Loans are considered impaired when, based on current information, it is probable
that the Company will not collect all principal and interest payments according
to contractual terms. Generally, loans are considered impaired once principal or
interest payments become ninety days or more past due and they are placed on
nonaccrual. Management also considers the financial condition of the borrower,
cash flows of the loan and the value of the related collateral. Impaired loans
do not include large groups of smaller balance homogeneous loans such as
residential real estate and consumer installment loans which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (ninety days or
less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company's impairment on such loans is measured by reference to
the fair value of the collateral. Interest income on impaired loans is
recognized on the cash basis.
Allowance for Credit Losses
The allowance for credit losses represents an amount which, in management's
judgement, will be adequate to absorb probable losses on existing loans and
other extensions of credit that may become uncollectible. The adequacy of the
allowance for credit losses is determined through careful and continuous review
and evaluation of the loan portfolio and involves the balancing of a number of
factors to establish a prudent level. Among the factors considered are lending
risks associated with growth and entry into new markets, loss allocations for
specific nonperforming credits, the level of the allowance to nonperforming
loans, historical loss experience, economic conditions, portfolio trends and
credit concentrations, the year 2000 issue, changes in the size and character of
the loan portfolio, and management's judgment with respect to current and
expected economic conditions and their impact on the existing loan portfolio.
Allowances for impaired loans are generally determined based on collateral
values. Loans deemed uncollectible are charged against, while recoveries are
credited to, the allowance. Management adjusts the level of the allowance
through the provision for credit losses, which is recorded as a current period
operating expense.
Management believes that the allowance for credit losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, and independent consultants engaged by the Bank,
periodically review the Bank's loan portfolio and allowance for credit losses.
Such review may result in recognition of additions to the allowance based on
their judgements of information available to them at the time of their
examination.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization computed using the straight-line method. Premises and equipment are
depreciated over the useful lives of the assets, except for leasehold
improvements which are amortized over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. The costs of
major renewals and betterments are capitalized, while the costs of ordinary
maintenance and repairs are expensed as incurred.
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31
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Other Real Estate Owned (OREO)
OREO comprises properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at the lower of cost or fair value at the
date acquired. Losses arising at the time of acquisition of such properties are
charged against the allowance for credit losses. Subsequent write-downs that may
be required are added to a valuation reserve. Gains and losses realized from the
sale of OREO, as well as valuation adjustments, are included in noninterest
income. Expenses of operation are included in noninterest expense.
Income Taxes
Income tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Under the liability method,
deferred income taxes are determined based on the differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (FASB 130) was issued and establishes standards for
reporting and displaying comprehensive income and its components. FASB 130
requires comprehensive income and its components, as recognized under the
accounting standards, to be displayed with the same prominence as other
financial statements. The Company adopted this disclosure standard, as required,
in the first quarter of 1998, including reclassification of the prior periods.
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information" (FASB 131), also issued in June 1997,
establishes new standards for reporting information about operating segments in
annual and interim financial statements. The standard also requires descriptive
information about the way the operating segments are determined, the products
and services provided by the segments and the nature of differences between
reportable years beginning after December 15, 1997. Adoption in interim
financial statements is not required until the year after initial adoption,
however comparative prior period information is required. Operating segments are
defined under the standard based on the availability and utilization of discrete
financial information as well as the necessity for this discrete financial
information to meet certain quantitative thresholds. Management believes that it
has no components that qualify as an operating segment under FASB 131 for the
year ended December 31, 1998.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pension
and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88
and 106" (FASB 132). This statement revises employers' disclosures about pension
and other postretirement benefit plans, but does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis and eliminates certain disclosures that are no longer as useful as they
were when Statements 87, 88 and 106 were issued. This statement is effective for
fiscal years beginning after December 15, 1997. Restatement of disclosures for
previous periods provided for comparative purposes is required unless the
information is not readily available, in which case the notes to the financial
statements should include all available information and a description of the
information not available. These disclosure requirements have been adopted for
the year ended December 31, 1998 and had no impact on the Company's financial
condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FASB 133). FASB 133 establishes new accounting and
reporting requirements for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. The standard
requires all derivatives to be measured at fair value and recognized as either
assets or liabilities in the balance sheet. Under certain conditions, a
derivative may be specifically designated as a hedge. Accounting for the changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. Adoption of the standard is required for the
Company's December 31, 2000 financial statements with early adoption allowed as
of the beginning of any quarter after June 30, 1998. Management elected to adopt
the standard July 1, 1998. Adoption did not result in a material financial
impact. The Company had no derivative instruments at December 31, 1998.
- --------------------------------------------------------------------------------
32
NOTE 2--CASH AND DUE FROM BANKS
Regulation D of the Federal Reserve Act requires that banks maintain reserve
balances with the Federal Reserve Bank based principally on the type and amount
of their deposits. At its option, the Bank maintains additional balances to
compensate for clearing and safekeeping services. The average daily balance
maintained in 1998 was $8,178,000 and in 1997 was $19,739,000.
