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 March 31, 1997
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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 ______________________
Commission File Number: O-19065
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Sandy Spring Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Maryland 52-1532952
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(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
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(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
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The number of shares of common stock outstanding as of April 25, 1997 is
4,920,936 shares.
SANDY SPRING BANCORP
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996................................. 1
Consolidated Statements of Income for the
the Three Month Periods Ended March 31, 1997 and 1996................ 2
Consolidated Statements of Cash Flows for
the Three Month Periods Ended March 31, 1997 and 1996................ 3
Notes to Consolidated Financial Statements........................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 5
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.................................................. 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 10
SIGNATURES................................................................. 11
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
March 31, December 31,
1997 1996
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ASSETS
Cash and due from banks $ 27,889 $ 32,899
Federal funds sold 28,122 23,278
Interest-bearing deposits with banks 1,304 861
Residential mortgage loans held for sale 3,793 7,985
Investments available-for-sale (at fair value) 233,859 234,423
Investments held-to-maturity -- fair value of
$121,563 (1997) and $123,067 (1996) 121,553 122,272
Other equity securities 4,537 5,111
Total Loans (net of unearned income) 537,244 523,166
Less: Allowance for credit losses (6,387) (6,391)
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Net loans 530,857 516,775
Premises and equipment 23,115 20,211
Accrued interest receivable 7,809 7,917
Other real estate owned 300 0
Other assets 6,340 6,863
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TOTAL ASSETS $989,478 $978,595
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LIABILITIES
Noninterest-bearing deposits $109,412 $117,052
Interest-bearing deposits 702,721 689,289
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Total deposits 812,133 806,341
Short-term borrowings 70,869 68,127
Long-term borrowings 4,712 4,820
Accrued interest and other liabilities 2,908 2,726
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TOTAL LIABILITIES 890,622 882,014
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares
authorized 15,000,000; shares issued
and outstanding 4,920,936 (1997) and
4,902,113 (1996) 4,921 4,902
Surplus 34,070 33,474
Retained earnings 59,840 57,669
Net unrealized gain on investments
available-for-sale 25 536
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TOTAL STOCKHOLDERS' EQUITY 98,856 96,581
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $989,478 $978,595
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See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Three Months Ended
March 31,
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1997 1996
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Interest income:
Interest and fees on loans $11,935 $11,351
Interest on loans held for sale 54 33
Interest on deposits with banks 27 23
Interest and dividends on securities:
Taxable 4,460 3,507
Nontaxable 790 845
Interest on federal funds sold 326 404
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TOTAL INTEREST INCOME 17,592 16,163
Interest expense:
Interest on deposits 6,986 6,972
Interest on short-term borrowings 807 398
Interest on long-term borrowings 80 89
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TOTAL INTEREST EXPENSE 7,873 7,459
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NET INTEREST INCOME 9,719 8,704
Provision for Credit Losses 100 183
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NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 9,619 8,521
Noninterest Income:
Securities gains (losses) 20 (54)
Service charges on deposit accounts 789 648
Gains on mortgage sales 269 197
Other income 751 710
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TOTAL NONINTEREST INCOME 1,829 1,501
Noninterest Expenses:
Salaries and employee benefits 3,740 3,394
Occupancy expense of premises 517 537
Equipment expenses 519 525
Other expenses 1,855 1,292
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TOTAL NONINTEREST EXPENSES 6,631 5,748
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Income Before Income Taxes 4,817 4,274
Income Tax Expense 1,614 1,398
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NET INCOME $ 3,203 $ 2,876
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PER SHARE DATA:
Net Income $0.65 $0.60
Dividends Declared 0.21 0.18
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
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1997 1996
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Cash Flows from Operating Activities:
Net Income $ 3,203 $ 2,876
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 503 437
