SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-19065
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Sandy Spring Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Maryland 52-1532952
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(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
----- -----
The number of shares of common stock outstanding as of July 20, 2000 is
9,563,848 shares.
SANDY SPRING BANCORP, INC.
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 2000 and December 31, 1999.................................... 1
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 2000 and 1999 ........................ 2
Consolidated Statements of Cash Flows for
the Six Month Periods Ended June 30, 2000 and 1999..................... 3
Consolidated Statements of Changes in Stockholders' Equity for
the Six Month Periods Ended June 30, 2000 and 1999..................... 5
Notes to Consolidated Financial Statements............................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................ 12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................. 12
SIGNATURES................................................................. 13
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS
June 30 December 31,
(Dollars in thousands, except per share data) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $35,735 $44,701
Federal funds sold 25,023 5,518
Interest-bearing deposits with banks 1,006 3,701
Residential mortgage loans held for sale 3,059 1,822
Investments available-for-sale (at fair value) 531,286 508,715
Investments held-to-maturity -- fair value of $107,499 (2000) and
$99,189 (1999) 111,094 105,117
Other equity securities 12,937 16,207
Total Loans 890,030 826,125
Less: Allowance for credit losses (9,184) (8,231)
---------------- ----------------
Net loans 880,846 817,894
Premises and equipment, net 31,714 32,023
Accrued interest receivable 13,787 12,765
Other real estate owned 196 163
Goodwill and other intangible assets, net 19,066 20,479
Other assets 25,813 22,176
---------------- ----------------
TOTAL ASSETS $1,691,562 $1,591,281
================ ================
LIABILITIES
Noninterest-bearing deposits $224,635 $206,462
Interest-bearing deposits 983,150 958,910
---------------- ----------------
Total deposits 1,207,785 1,165,372
Short-term borrowings 305,135 238,976
Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 29,010 38,120
Accrued interest and other liabilities 3,739 5,093
---------------- ----------------
TOTAL LIABILITIES 1,580,669 1,482,561
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 15,000,000; shares issued
and outstanding 9,571,196 (2000) and 9,647,975 (1999) 9,571 9,648
Surplus 22,916 24,476
Retained earnings 91,993 86,620
Accumulated other comprehensive loss (13,587) (12,024)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 110,893 108,720
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,691,562 $1,591,281
================ ================
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(PRIVATE)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
2000 1999 2000 1998
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Interest Income:
Interest and fees on loans $18,608 $13,999 $36,219 $27,361
Interest on loans held for sale 55 100 105 238
Interest on deposits with banks 23 50 71 125
Interest and dividends on securities:
Taxable 8,495 6,687 16,288 13,642
Nontaxable 1,908 1,566 3,800 3,008
Interest on federal funds sold 192 192 390 395
------------------------------- -----------------------------
TOTAL INTEREST INCOME 29,281 22,594 56,873 44,769
Interest Expense:
Interest on deposits 9,654 6,690 18,756 13,592
Interest on short-term borrowings 3,580 2,611 6,707 5,693
Interest on long-term borrowings 1,359 447 2,679 546
------------------------------- -----------------------------
TOTAL INTEREST EXPENSE 14,593 9,748 28,142 19,831
------------------------------- -----------------------------
NET INTEREST INCOME 14,688 12,846 28,731 24,938
Provision for Credit Losses 990 275 1,290 475
------------------------------- -----------------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 13,698 12,571 27,441 24,463
Noninterest Income:
Securities gains (losses) 55 (74) 47 (56)