NOTE 3--INVESTMENTS AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of investments available-for-sale
at December 31 are as follows:
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
U.S. Treasury $ 0 $ 0 $ 0 $ 0
U.S. Agency 441,583 1,150 (958) 441,775
State and municipal 59,328 1,637 (8) 60,957
Corporate debt obligations 0 0 0 0
Mortgage-backed securities 30,462 108 (23) 30,547
-------- -------- -------- --------
Total Debt Securities 531,373 2,895 (989) 533,279
Marketable equity securities 4,794 1,670 (101) 6,363
-------- -------- -------- --------
Total Investments
Available-for-Sale $536,167 $ 4,565 $ (1,090) $539,642
======== ======== ======== ========
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
U.S. Treasury $ 2,992 $ 11 $ 0 $ 3,003
U.S. Agency 288,273 802 (174) 288,901
State and municipal 31,241 577 0 31,818
Corporate debt obligations 1,500 0 (4) 1,496
Mortgage-backed securities 14,269 191 (145) 14,315
-------- -------- -------- --------
Total Debt Securities 338,275 1,581 (323) 339,533
Marketable equity securities 2,593 2,132 0 4,725
-------- -------- -------- --------
Total Investments
Available-for-Sale $340,868 $ 3,713 $ (323) $344,258
======== ======== ======== ========
The amortized cost and estimated fair values of debt securities
available-for-sale at December 31, 1998 and 1997 by contractual maturity, except
mortgage-backed securities for which an average life is used, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
1998 1997
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
Due in one year or less $ 30,110 $ 30,222 $ 43,237 $ 43,294
Due after one year through five years 202,826 203,835 172,780 173,305
Due after five years through ten years 269,513 269,937 100,074 100,449
Due after ten years 28,924 29,285 22,184 22,485
-------- -------- -------- --------
Total Debt Securities Available-for-Sale $531,373 $533,279 $338,275 $339,533
======== ======== ======== ========
Sale of investments available-for-sale during 1998, 1997 and 1996 resulted in
the following:
(In thousands) 1998 1997 1996
Proceeds $20,933 $86,005 $19,392
Gross gains 476 998 97
Gross losses 74 570 73
At December 31, 1998 and 1997, investments available-for-sale with a carrying
value of $211,579,000 and $84,962,000, respectively, were pledged as collateral
for certain government deposits and for other purposes as required or permitted
by law. The outstanding balance of no single issuer, except for U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 1998 and 1997.
The Company has had covered call options which are subject to disclosure as
derivative financial instruments in accordance with Statements of Financial
Accounting Standards Nos. 119 and 133. These options are incident to an
established plan to enhance the yield on certain of the Bank's equity securities
in the available-for-sale portfolio. The option contracts do not exhibit credit
risk since the Bank is holder of the premiums paid. Market risk is mitigated by
the fact that the option price is stated in the contract and that the underlying
securities held have a significant unrealized gain position.
- --------------------------------------------------------------------------------
33
- --------------------------------------------------------------------------------
The Company had covered call options at the beginning of 1998 which expired
during 1998, resulting in total premiums of $7,000. The Company had no covered
call options at December 31, 1998.
At December 31, 1997, the Bank had outstanding covered call option contracts for
3,000 shares of Sallie Mae common stock, with expiration dates of January 17,
1998 (1,000 shares), and April 18, 1998 (2,000 shares). Premiums received on
these options amounted to $35,000. The contracts have an average option price of
$156.67 per share and the underlying securities have a quoted market price of
$139.13 per share. Excluding option premiums, these Sallie Mae holdings had an
unrealized gain at December 31, 1997 of $1,004,000 ($138.83 per share).
Generally, the option contracts have a term of approximately one to four months.
During 1997, the Bank received total option premiums of $70,000.
NOTE 4--INVESTMENTS HELD-TO-MATURITY AND OTHER EQUITY SECURITIES
The amortized cost and estimated fair values of investments held-to-maturity at
December 31 are as follows:
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
U.S. Agency $ 3,346 $ 0 $ (3) $ 3,343
State and municipal 52,111 963 (653) 52,421
Mortgage-backed securities 0 0 0 0
-------- -------- -------- --------
Total Investments
Held-to-Maturity $ 55,457 $ 963 $ (656) $ 55,764
======== ======== ======== ========
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
U.S. Agency $ 32,294 $ 235 $ (54) $ 32,475
State and municipal 49,371 1,032 (40) 50,363
Mortgage-backed securities 27,326 304 (31) 27,599
-------- -------- -------- --------
Total Investments
Held-to-Maturity $108,991 $ 1,571 $ (125) $110,437
======== ======== ======== ========
Upon adoption of FASB 133 on July 1, 1998, as permitted by the Statement, the
Bank made a one-time transfer of $51,515,000 of held-to-maturity securities into
the available-for-sale category with net unrealized losses of $177,000.
The amortized cost and estimated fair values of debt securities held-to-maturity
at December 31 by contractual maturity, except mortgage-backed securities for
which an average life is used, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
1998 1997
Estimated Estimated
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
Due in one year or less $ 347 $ 347 $ 14,247 $ 14,267
Due after one year through five years 4,957 5,007 52,507 53,327
Due after five years through ten years 12,921 13,322 18,197 18,454
Due after ten years 37,232 37,088 24,040 24,389
-------- -------- -------- --------
Total Debt Securities Held-to-Maturity $ 55,457 $ 55,764 $108,991 $110,437
======== ======== ======== ========
At December 31, 1998 and 1997, investments held-to-maturity with a book value of
$2,998,000 and $10,132,000, respectively, were pledged as collateral for certain
government deposits and for other purposes as required or permitted by law. The
outstanding balance of no single issuer, except for U.S. Government and U.S.
Government Agency securities, exceeded ten percent of stockholders' equity at
December 31, 1998 or 1997.