Provision for credit losses 100 183
Deferred income taxes 60 102
Origination of loans held for sale (12,393) (12,478)
Proceeds from sales of loans held for sale 16,854 13,510
Gains on sales of loans held for sale (269) (197)
Securities (gains) losses (20) 54
Net change in:
Accrued interest receivable 109 10
Accrued income taxes 527 1,032
Other accrued expenses (345) (1,347)
Other -- net 580 (4,727)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 8,909 (545)
Cash Flows from Investing Activities:
Net increase in interest-bearing deposits with banks (443) (4,673)
Purchases of investments held-to-maturity (2,998) (16,178)
Purchases of investments available-for-sale (46,686) (42,961)
Proceeds from sales of investments available-for-sale 15,803 2,301
Proceeds from maturities and principal payments of 3,773 13,609
investments held-to-maturity
Proceeds from maturities and principal payments of 31,085 22,351
investments available-for-sale
Proceeds from sales of other real estate owned 0 250
Net increase in loans receivable (14,378) (5,125)
Expenditures for premises and equipment (3,240) (574)
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NET CASH USED BY INVESTING ACTIVITIES (17,084) (31,000)
Cash Flows from Financing Activities:
Net increase (decrease) in demand and savings accounts 1,401 8,299
Net increase in time and other deposits 4,391 10,057
Net increase in short-term borrowings 2,642 2,428
Proceeds from long-term borrowings 0 2,000
Retirement of long-term borrowings (8) (7)
Net decrease in balance due to banks 0 (1,191)
Proceeds from issuance of common stock 614 674
Dividends paid (1,031) (831)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 8,009 21,429
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (166) (10,116)
Cash and Cash Equivalents at Beginning of Quarter 56,177 60,435
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CASH AND CASH EQUIVALENTS AT END OF QUARTER* $ 56,011 $ 50,319
=====================
Supplemental Disclosures:
Interest payments $ 6,974 $ 7,372
Income tax payments 905 489
Noncash Investing Activities:
Transfers from loans to other real estate owned 300 0
Reclassification of borrowings form long-term to 100 2,000
short-term
Unrealized loss on investments available-for-sale
net of deferred tax effect of $(322) in 1997 and $(335) $ (511) $ (533)
in 1996
*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.
3
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
1996 Annual Report to Shareholders. The results shown in this interim report
are not necessarily indicative of results to be expected for the full year 1997.
The accounting and reporting policies of Sandy Spring Bancorp 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.
First quarter 1996 financial data have been restated under pooling of
interests accounting for the Annapolis Bancshares, Inc. merger consummated
August 29, 1996.
NOTE 2 - STOCKHOLDERS' EQUITY
On April 16, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 5%, or 246,042 shares, of Bancorp's
outstanding common stock, par value $1.00 per share, in connection with shares
expected to be issued pursuant to Bancorp's dividend reinvestment, stock option,
and employee benefit plans and for other corporate purposes. The share
repurchases would be made on the open market and in privately negotiated
transactions, from time to time until March 31, 1999, or earlier termination of
the program by the Board.
NOTE 3 - PER SHARE DATA
Net income per common share is based on the weighted average number of shares
outstanding of 4,906,385 in 1997 and 4,832,750 in 1996.
4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Consolidated basis, dollars in thousands except per share data)
This Management's Discussion and Analysis contains forward-looking statements,
including statements of goals, intentions and expectation, regarding or based
upon general economic conditions, interest rates, developments in national and
local markets, and other matters, and which, by their nature, are subject to
significant uncertainties.
In the following discussion, all financial information pertaining to the first
quarter of 1996 except dividends per share have been retroactively restated for
the Annapolis Bancshares merger completed in third quarter 1996.
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 nineteen banking offices in Montgomery, Howard, and Anne Arundel
Counties in Maryland. On April 16, 1997, the Company announced that its Board
of Directors had authorized the repurchase of up to 5%, or 246,042 shares, of
its outstanding common stock, par value $1.00 per share, in connection with
shares expected to be issued under the Company's dividend reinvestment, stock
option, and employee benefit plans and for other corporate purposes. The share
repurchases are expected to be made primarily on the open market from time to
time until March 31, 1999, or earlier termination of the repurchase program by
the Board. Repurchases under the program will be made at the discretion of
management based upon market, business, legal, accounting and other factors.
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 $989,478 at March 31, 1997, compared to
$978,595 at December 31, 1996, increasing $10,883 or 1.1% during the first
quarter of 1997. Earning assets increased $13,316 or 1.5% to $930,412 from
$917,096.