Service charges on deposit accounts 1,468 1,095 2,779 2,135
Gains on mortgage sales 207 597 376 1,222
Trust department income 436 377 845 741
Gains (losses) on sales of premises and
equipment (32) (2) 1,470 (1)
Other income 1,700 986 3,063 1,864
------------------------------- -----------------------------
TOTAL NONINTEREST INCOME 3,834 2,979 8,580 5,905
Noninterest Expenses:
Salaries and employee benefits 6,090 5,536 11,752 10,718
Occupancy expense 1,210 707 2,382 1,388
Equipment expenses 816 649 1,585 1,241
Marketing 444 297 801 808
Outside data services 580 458 1,216 925
Intangible asset amortization 706 92 1,412 185
Other expenses 2,186 1,785 4,138 3,213
------------------------------- -----------------------------
TOTAL NONINTEREST EXPENSES 12,032 9,524 23,286 18,478
------------------------------- -----------------------------
Income Before Income Taxes 5,500 6,026 12,735 11,890
Income Tax Expense 1,300 1,622 3,515 3,232
------------------------------- -----------------------------
NET INCOME $4,200 $4,404 $9,220 $8,658
=============================== =============================
Basic Net Income Per Share $0.44 $0.46 $0.96 $0.90
Diluted Net Income Per Share 0.44 0.46 0.96 0.90
Dividends Declared Per Share 0.20 0.19 0.40 0.37
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
June 30,
------------------------------------------
2000 1999
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Cash Flows from Operating Activities:
Net Income $9,220 $8,658
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,846 1,226
Provision for credit losses 1,290 475
Deferred income taxes 182 (341)
Origination of loans held for sale (28,161) (90,332)
Proceeds from sales of loans held for sale 27,300 100,402
Gains on sales of loans held for sale (376) (1,222)
Securities (gains) losses (47) 56
Proceeds from sales of premises and equipment (1,502) (1)
Net change in:
Accrued interest receivable (1,022) 810
Accrued income taxes (10) (386)
Other accrued expenses (2,698) (4,054)
Other - net (1,900) (157)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,122 15,134
Cash Flows from Investing Activities:
Net decrease (increase) in interest-bearing deposits with banks 2,695 (3,312)
Purchases of investments held-to-maturity ( 5,983) (23,088)
Purchases of other equity securities (8,813) (941)
Purchases of investments available-for-sale (55,405) (103,492)
Proceeds from sales of investments available-for-sale 15,486 45,387
Proceeds from maturities, calls and principal payments of investments 0 3,598
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 14,877 151,674
available-for-sale
Redemption of Federal Home Loan Bank of Atlanta stock 12,083 2,707
Proceeds from sales (purchases) of other real estate owned 330 (90)
Net increase in loans receivable (64,211) (52,463)
Purchases of loans 0 (12,037)
Proceeds from sales of premises and equipment 2,965 57
Expenditures for premises and equipment (2,585) (721)
--------------- ---------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (88,561) 7,279
Cash Flows from Financing Activities:
Net increase in demand and savings accounts 44,271 22,703
Net decrease in time and other deposits (1,858) (13,133)
Net increase (decrease) in short-term borrowings 66,059 (44,883)
Proceeds from long-term borrowings 25,990 35,000
Retirement of long-term borrowings (35,000) (46)
Common stock purchased and retired (2,731) (833)
Proceeds from issuance of common stock 1,094 1,273
Dividends paid (3,847) (3,547)
--------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 93,978 (3,466)
--------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 10,539 18,947
Cash and Cash Equivalents at Beginning of Period 50,219 48,198
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD* $60,758 $67,145
=============== ===============
3
Cont'd
CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental Disclosures:
Interest payments $28,179 $20,071
Income tax payments 3,799 3,221
Noncash Investing Activities:
Transfers from loans to other real estate owned 306 62
Reclassification of borrowings from long-term to short-term 100 11,100
*Cash and cash equivalents include amounts of "Cash and due from banks" and
"Federal funds sold" on the Consolidated Balance Sheets.
See Notes to Consolidated Financial Statements.