Other equity securities at December 31, are as follows:
(In thousands) 1998 1997
Federal Reserve Bank stock $ 1,826 $ 1,826
Federal Home Loan Bank stock 16,654 9,659
------- -------
$18,480 $11,485
======= =======
- --------------------------------------------------------------------------------
34
NOTE 5--LOANS
Major loan categories at December 31 are presented below:
(In thousands) 1998 1997
Real estate--mortgage $ 424,690 $ 393,661
Real estate--construction 71,948 57,687
Consumer 48,515 35,021
Commercial 79,259 72,511
Tax exempt 0 13
--------- ---------
Total Loans 624,412 558,893
Less: Allowance for credit losses (7,350) (7,016)
--------- ---------
NET LOANS $ 617,062 $ 551,877
========= =========
Loan fees amounting to $352,000 (1998), $316,000 (1997) and $254,000 (1996) were
included in interest and fees on loans. The servicing portfolio of mortgage
loans sold totaled $59,138,000 at December 31, 1998 and $78,344,000 at December
31, 1997. Escrow balances relating to the servicing portfolio amounted to
$558,000 and $663,000 at December 31, 1998 and 1997, respectively.
Activity in the allowance for credit losses for the preceding three years ended
December 31 is shown below:
(In thousands) 1998 1997 1996
Balance at beginning of year $ 7,016 $ 6,391 $ 6,597
Provision for credit losses 552 986 308
Loan charge-offs (335) (541) (615)
Loan recoveries 117 180 101
------- ------- -------
Net charge-offs (218) (361) (514)
------- ------- -------
BALANCE AT END OF YEAR $ 7,350 $ 7,016 $ 6,391
======= ======= =======
Information with respect to impaired loans at December 31, 1998 and 1997 and for
the respective years ended is as follows:
(In thousands) 1998 1997
Impaired loans with a valuation allowance $ 0 $ 0
Impaired loans without a valuation allowance 773 890
------ ------
Total impaired loans $ 773 $ 890
====== ======
Allowance for credit losses related to impaired loans $ 0 $ 0
Allowance for credit losses related to other than impaired loans 7,350 7,016
------ ------
Total allowance for credit losses $7,350 $7,016
====== ======
Average impaired loans for the year $ 920 $1,101
Interest income on impaired loans recognized on the cash basis $ 0 $ 0
- --------------------------------------------------------------------------------
35
- --------------------------------------------------------------------------------
NOTE 6--PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
(In thousands) 1998 1997
Land $ 8,776 $ 8,745
Buildings and leasehold improvements 19,124 18,358
Equipment 13,834 13,233
-------- --------
Total 41,734 40,336
Less: Accumulated depreciation and amortization (13,814) (11,868)
-------- --------
NET PREMISES AND EQUIPMENT $ 27,920 $ 28,468
======== ========
Depreciation and amortization expense for premises and equipment amounted to
$2,338,000 for 1998, $1,825,000 for 1997 and $1,726,000 for 1996.
Total rental expenses (net of rental income) for premises and equipment for the
three years ended December 31 were $908,000 (1998), $513,000 (1997) and $303,000
(1996). Lease commitments entered into by the Company bear initial terms varying
from 3 to 10 years, or they are 20-year ground leases, and are associated with
premises. Future minimum payments as of December 31, 1998 for all noncancelable
operating leases are:
Operating
(Dollars in thousands) Leases
1999 $ 992
2000 977
2001 1,024
2002 1,030
2003 825
Thereafter 5,408
-------
TOTAL MINIMUM LEASE PAYMENTS $10,256
=======
NOTE 7--DEPOSITS
Deposits outstanding at December 31 consist of:
(In thousands) 1998 1997
Noninterest-bearing Deposits $185,900 $150,957
Interest-bearing Deposits:
Demand 128,006 115,391
Money market savings 150,073 150,465
Regular savings 98,446 91,853
Time deposits less than $100,000 315,234 281,378
Time deposits--$100,000 or more 76,912 62,967
-------- --------
Total Interest-bearing 768,671 702,054
-------- --------
TOTAL DEPOSITS $954,571 $853,011
======== ========
Interest expense on time deposits of $100,000 or more amounted to $3,756,000,
$3,256,000 and $2,640,000 for 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
36
- --------------------------------------------------------------------------------
NOTE 8--SHORT-TERM BORROWINGS
Information relating to short-term borrowings is as follows for the years ended
December 31:
1998 1997 1996
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
At Year-End:
Federal Home Loan Bank advances $175,200 4.90% $ 84,200 5.27% $20,200 5.58%
Repurchase agreements 74,545 4.25 58,196 4.80 44,193 4.65
Other short-term borrowings 7,281 5.00 2,030 6.44 2,375 6.19
-------- -------- -------
Total $257,026 4.71% $144,426 5.09% $66,768 4.99%
======== ======== =======
Average for the Year:
Federal Home Loan Bank advances $104,790 5.16% $ 53,965 5.27% $ 7,316 5.59%
Repurchase agreements 67,668 4.82 49,836 4.78 34,125 4.66
Other short-term borrowings 896 5.47 1,743 4.50 523 4.43
Maximum Month-end Balance:
Federal Home Loan Bank advances $175,200 $ 84,200 $20,200
Repurchase agreements 81,004 59,868 44,193
Other short-term borrowings 7,281 3,575 2,375
The Bank pledges U.S. Government Agency Securities, based upon their market
values, as collateral for 102% of the principal and accrued interest of its
repurchase agreements.
The Company has a line of credit arrangement with the Federal Home Loan Bank of
Atlanta under which it may borrow up to $247,300,000 at interest rates based
upon current market conditions.