Total loans rose 2.7% or $14,078 during the first quarter of 1997. All of the
major loan categories increased. Commercial loans showed significant growth,
rising $3,295 or 4.8%, as did construction loans, which increased $2,714 or 5.7%
due primarily to growth in the residential sector. Real estate mortgages
increased $7,649 or 2.0% during the first quarter of 1997, while consumer loans
rose $420 or 1.4%.
The investment portfolio, consisting of available-for-sale, held-to-maturity
and other equity securities, is the other significant category of earning
assets. Total investments decreased $1,857 or 0.5% from December 31, 1996 to
March 31, 1997. During this period, loan production required funding in excess
of that achieved by growth in core deposits and borrowings.
Total deposits were $812,133 at March 31, 1997, increasing $5,792 or 0.7% from
$806,341 at December 31, 1996. Interest-bearing deposits advanced $13,432 or
1.9% while noninterest-bearing demand deposits declined $7,640 or 6.5%. The
level of interest free deposits is impacted by seasonality and the use of cash
management by businesses through sweep accounts and repurchase agreements in
place of traditional checking accounts. Federal Home Loan Bank of Atlanta
advances were largely responsible for the $2,742 or 4.0% increase in short-term
borrowings.
5
Liquidity and Interest Ratio Sensitivity
The Company's liquidity position, considering both internal and external
sources available, exceeded anticipated short and long term funding needs at
March 31, 1997.
In assessing liquidity, management considers operating requirements, the
seasonality of loan and deposit flows, investment, loan and deposit maturities,
expected fundings of loans, deposit withdrawals, and the market values of
available-for-sale investments.
The Company employs simulation analysis in order to assess the degree of
interest rate risk inherent in its asset and liability portfolios. Such risk is
monitored in accordance with board of directors' policy limits by the Bank's
asset-liability committee. The limit established for the estimated twelve month
period impact of a 200 basis point change in interest rates on net interest
income is 15%, while the limit for the estimated change in the fair value of the
Company's net assets is 25%. Management believes that the Company continues to
operate within these policy limits. The simulation model captures optionality
factors such as call features and interest rate caps and floors imbedded in
investment and loan portfolio contracts.
Capital Management
The Company recorded a total risk-based capital ratio of 17.89% at March 31,
1997, compared to 17.56% at December 31, 1996; a tier 1 risk-based capital ratio
of 16.79%, compared to 16.44%; and a capital leverage ratio of 10.13%, compared
to 10.38%. Capital adequacy, as measured by these ratios, was well above
regulatory requirements.
Stockholders' equity totaled $98,856 (including a net unrealized gain of $25
on investments available-for-sale) at March 31, 1997, an increase of 2.4% from
$96,581 (including a net unrealized gain of $536) at December 31, 1996.
Internal capital generation (net income less dividends) provided $2,172 in
additional equity during the first three months of 1997, representing an
annualized rate (when considered as a percentage of average total stockholders'
equity) of 9.1% versus 8.7% for the year ended December 31, 1996. External
capital formation amounted to $614 for the quarter ended March 31, 1997,
resulting from issuance of 9,475 shares under the Company's dividend
reinvestment plan and 9,358 shares from employee purchases through 401K benefit
plans.
First quarter dividends were $1,031 or $0.21 per share in 1997, compared to
$786 or $0.18 per share in 1996, for dividend payout ratios of 32.31% and
30.00%, respectively.
B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Net income for the first three months of the year rose $327 or 11.4% in 1997,
to $3,203 ($0.65 per share) from year earlier $2,876 ($0.60 per share). Net
income equates to an annualized first quarter return on average assets of 1.34%
in 1997 compared to 1.30% in 1996, and returns on average equity of 13.45% and
13.23%, respectively.
Net Interest Income
First quarter net interest income was $9,719 in 1997, an increase of 11.7%
over $8,704 in 1996, reflecting primarily a higher volume of average earning
assets, along with a 4 basis point increase in net interest spread to 3.79% from
3.75%.
First quarter tax-equivalent interest income increased $1,340 or 8.1% in 1997,
compared to 1996. Average earning assets rose 10.2% over the prior year period
while the average yield earned on those assets decreased 8 basis points.