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in
thousands, except per share data)
Accum-
ulated
Other
Compre- TOTAL
hensive STOCK-
Common Retained Income HOLDERS'
Stock Surplus Earnings (loss) EQUITY
- -----------------------------------------------------------------------------------------------------------------
BALANCES AT JANUARY 1, 1999 $9,586 $22,913 $76,305 $2,133 $110,937
Comprehensive Income:
Net income 8,658 8,658
Other comprehensive income
(loss), net of tax and
reclassification adjustment (8,959) (8,959)
------------
Total comprehensive income (301)
Cash dividends - $0.37 per share (3,547) (3,547)
Common stock issued pursuant to:
Incentive stock option plan - 832
shares 1 19 20
Dividend reinvestment and stock
purchase plan - 44,786 shares 45 1,208 1,253
Stock repurchases - 29,529 shares (30) (803) (833)
---------- ---------- ---------- ----------- ------------
BALANCES AT JUNE 30, 1999 $9,602 $23,337 $81,416 $(6,826) $107,529
========== ========== ========== =========== ============
BALANCES AT JANUARY 1, 2000 $9,648 $24,476 $86,620 $(12,024) $108,720
Comprehensive Income:
Net income 9,220 9,220
Other comprehensive loss,
net of tax and reclassification
adjustment (1,563) (1,563)
------------
Total comprehensive income 7,657
Cash dividends - $0.40 per share (3,847) (3,847)
Common stock issued pursuant to:
Dividend reinvestment and stock
purchase plan - 51,078 shares 51 1,043 1,094
Stock repurchases - 127,357 shares (128) (2,603) (2,731)
---------- ---------- ---------- ----------- ------------
BALANCES AT JUNE 30, 2000 $9,571 $22,916 $91,993 $(13,587) $110,893
========== ========== ========== =========== ============
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The foregoing financial statements are unaudited; however, in the
opinion of Management, all adjustments (comprising only normal recurring
accruals) necessary for a fair presentation of the results of the interim
periods have been included. These statements should be read in conjunction with
the financial statements and accompanying notes included in Sandy Spring
Bancorp's 1999 Annual Report to Shareholders. The results shown in this interim
report are not necessarily indicative of results to be expected for the full
year 2000.
The accounting and reporting policies of Sandy Spring Bancorp (the
"Company") conform to generally accepted accounting principles and to general
practice within the banking industry. Certain reclassifications have been made
to amounts previously reported to conform with current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
NOTE 2 - PER SHARE DATA
The calculations of net income per common share for the periods ended
June 30 are as shown in the following table. Basic net income per share is
computed by dividing net income available to common stockholders by the weighted
average number of common shares outstanding and does not include the impact of
any potentially dilutive common stock equivalents. The diluted earnings per
share calculation method is arrived at by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
adjusted for the dilutive effect of outstanding stock options.
(Dollars and amounts in thousands, except Three Months Ended Six Months Ended
Per share data) June 30, June 30,
- ----------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Basic:
Net income available to common stockholders $4,200 $4,404 $9,220 $8,658
Average common shares outstanding 9,579 9,591 9,607 9,586
Basic net income per share $0.44 $0.46 $0.96 $0.90
==============================================================
Diluted:
Net income available to common stockholders $4,200 $4,404 $9,220 $8,658
Average common shares outstanding 9,579 9,591 9,607 9,586
Stock option adjustment 29 38 28 40
--------------------------------------------------------------
Average common shares outstanding-diluted 9,608 9,629 9,635 9,626
Diluted net income per share $0.44 $0.46 $0.96 $0.90
==============================================================
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes forward looking statements in this management's
discussion and analysis that are subject to risks and uncertainties. These
forward looking statements include: statements of goals, intentions and
expectations; estimates of risks and of future costs and benefits; projections
of potential liquidity needs and sources; assessments of probable future loan
losses; and statements of the ability to achieve financial and other goals.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by: management's estimates and
projections of future interest rates and other economic conditions; future laws
and regulations; and a variety of other matters. Because of these uncertainties,
the actual future results may be materially different from the results indicated
by these forward looking statements. In addition, the Company's past results of
operations do not necessarily indicate its future results.
THE COMPANY
The Company is the registered bank holding company for Sandy Spring
National Bank of Maryland (the "Bank"), headquartered in Olney, Maryland. The
Bank operates thirty community offices in Montgomery, Howard, Prince George's
and Anne Arundel Counties in Maryland and in Fairfax County, Virginia, together
with an insurance agency. Management is in the process of closing the Fairfax
County, Virginia branch. The Company has established a strategy of independence,
and intends to establish or acquire additional offices or banking organizations
as appropriate opportunities may arise.