NOTE 9--LONG-TERM BORROWINGS
The Company had long-term borrowings with the Federal Home Loan Bank of Atlanta
(FHLB) at December 31 as follows:
(Dollars in thousands) 1998 1997
8.21% Advance due 1999 $ 0 $ 1,000
5.58% Advance due 2003 0 10,000
6.12% Advance due 2003 2,020 2,020
6.45% Advance due 2006 650 750
6.68% Advance due 2006 650 750
5.04% Advance due 2008 11,000 0
------- -------
$14,320 $14,520
======= =======
The 2006 advances are principal reducing with payments of $50,000 each
semi-annually. The 2008 advance is callable in 2000. Interest on these
instruments is generally paid monthly. FHLB advances are fully collateralized by
pledges of loans and U.S. agency securities. The Bank has pledged, under a
blanket lien, all qualifying residential mortgage loans as collateral under the
borrowing agreement with the FHLB.
The Company also had outstanding mortgages with balances due of $46,000 at
December 31, 1998 and $72,000 at December 31, 1997. Interest rates range up to
10% and the maximum maturity is July 2000.
- --------------------------------------------------------------------------------
37
- --------------------------------------------------------------------------------
NOTE 10--STOCKHOLDERS' EQUITY
Bancorp's Articles of Incorporation authorize 15,000,000 shares of capital stock
(par value $1.00 per share) which were initially classified as common stock with
the provision that remaining unissued shares may later be designated as either
common or preferred stock.
Sandy Spring Bancorp has a dividend reinvestment plan which provides
shareholders with the opportunity to increase their equity ownership in Bancorp
by electing to have cash dividends automatically reinvested in additional shares
of common stock without payment of any brokerage commission or service charge.
On October 31, 1997, the Company announced changes to the plan, renamed the
Sandy Spring Bancorp Dividend Reinvestment and Stock Purchase Plan, permitting
shareholders to make optional quarterly cash purchases of stock, subject to
minimum and maximum dollar amounts, and increasing the number of shares reserved
for issuance under the plan from 400,000 to 800,000 (share amounts have been
adjusted to give retroactive effect to a 2-for-1 stock split declared on January
28, 1998).
On April 16, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 5%, or 492,084 shares (adjusted to give
retroactive effect to a 2-for-1 stock split declared on January 28, 1998), of
Bancorp's outstanding common stock, par value $1.00 per share, in connection
with shares expected to be reissued pursuant to the Company's dividend
reinvestment and stock purchase plan, incentive stock option plan, employee
benefit plans, and for other corporate purposes. The share repurchases would be
made from time to time, either on the open market or in privately negotiated
transactions, until March 31, 1999, or earlier, upon termination of the program
by the Board.
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and Bancorp. At December 31,
1998, the Bank could have paid dividends to its parent company amounting to
$32,893,000. There were no loans outstanding between the Bank and Bancorp at
December 31, 1998 and 1997.
NOTE 11--INCENTIVE STOCK OPTION PLAN
The Company's 1992 Stock Option Plan, which essentially replaced the expired
1982 Incentive Stock Option Plan, provides for the granting of incentive and
non-qualifying options to selected key employees on a periodic basis at the
discretion of the Board. Share amounts and prices which follow have been
adjusted to give retroactive effect to the 2-for-1 stock split declared on
January 28, 1998. The 1992 Plan authorizes the issuance of up to 540,000 shares
of common stock, has a term of ten years, and is administered by the
Compensation Committee of the Board. Options are granted at market value at date
of grant and must be exercised within ten years. Options granted prior to
February 1996 were immediately exercisable. Options granted since February 1996
become exercisable over a period of two years.
A total of 207,800 shares of common stock were granted under the 1982 Plan, of
which 12,000 are outstanding, and the outstanding options will continue until
exercise or expiration.
The following is a summary of changes in shares under option for the years ended
December 31:
1998 1997 1996
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Balance, beginning of year 116,002 $17.21 72,002 $12.67 153,872 $ 8.95
Granted 30,300 30.50 44,000 24.63 12,000 16.83
Exercised (4,502) 10.50 0 0 (93,870) 7.10
------- ------- -------
BALANCE, END OF YEAR 141,800 $20.26 116,002 $17.21 72,002 $12.67
======= ======= =======
Weighted average fair value
of options granted during the year $15.57 $ 4.79 $ 3.84
- --------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
The following table summarizes information about options outstanding at December
31, 1998:
Options Outstanding Options Exercisable
Weighted Average
Remaining
Range of Contractual Life Weighted Average Weighted Average
Exercise Price Number (in years) Exercise Price Number Exercise Price
$ 8.00-$12.25 45,000 4.6 $10.42 45,000 $10.42
$16.63-$18.50 22,500 7.4 17.61 22,500 17.61
$24.63-$30.50 74,300 9.4 27.02 39,410 26.13
------- -------
141,800 $20.26 106,910 $17.72
======= =======
The fair value of each option grant is estimated on the date of grant using the
extended binomial option-pricing model with the following weighted-average
assumptions used for grants during the three years ended December 31:
1998 1997 1996
Dividend yield 2.42% 2.14% 2.67%
Expected volatility 44.85% 20.41% 25.00%
Risk-free interest rate 4.64% 5.48% 5.58%
Expected lives (in years) 10 10 10
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FASB
123), but applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock option plans. No compensation
expense related to the plans was recorded during the three years ended December
31, 1998. If the Company had elected to recognize compensation cost based on the
fair value at the grant dates for awards under the plan consistent with the
method prescribed by FASB 123, net income and earnings per share would have been
changed to the pro forma amounts as follows for the years ended December 31:
(In thousands, except per share data) 1998 1997 1996
Net income:
As reported $16,105 $13,195 $11,494
Pro forma 15,947 12,984 11,475
Basic net income per share:
As reported $ 1.67 $ 1.35 $ 1.18
Pro forma 1.65 1.33 1.18
Diluted net income per share:
As reported $ 1.66 $ 1.34 $ 1.18
Pro forma 1.65 1.32 1.18
The pro forma amounts are not representative of the effects on reported net
income for future years.
NOTE 12--PENSION, PROFIT SHARING AND OTHER EMPLOYEE BENEFIT PLANS
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits are based on years of service and
the employee's compensation during the last five years of employment. The
Company's funding policy is to contribute the maximum amount deductible for
federal income tax purposes. The Plan invests primarily in a diverse portfolio
of managed fixed income and equity funds. Contributions provide not only for
benefits attributed to service to date, but also for those expected to be earned
in the future.
- --------------------------------------------------------------------------------
39
- --------------------------------------------------------------------------------
The Plan's funded status as of December 31 is as follows:
(In thousands) 1998 1997
Reconciliation of Benefit Obligation:
Obligation at January 1 $5,766 $4,590
Service cost 620 436
Interest cost 428 340
Actuarial loss 1,443 522
Benefit payments (164) (122)
------ ------
Obligation at December 31 8,093 5,766
------ ------
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets at January 1 6,110 4,903
Actual return on plan assets 944 698
Employer contributions 754 631
Benefit payments (164) (122)
------ ------
Fair value of plan assets at December 31 7,644 6,110
------ ------
Funded Status:
Funded status at December 31 (449) 344
Unrecognized transition asset (3) (6)
Unrecognized prior service cost 7 8
Unrecognized loss 2,214 1,199
------ ------
PREPAID PENSION COST INCLUDED IN OTHER ASSETS $1,769 $1,545
====== ======
Weighted Average Assumptions as of December 31: 1998 1997 1996
Discount rate 6.75% 7.50% 7.50%
Expected return on plan assets 8.50 8.50 8.50
Rate of compensation increase 4.50 5.50 5.50
Net pension expense for the previous three years includes the following
components:
(In thousands) 1998 1997 1996
Service cost for benefits earned $ 620 $ 436 $ 377
Interest cost on projected benefit obligation 428 340 351
Expected return on plan assets (565) (455) (443)
Amortization of prior service cost 1 1 1
Amortization of transition asset (3) (3) (3)
Recognized net actuarial loss 50 41 38
----- ----- -----
PENSION EXPENSE FOR THE YEAR $ 531 $ 360 $ 321
===== ===== =====
The Company has a qualified, noncontributory profit sharing plan that covers all
employees after ninety days of service. The plan permits employees to purchase
shares of Sandy Spring Bancorp common stock with their profit sharing
allocations and other contributions under the plan. Profit sharing contributions
by the Company, which are included in operating expenses, totaled $482,000 in
1998, $465,000 in 1997 and $442,000 in 1996. Beginning in 1996, the Company
expanded its benefit plans to include a performance based compensation benefit
which provides additional incentives to employees based on the Company's
financial performance as measured against key performance indicator goals set by
management. Payments are made quarterly and total expense under the plan
amounted to $1,327,000 in 1998, $465,000 in 1997 and $510,000 in 1996.
The Company has Supplemental Executive Retirement Agreements (SERAs) with its
executive officers providing for retirement income benefits as well as
pre-retirement death benefits for selected executives. Retirement benefits
payable under the SERAs, if any, are integrated with other pension plan and
Social Security retirement benefits expected to be received by the officer. The
Company is accruing the present value of these benefits over the remaining
number of years to the officers' retirement dates. Benefit accruals included in
operating expenses for 1998, 1997 and 1996 were $112,000, $55,000 and $25,000,
respectively.
- --------------------------------------------------------------------------------
40
- --------------------------------------------------------------------------------
The Company has an Executive Health Plan effective January 1, 1991 that provides
for payment of defined medical and dental expenses not otherwise covered for
selected executives including their families. Benefits, which are paid during
both employment and retirement, are subject to a $5,000 limitation for each
executive per year. Expenses under the plan, covering insurance premium and out-
of-pocket expense reimbursement benefits, totaled $50,000 in 1998 and 1997, and
$7,000 in 1996.
NOTE 13--INCOME TAXES
Income tax expense for the years ended December 31 consists of:
(In thousands)
1998 1997 1996
Current Income Taxes:
Federal $ 6,252 $ 5,718 $ 4,692
State 558 975 1,249
------- ------- -------
Total Current 6,810 6,693 5,941
Deferred Income Taxes (Benefit):
Federal 104 (86) (122)
State 22 (19) (30)
------- ------- -------
Total Deferred 126 (105) (152)
------- ------- -------
TOTAL INCOME TAX EXPENSE $ 6,936 $ 6,588 $ 5,789
======= ======= =======
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities result in deferred taxes. Deferred
tax assets and liabilities, shown as the sum of the appropriate tax effect for
each significant type of temporary difference, are presented below for the years
ended December 31:
(In thousands) 1998 1997
Deferred Tax Assets:
Allowance for credit losses $ 2,391 $ 2,262
Deferred loan fees and costs 504 542
Net operating loss carry forward 355 395
Other 183 300
------- -------
Gross Deferred Tax Assets 3,433 3,499
Deferred Tax Liabilities:
Depreciation (1,042) (928)
Pension plan costs (967) (823)
Unrealized gains on Investments available-for-sale (1,341) (1,309)
Other (300) (366)
------- -------
Gross Deferred Tax Liabilities (3,650) (3,426)
------- -------
NET DEFERRED TAX (LIABILITY) ASSET $ (217 $ 73
======= =======
No valuation allowance exists with respect to deferred tax items. The Company
has a net operating loss carryforward (NOL) of $920,000 which expires in 2008.