A. FINANCIAL CONDITION
The Company's total assets were $1,691,562,000 at June 30, 2000,
compared to $1,591,281,000 at December 31, 1999, increasing $100,281,000 or 6.3%
during the first six months of 2000. Earning assets increased $107,230,000 or
7.3% to $1,574,435,000 at June 30, 2000, from $1,467,205,000 at December 31,
1999.
Total loans rose 7.7% or $63,905,000 during the first six months of
2000 to $890,030,000. Of the major loan categories, mortgage loans increased
$27,466,000 (up 5.8%), attributable primarily to an increase in 1-4 family
residential first mortgages, consumer loans rose $23,340,000 (up 12.7%)
reflecting growth in home equity products, commercial loans increased
$12,023,000 (up 13.0%) and construction loans increased $1,076,000 (up 1.4%).
Also, residential mortgage loans held for sale increased by $1,237,000 (up
67.9%) from December 31, 1999 to $3,059,000 at June 30, 2000.
The investment portfolio, consisting of available-for-sale,
held-to-maturity and other equity securities, increased $25,278,000 or 4.0% from
December 31, 1999 to June 30, 2000. This change primarily reflected the
investment of funds borrowed under the Company's leverage programs in
available-for-sale securities. The aggregate of federal funds sold and
interest-bearing deposits with banks increased by $16,810,000 during the first
six months of 2000 to $26,029,000 at June 30, 2000.
Total deposits were $1,207,785,000 at June 30, 2000, increasing
$42,413,000 or 3.6% from $1,165,372,000 at December 31, 1999. Growth was
achieved for noninterest-bearing demand deposits, up 8.8% or $18,173,000,
attributable primarily to increases in commercial and small business checking
balances. Interest-bearing deposits increased $24,240,000 or 2.5% due almost
entirely to a rise in money market savings accounts. Total borrowings increased
by 18.3% or $57,049,000, due to a $75,000,000 increase in short-term advances
from the Federal Home Loan Bank of Atlanta used to fund investments in the
leverage programs, along with $18,229,000 higher short-term repurchase
agreements related primarily to commercial cash management services. Federal
funds purchased, which are also short-term borrowings, declined $27,070,000 to a
zero balance at June 30, 2000, while other long-term borrowings posted a
decrease of $9,110,000 for the period.
7
Market Risk Management
By employing simulation analysis through use of computer models, the
Company intends to effectively manage the potential adverse impacts that
changing interest rates can have on its short-term earnings, long term value,
and liquidity. The simulation model captures optionality factors such as call
features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. Measured from June 30, 2000, the simulation analysis
indicates that net interest income would decline by 10% over a twelve month
period given an increase in interest rates of 200 basis points, against a policy
limit of 15%. In terms of equity capital on a fair value basis, a 200 basis
point increase in interest rates is estimated to reduce the fair value of
capital (as computed) by 11%, as compared to a policy limit of 25%.
Liquidity
In June 2000, the Company implemented a new liquidity management
approach designed to take into account the Company's growth, mortgage banking
activities and expanded leverage programs along with the greater sophistication
and, more recently, the decreased liquidity of its investment portfolio. Under
this approach, the Company's liquidity position is measured weekly, looking
forward thirty, sixty and ninety days. The measurement is based upon the
asset-liability management model's projection of a funds sold or purchased
position, along with ratios and trends developed to measure dependence on
purchased funds, leverage limitations and core growth. A range of liquidity
standards will be employed. Resulting projections as of June 30, 2000 show
short-term investments exceeding short-term borrowings over the next 90 days.
This excess of liquidity over projected requirements for funds indicates that
the Company can continue to increase its loans and other earning assets without
incurring additional borrowing. The Company also has external sources of funds
which can be drawn upon when funds are required. The primary source of external
liquidity available is a line of credit for $485,170,000 with the Federal Home
Loan Bank of Atlanta, of which $222,220,000 was outstanding at June 30, 2000.
Other external sources of liquidity available to the Company in the form of
lines of credit granted by the Federal Reserve, correspondent banks and other
institutions totaled $238,400,000 at June 30, 2000 against which there were no
outstandings. Based upon its liquidity analysis, including external sources of
liquidity available, management believes the liquidity position is appropriate
at June 30, 2000.