The NOL is a result of an acquisition in 1993 and is subject to annual
limitations under IRS Code Section 382.
A three year reconcilement of the difference between the statutory federal
income tax rate and the effective tax rate for the Company is as follows:
1998 1997 1996
FEDERAL INCOME TAX RATE 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax-exempt interest income (6.7) (5.2) (5.8)
State income taxes, net of federal income tax benefits 1.6 5.0 4.6
Other .2 (1.5) (0.3)
---- ---- ----
EFFECTIVE TAX RATE 30.1% 33.3% 33.5%
==== ==== ====
- --------------------------------------------------------------------------------
41
- --------------------------------------------------------------------------------
NOTE 14--NET INCOME PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued FASB No. 128,
"Earnings Per Share" (FASB 128), which became effective for the Company for
reporting periods ending after December 15, 1997. Under the provisions of FASB
128, primary and fully-diluted earnings per share were replaced with basic and
diluted earnings per share in an effort to simplify the computation of these
measures and align them more closely with the methodology used internationally.
Basic earnings per share is arrived at 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 arrived at by
dividing net income by the weighted-average number of shares outstanding,
adjusted for the dilutive effect of outstanding stock options and warrants. For
purposes of comparability, all prior-period earnings per share data has been
restated. All per share data and share amounts below have been adjusted to give
retroactive effect to a 2-for-1 stock split declared on January 28, 1998.
The calculation of net income per common share for the years ended December 31
was as follows:
(In thousands, except per share data) 1998 1997 1996
Basic:
Net income (available to common stockholders) $16,105 $13,195 $11,494
Average common shares outstanding 9,636 9,799 9,736
Basic net income per share $ 1.67 $ 1.35 $ 1.18
------- ------- -------
Diluted:
Net income (available to common stockholders) $16,105 $13,195 $11,494
Average common shares outstanding 9,636 9,799 9,736
Stock option adjustment 50 13 22
Warrant stock adjustment 1 5 5
------- ------- -------
Average common shares outstanding--diluted 9,687 9,817 9,763
Diluted net income per share $ 1.66 $ 1.34 $ 1.18
------- ------- -------
NOTE 15--RELATED PARTY TRANSACTIONS
Certain directors and executive officers have loan transactions with the
Company. Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with outsiders. The following
schedule summarizes changes in amounts of loans outstanding, both direct and
indirect, to these persons during 1998 and 1997.
(In thousands) 1998 1997
Balance at January 1 $ 6,426 $ 7,401
Additions 2,686 1,090
Repayments (2,618) (2,065)
------- -------
BALANCE AT DECEMBER 31 $ 6,494 $ 6,426
======= =======
NOTE 16--FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company has various outstanding credit
commitments which are properly not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Company's clients.
The associated credit risk is controlled by subjecting such activity to the same
credit and quality controls as exist for the Company's lending and investment
activities. The commitments involve diverse business and consumer customers and
are generally well collateralized. Management does not anticipate that losses,
if any, which may occur as a result of these commitments would materially affect
the stockholders' equity of the Company. Since a portion of the commitments have
some likelihood of not being exercised, the amounts do not necessarily represent
future cash requirements.
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Loan and credit line commitments, excluding unused portions of home equity lines
of credit, totaled $121,171,000 at December 31, 1998 and $105,229,000 at
December 31, 1997. These commitments are contingent upon continuing customer
compliance with the terms of the agreement.
Unused portions of equity lines at year end amounted to $63,757,000 in 1998 and
$59,157,000 in 1997. The Company's home equity line accounts, which are secured
by the borrower's residence, are reviewed annually.
Irrevocable letters of credit, totaling $4,137,000 at December 31, 1998 and
$4,124,000 at December 31, 1997, are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements.
They are primarily used to guarantee a customer's contractual and/or financial
performance, and are seldom exercised.
NOTE 17--LITIGATION
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, and other activities of the Company.
Management, after consultation with legal counsel, does not anticipate that the
ultimate liability, if any, arising out of these matters will have a material
effect on the Company's financial condition, operating results or liquidity.
NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" (FASB 107), as amended by Statement of Financial
Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" (FASB 119), requires the disclosure in
statement form of estimated fair values of financial instruments. Financial
instruments have been defined broadly to encompass 97.2% of the Company's assets
and 99.7% of its liabilities.
Quoted market prices, where available, are shown as estimates of fair market
values. Because no quoted market prices are available for a significant part of
the Company's financial instruments, the fair values of such instruments have
been derived based on the amount and timing of future cash flows and estimated
discount rates.
Present value techniques used in estimating the fair value of many of the
Company's financial instruments are significantly affected by the assumptions
used. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities and should not be considered an
indication of the fair value of the Company.
The estimated fair values of the Company's financial instruments at December 31
are as follows:
1998 1997
Book Estimated Book Estimated
(In thousands) Value Fair Value Value Fair Value
FINANCIAL ASSETS
Cash and temporary investments(1) $ 62,464 $ 62,621 $ 55,737 $ 55,866
Investments available-for-sale 539,642 539,642 344,258 344,258
Investments held-to-maturity and other equity securities 73,937 74,244 120,476 121,922
Loans, net of allowance 617,062 636,777 551,877 568,565
Accrued interest receivable and other assets(2) 11,774 11,774 10,254 10,254
FINANCIAL LIABILITIES
Deposits $ 954,571 $952,777 $853,011 $853,184
Short-term borrowings 257,026 258,445 144,426 144,423
Long-term borrowings 14,366 14,527 14,592 14,583
Accrued interest payable and other liabilities(2) 3,025 3,025 2,749 2,749
Estimated Estimated
(In thousands) Amount Fair Value Amount Fair Value
OFF-BALANCE SHEET FINANCIAL ASSETS
Commitments to extend credit(3) $184,928 $ (898) $164,386 $ (567)
Irrevocable letters of credit 4,137 (21) 4,124 (21)
Servicing rights on mortgages sold 59,138 532 78,344 783
(1) Temporary investments include interest-bearing deposits with banks, federal
funds sold and residential mortgage loans held for sale.