Capital Management
The Company recorded a total risk-based capital ratio of 14.57% at June
30, 2000, compared to 15.23% at December 31, 1999; a tier 1 risk-based capital
ratio of 13.67%, compared to 14.34%; and a capital leverage ratio of 8.84%,
compared to 8.74%. Declines in the total and tier 1 ratios were attributable to
asset growth and share repurchases. Capital adequacy, as measured by these
ratios, was well above regulatory requirements. Management believes the level of
capital at June 30, 2000 was appropriate.
Stockholders' equity for June 30, 2000 totaled $110,893,000 (net of
$13,587,000 reported for accumulated other comprehensive loss), representing an
increase of 2.0% from $108,720,000 at December 31, 1999 (net of $12,024,000
reported for accumulated other comprehensive loss). The Company's accumulated
other comprehensive loss category is comprised of net unrealized losses on
available-for-sale securities. Internal capital generation (net income less
dividends) provided $5,373,000 in additional equity during the first six months
of 2000, representing an annualized rate (when considered as a percentage of
average total stockholders' equity) of 10.0% versus 9.4% for the year ended
December 31, 1999. When the nonrecurring after tax gain of $889,000 on the sale
of a building during the first quarter of 2000 is excluded from net income,
internal capital formation was $4,484,000, or a growth rate of 8.4%.
External capital formation resulting from stock issuances under the
dividend reinvestment and stock purchase plan totaled $1,094,000 during the
first six months of 2000. However, share repurchases amounted to $2,731,000
through June 30, 2000, for a net decrease in stockholder's equity from these
sources of $1,637,000.
Dividends for the first six months of the year were $0.40 per share in
2000, compared to $0.37 per share in 1999, for dividend payout ratios of
dividends declared per share to diluted net income per share of 41.67% (46.51%
when the gain on the sale of a building referred to above is excluded from net
income) and 41.11%, respectively.
8
B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Net income for the first six months of the year rose $562,000 or 6.5%
in 2000 over 1999, to $9,220,000 from $8,658,000. Diluted earnings per share
after six months were $0.96 in 2000 and $0.90 in 1999. The annualized returns on
average equity for the six month periods ended June 30 were 17.23% in 2000 and
15.71% in 1999. The annualized return on average assets for the same six month
periods were 1.15% and 1.31% in 2000 and 1999, respectively. Excluding a
nonrecurring after tax gain of $889,000 from the sale of a building in the first
quarter of 2000, net income for the first half of the year was $8,331,000 ($0.86
per diluted share) or 3.8% below 1999, for a return on average equity of 15.57%
and a return on average assets of 1.04%. These results reflect a $742,000 after
tax increase in nonoperating expenses as a result of higher intangibles
amortization. Most of the Company's intangible assets were acquired in September
1999. The amortization of this intangible is a non-cash item and does not affect
cash earnings. The Company's stock repurchase and leverage programs have had the
effect of lowering the return on average assets while increasing earnings per
share and the return on average equity. Comparing the six month periods ended
June 30, the net interest margin decreased by 18 basis points, to 4.17% in 2000
from 4.35% in 1999, while the net interest spread decreased by 12 basis points,
to 3.59% from 3.71%. The greater decline shown for the net interest margin than
for the net interest spread reflects a decline in the percentage of average
earning assets funded from noninterest-bearing sources during the first six
months of 2000 compared to the same period of 1999.
Net Interest Income
Net interest income for the first six months of the year was
$28,731,000 in 2000, an increase of 15.2% over $24,938,000 in 1999, reflecting a
higher volume of average earning assets.
For the first six months, tax-equivalent interest income increased
$12,608,000 or 27.0% in 2000, compared to 1999. Average earning assets rose
20.6% over the prior year period while the average yield earned on those assets
increased 38 basis points to 7.93% from 7.55%. Comparing the first six months of
2000 versus 1999, average loans grew 31.5% to $856,207,000 (57.0% of average
earning assets, versus 52.2% a year ago), while the average yield on loans
remained essentially level. Except for residential construction, all major loan
categories increased. Average total securities increased 10.2% to $632,697,000
(42.1% of average earning assets, versus 46.1% a year ago) and recorded a 63
basis point increase in average yield to 7.16% from 6.53%.
Interest expense for the first six months of the year increased
$8,311,000 or 41.9% in 2000 over 1999, due to the combined effects of 25.3% or
$262,832,000 higher average interest-bearing liabilities and a 50 basis point
increase in the average rate paid for those funds to 4.34% from 3.84%. Most of
the increase in average balance was due to the acquisition of seven branch
offices in the third quarter of 1999.
Credit Risk Management
During the first six months of the year, the provision for credit
losses was $1,290,000 in 2000, compared to $475,000 in 1999. The provision was
increased in 2000 primarily to cover growth in the loan portfolio. Net
charge-offs of $337,000 were recorded for the six month period ended June 30,
2000 while there were net charge-offs of $125,000 for the same period a year
earlier.
The Company regularly analyzes the sufficiency of its 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, 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. Management establishes the
allowance for credit losses in an amount that it determines, based upon these
factors, is sufficient to provide for losses inherent in the loan portfolio. The
allowance for credit losses was 1.03% of total loans at June 30, 2000 and 1.00%
at December 31, 1999. Management believes the allowance for credit losses at
June 30, 2000 was adequate. (continued on page 11)
9
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
6 Months Ended 12 Months Ended
June 30, 2000 December 31, 1999
- --------------------------------------------------------------------------------
Balance, January 1 $8,231 $7,350
Provision for credit losses 1,290 1,216
Loan charge-offs:
Real estate-mortgage (134) (105)
Real estate-construction 0 0
Consumer (184) (225)
Commercial (40) (85)
----------------- ---------------------
Total charge-offs (358) (415)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 17 48
Commercial 4 32
----------------- ---------------------
Total recoveries 21 80
----------------- ---------------------
Net charge-offs (337) (335)
----------------- ---------------------
BALANCE, PERIOD END $9,184 $8,231
================= =====================
Net charge-offs to average loans
(annual basis) 0.08% 0.05%
Allowance to total loans 1.03% 1.00%
Balance sheet risk inherent in the lending function is presented as follows at
the dates indicated:
June 30, December 31,
2000 1999
- -------------------------------------------------------------------------------
Non-accrual loans $662 $275
Loans 90 days past due 1,909 1,710
Restructured loans 0 0
--------------- -----------------
Total Nonperforming Loans* 2,571 1,985
Other real estate owned 196 163
--------------- -----------------
TOTAL NONPERFORMING ASSETS $2,767 $2,148
=============== =================
Nonperforming assets to total assets 0.16% 0.13%
- ------------------------------------------------------------------------------
* Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $5,703,000 at June 30, 2000,
compared to $5,401,000 at December 31, 1999. Although these are loans where
known information about the borrowers' possible credit problems causes
management to have doubts as to their ability to comply with the present loan
repayment terms, most are well collateralized and are not believed to present
significant risk of loss.
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(continued from page 9)
Nonperforming loans increased by $586,000 to $2,571,000 and total
nonperforming assets increased by $619,000 to $2,767,000 from December 31, 1999
to June 30, 2000. Expressed as a percentage of total assets, nonperforming
assets were 0.16% at June 30, 2000 and 0.13% at December 31, 1999. The allowance
for credit losses represented 357% of nonperforming loans at June 30, 2000,
compared to coverage of 415% at December 31, 1999. Significant variation in this
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. Other real
estate owned totaled $196,000 at June 30, 2000, compared to $163,000 at December
31, 1999. The balance of impaired loans at June 30, 2000 was $140,000, with
reserves against those loans totalling $65,000, versus a balance at December 31,
1999 of $219,000, with reserves of $50,000.
Noninterest Income and Expenses
Noninterest income increased by 45.3% or $2,675,000 during the six
months ended June 30, 2000 versus 1999. Excluding the $1,502,000 gain on the
sale of a building in the first quarter of 2000, the increase in noninterest
income was 19.9% or $1,173,000, and was primarily attributable to growth in
transaction based service fees and income from sales of investment products.