(2) Only financial instruments as defined in FASB 107 are included in other
assets and other liabilities.
(3) Includes loan and credit line commitments and unused portions of equity
lines.
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The following methods and assumptions were used to estimate the fair value of
each category of financial instruments for which it is practicable to estimate
that value:
Cash and due from banks and federal funds sold. Carrying amount approximated
fair value.
Interest-bearing deposits with banks. The fair value was estimated by computing
the discounted value of contractual cash flows using a current interest rate for
similar instruments.
Residential mortgage loans held for sale. The fair value of mortgage loans held
for sale was derived from secondary market quotations for similar instruments.
Securities. The fair value for U.S. Treasury and Agency, state and municipal,
and corporate debt securities is based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and for equity securities upon quoted market prices.
Loans. Fair value was estimated by computing the discounted value of estimated
cash flows, adjusted for potential credit losses, for pools of loans having
similar characteristics. The discount rate was based on the current loan
origination rate for a similar loan. Nonperforming loans have an assumed
interest rate of 0%.
Accrued interest receivable. Carrying amount approximated the fair value of
accrued interest, considering the short-term nature of the receivable and its
expected collection.
Other assets. Carrying amount approximated fair value of certain accrued
commissions in other assets, considering the short-term nature of the receivable
and its expected collection.
Deposit liabilities. Under FASB 107, the fair value of demand, money market
savings and regular savings deposits, which have no stated maturity, must be
considered equal to their book value, representing the amount payable on demand,
regardless of any value which may be derived from retaining those deposits for
an expected future period of time (the deposit base intangible).
The fair value of time deposits was based upon the discounted value of
contractual cash flows at current rates for deposits of similar remaining
maturity.
Short-term borrowings. Carrying amount approximated fair value of repurchase
agreements due to their variable interest rates. The fair value of Federal Home
Loan Bank advances was estimated by computing the discounted value of
contractual cash flows payable at current interest rates for obligations with
similar remaining terms.
Long-term borrowings. The fair value of these mortgage and Federal Home Loan
Bank advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
Other liabilities. Carrying amount approximated fair value of accrued interest
payable, accrued dividends and premiums payable, considering their short-term
nature and expected payment.
Off-balance sheet instruments. The fair value of unused lines of credit, letters
of credit, and commitments to fund and deliver loans was estimated based upon
the amount of unamortized fees collected or paid incident to granting or
receiving the commitment. The fair value of the Bank's serviced mortgage loan
portfolio was estimated utilizing an independent appraisal which considered fees
receivable, number of loans, average loan size, delinquency data, escrow
balances, prepayment risks, and current market supply and demand factors.
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NOTE 19--PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for Sandy Spring Bancorp (Parent Only)
pertaining to the periods covered by the Company's consolidated financial
statements are presented below:
BALANCE SHEETS December 31,
(In thousands) 1998 1997
ASSETS
Cash and due from banks $ 1,326 $ 6,280
Investments available-for-sale (at fair value) 5,667 3,702
Investment in subsidiary 102,402 93,756
Other assets 256 258
-------- --------
Total Assets $109,651 $103,996
======== ========
LIABILITIES
Other liabilities $ 311 $ 496
-------- --------
Total Liabilities 311 496
STOCKHOLDERS' EQUITY
Common stock 9,586 4,862
Surplus 22,913 31,695
Retained earnings 76,305 66,261
Accumulated other comprehensive income 536 682
-------- --------
Total Stockholders' Equity 109,340 103,500
-------- --------
Total Liabilities and Stockholders' Equity $109,651 $103,996
======== ========
STATEMENTS OF INCOME Years Ended December 31,
(In thousands) 1998 1997 1996
Income:
Cash dividends from subsidiary $ 7,583 $ 4,601 $ 3,620
Interest and dividends on securities 187 379 366
-------- -------- --------
Total Income 7,770 4,980 3,986
Interest and other expenses 386 395 647
-------- -------- --------
Income before income taxes and equity in undistributed income of subsidiary 7,384 4,585 3,339
Income tax expense (benefit) (75) 12 (14)
-------- -------- --------
Income before equity in undistributed income of subsidiary 7,459 4,573 3,353
Equity in undistributed income of subsidiary 8,646 8,622 8,141
-------- -------- --------
NET INCOME $ 16,105 $ 13,195 $ 11,494
======== ======== ========
STATEMENTS OF CASH FLOWS Years Ended December 31,
(In thousands) 1998 1997 1996
Cash Flows from Operating Activities:
Net Income $ 16,105 $ 13,195 $ 11,494
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income--subsidiary (8,646) (8,622) (8,141)
Other--net (65) 14 73
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,394 4,587 3,426
Cash Flows from Investing Activities:
Purchase of investments available-for-sale (2,203) (2,126) 0
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES (2,203) (2,126) 0
Cash Flows from Financing Activities:
Retirement of long-term debt (26) (23) (21)
Common stock purchased and retired (6,614) (3,857) 0
Proceeds from issuance of common stock 2,556 2,038 1,741
Dividends paid (6,061) (4,603) (3,763)
-------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES (10,145) (6,445) (2,043)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,954) (3,984) 1,383
Cash and Cash Equivalents at Beginning of Year 6,280 10,264 8,881
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,326 $ 6,280 $ 10,264
======== ======== ========
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NOTE 20--REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 1998 and 1997, the capital levels of the
Company and the Bank substantially exceed all capital adequacy requirements to
which they are subject.