Gains on mortgage sales for the first six months of the year declined sharply in
2000, by 69.2% or $846,000, reflecting lower amounts of loans sold to outside
investors.
For the six months ended June 30, noninterest expenses increased 26.0%,
or $4,808,000 to $23,286,000 in 2000 from $18,478,000 in 1999. The Company
incurs additional costs in order to enter new markets, provide new services, and
support the growth of the Company. Management controls its operating expenses,
however, with the goal of maximizing profitability over time. Excluding
amortization of intangible assets, the increase in noninterest expenses was
19.6% or $3,581,000 in the first six months of 2000 versus the same period of
1999. This increase was due in large part to higher salary and occupancy
expenses reflecting the branches acquired in September 1999 along with openings
of a branch office and a regional lending and sales center during 2000's first
quarter. Average full-time equivalent employees increased by 31 persons (up
7.1%) to 468 during the first six months of 2000 compared to 437 during the
first six months of 1999. With the increase in staff and exclusion from earnings
of the nonrecurring gain on the sale of a building in first quarter 2000, the
ratio of net income per average full-time-equivalent employee decreased to
$18,000 from $20,000.
Income Taxes
The effective tax rate for the first six months of the year was 27.6%
in 2000, compared to 27.2% in 1999.
C. RESULTS OF OPERATIONS - SECOND QUARTER 2000 AND 1999
Second quarter net income of $4,200,000 ($0.44 per share-diluted) in
2000 was $204,000 or 4.6% below net income of $4,404,000 ($0.46 per
share-diluted) shown for the same quarter of 1999.
Tax-equivalent net interest income rose 14.7% during the second quarter
of 2000 compared to the like three month period of 1999, showing the net effect
of a 22.5% increase in the average earning asset base and a 27 basis point
decrease in net interest margin.
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The provision for credit losses was $990,000 for the quarter ended June
30, 2000, compared to a provision of $275,000 for the same three month period of
1999. The increase reflects the significant expansion of the loan portfolio
according to management's plans. Net charge-offs of $206,000 were recorded for
the second quarter of 2000, compared to net charge-offs of $66,000 for the
second quarter of 1999.
Noninterest income for the second quarter increased $855,000 or 28.7%
in 2000, compared to 1999. As in the year-to-date comparison above, the change
was due primarily to increased transaction based service fees and income from
sales of investment products, while gains on mortgage sales declined sharply.
Excluding non-operating amortization of intangible assets, noninterest
expenses rose 20.1% (almost identical to the year-to-date percentage increase),
with the majority attributable to higher salary and occupancy expenses
reflecting branch acquisition and new offices opened, as in the year-to-date
results.
The second quarter effective tax rate was 23.6% in 2000 versus 26.9%
shown in 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Condition - Market Risk Management" in Management's
Discussion and Analysis of Financial Condition and Results of Operations, above.
Management has determined that no additional disclosures are necessary to assess
changes in information about market risk that have occurred since December 31,
1999.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting held on April 18, 2000,
the shareholders of the Company elected Susan D. Goff, Robert L. Mitchell,
Robert L. Orndorff, Jr., and David E. Rippeon as directors for three year terms.
There were no solicitations in opposition to management's nominees and all such
nominees were elected. All of these nominees were incumbent directors. Other
directors continuing in office are Solomon Graham, Gilbert Hardesty, Charles F.
Mess, Lewis R. Schumann, W. Drew Stabler, John Chirtea, Joyce R. Hawkins, Hunter
R. Hollar and Thomas O. Keech.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following is a list of Exhibits filed as part of this
Quarterly Report on Form 10-Q:
No. Exhibit
---- -------
27 Financial Data Schedule
(b) Reports on Form 8-K. None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this quarterly report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By: /s/ HUNTER R. HOLLAR
-----------------------
Hunter R. Hollar
President and Chief Executive Officer
Date: August 4, 2000
By: /s/ JAMES H. LANGMEAD
------------------------
James H. Langmead
Vice President and Treasurer
Date: August 4, 2000
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