As of December 31, 1998, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Company's or the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
Total Capital (to risk weighted assets):
Company $115,652 15.67% $ 59,060 8.00%
Sandy Spring National Bank of Maryland 108,858 14.86 58,612 8.00 $ 73,265 10.00%
Tier 1 Capital (to risk weighted assets):
Company 107,596 14.58 29,530 4.00
Sandy Spring National Bank of Maryland 101,195 13.81 29,306 4.00 43,959 6.00
Tier 1 Capital (to average assets):
Company 107,596 8.50 37,961 3.00
Sandy Spring National Bank of Maryland 101,195 8.03 37,784 3.00 62,973 5.00
As of December 31, 1997:
Total Capital (to risk weighted assets):
Company 109,043 17.07 51,116 8.00
Sandy Spring National Bank of Maryland 99,981 15.73 50,834 8.00 63,542 10.00
Tier 1 Capital (to risk weighted assets):
Company 102,027 15.97 25,558 4.00
Sandy Spring National Bank of Maryland 92,965 14.63 25,417 4.00 38,125 6.00
Tier 1 Capital (to average assets):
Company 102,027 9.46 41,262 4.00
Sandy Spring National Bank of Maryland 92,965 8.63 41,224 4.00 51,530 5.00
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NOTE 21--QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected consolidated quarterly financial data for the two years
ended December 31, 1998 is reported as follows, with per share amounts
retroactively adjusted to give effect to a 2-for-1 stock split declared on
January 28, 1998:
First Second Third Fourth
(Dollars in thousands, except per share data) Quarter Quarter Quarter Quarter
1998
Interest income $20,011 $20,498 $21,882 $21,881
Net interest income 10,904 11,210 11,721 11,688
Provision for credit losses 267 275 0 10
Income before income taxes 5,610 5,460 5,996 5,975
Net income 3,860 3,875 4,289 4,081
Basic net income per share $ 0.40 $ 0.40 $ 0.45 $ 0.42
Diluted net income per share 0.40 0.40 0.44 0.42
Interest income $17,592 $18,693 $19,411 $19,869
Net interest income 9,719 10,244 10,328 10,788
Provision for credit losses 100 125 300 461
Income before income taxes 4,817 4,815 5,277 4,874
Net income 3,203 3,120 3,514 3,358
Basic net income per share $ 0.33 $ 0.32 $ 0.36 $ 0.34
Diluted net income per share 0.33 0.32 0.35 0.34
NOTE 22--CONTINGENCIES
In the fourth quarter of 1996, the Bank learned that it had not fully complied
with certain requirements of the federal Bank Secrecy Act and related
regulations, including obligations to monitor and file reports of certain types
of currency transactions. Financial institutions that fail to comply with the
requirements of the Bank Secrecy Act may be subject to penalties, including
civil money penalties. It is not now known whether such penalties or any other
action will be sought against the Bank in connection with its noncompliance, or,
if they are, the amount or nature of such penalties. Since 1996, the Bank has
complied with several requests to file amendments to currency transaction
reports (CTR's) for periods before the fourth quarter of 1996. The Bank was
advised on June 30, 1998 by the Internal Revenue Service that no additional
amendments of CTR's would be required for those periods.
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Sandy Spring Bancorp and Subsidiaries
Management's Statement of Responsibility
Management acknowledges its responsibility for financial reporting (both audited
and unaudited) which provides a fair representation of the Company's operations
and is reliable and relevant to a meaningful appraisal of the Company.
Management has prepared the financial statements in accordance with generally
accepted accounting principles, making appropriate use of estimates and
judgement, and considering materiality. Except for tax equivalency adjustments
made to enhance comparative analysis, all financial information is consistent
with the audited financial statements.
Oversight of the financial reporting process is provided by the Audit Committee
of the Board of Directors, which consists of outside directors. This Committee
meets on a regular basis, in private, with the internal auditor, who reports
directly to the Board of Directors, to approve the audit schedule and scope,
discuss the adequacy of the internal control system and the quality of financial
reporting, review audit reports and address problems. The Committee also reviews
the Company's annual report to shareholders and the annual report to the
Securities and Exchange Commission on Form 10-K. The Audit Committee meets at
least annually with the external auditors, and has direct and private access to
them at any time.
The independent public accounting firm of Stegman & Company has examined the
Company's financial records. The resulting opinion statement which follows is
based upon knowledge of the Company's accounting systems, as well as on tests
and other audit procedures performed in accordance with generally accepted
auditing standards.
/s/ Hunter R. Hollar /s/ James H. Langmead
Hunter R. Hollar James H. Langmead
President and Chief Executive Officer Vice President and Treasurer
Report of Independent Auditors
STEGMAN & COMPANY
Certified Public Accountants
BOARD OF DIRECTORS AND SHAREHOLDERS
SANDY SPRING BANCORP
OLNEY, MARYLAND
We have audited the accompanying consolidated balance sheets of Sandy Spring
Bancorp and Subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the management of Sandy Spring
Bancorp and Subsidiaries. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sandy Spring Bancorp
and Subsidiaries as of December 31, 1998 and 1997, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ Stegman & Company
Baltimore, Maryland
January 29, 1999
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