Comparing the first quarter of 1997 versus 1996, average loans grew 6.3% to
$527,084 (57.9% of average earning assets) while the
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average yield on loans decreased by 6 basis points. Commercial mortgages and
commercial loans were responsible for most of the rise in total loans. Average
total securities increased 18.8% to $351,947 (38.7% of average earning assets)
and recorded a 2 basis point decrease in average yield.
First quarter interest expense increased $414 or 5.6%, as a net result of 9.6%
higher average interest-bearing liabilities and a 12 basis point decrease in
average rate paid.
Credit Risk Management
The first quarter provision for credit losses was $100 in 1997 compared to
$183 in 1996. Net charge-offs of $104 were recorded for the three month period
ended March 31, 1997 while there were no net charge-offs for the same quarterly
period a year earlier.
Nonperforming loans decreased by $1,221 or 26%, and total nonperforming assets
decreased by $921, or 20%, from December 31, 1996 to March 31, 1997. Expressed
as a percentage of total assets, Nonperforming assets decreased to 0.38% at
March 31, 1997 from 0.48% at December 31, 1996. Because the loan portfolio
includes a significant number of loans with large individual balances, the
unexpected deterioration of one or a few such loans may cause a significant
increase in nonperforming loans and assets or in potential problem loans. The
total balance of impaired loans was $1,060 at March 31, 1997 and the reserve on
those loans was $223 compared to $1,280 with a reserve of $127 at December 31,
1996.
The Company regularly analyzes the sufficiency of its allowance for credit
losses based upon a number of factors, including 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, and
changes in the size and character of the 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. At March 31, 1997, the allowance for credit losses was 1.19% of
total loans versus 1.22% at December 31, 1996. Coverage of risk in the loan
portfolio may be evaluated using a ratio of the allowance for credit losses to
nonperforming loans. Significant variation in this coverage ratio may occur
from period to period because the amount of nonperforming loans depends largely
upon the condition of a small number of individual loans and borrowers relative
to the total loan portfolio. At March 31, 1997, the allowance for credit losses
represented 186% of nonperforming loans compared to 137% at December 31, 1996.
Management believes the allowance for credit losses at March 31, 1997 is
adequate.
Noninterest Income and Expenses
First quarter noninterest income rose $328 or 21.9% to $1,829 in 1997 from
$1,501 in 1996. Excluding a nonrecurring gain on sale of other real estate
owned of $158 included in other income during the first quarter of 1996, the
increase in noninterest income was $486 or 36.2%. The primary causes for the
change were a $141 or 21.8% increase in service charge income, attributable
largely to a volume driven increase in return check charges, and $111 or 21.1%
higher fees in other income, primarily related to trust services and a new debit
card product.
First quarter noninterest expenses increased $883 or 15.4% to $6,631 in 1997
from $5,748 in 1996. Income statement categories that increased were salaries
and employee benefits, which rose $346 or 10.2%, and other expenses, which rose
$563 or 43.6%. The increase in staff expenses was due in large part to
expansion of the bank. The rise in other expenses included $188 or 128.8%
higher marketing expenses associated with entry into new geographic markets, and
a $76 increase in amortization of intangibles which resulted from acquisition of
a branch office in the fourth quarter of 1996.
7
The ratio of net income to average full-time-equivalent (FTE) employees was $9
for the three month periods ended March 31, 1997 and 1996, while the number of
average FTE employees rose to 365 for the first quarter of 1997 from 334 for the
first quarter of 1996.
Income Taxes
The first quarter effective tax rate was 33.5% in 1997, compared to 32.7% in
1996.
8
ANALYSIS OF CREDIT RISK
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
3 Months Ended 12 Months Ended
March 31, 1997 December 31, 1996
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Balance, January 1 $6,391 $6,597
Provision for credit losses 100 308
Loan charge-offs:
Real estate-mortgage (79) (3)
Real estate-construction 0 0
Consumer (20) (143)
Commercial (31) (469)
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Total charge-offs (130) (615)
Loan recoveries:
Real estate-mortgage 0 0
Real estate-construction 0 0
Consumer 19 37
Commercial 7 64
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Total recoveries 26 101
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Net charge-offs (104) (514)
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BALANCE, PERIOD END $6,387 $6,391
=============== =================
Net charge-offs to average loans
(annual basis) 0.08% 0.10%
Allowance to total loans 1.19% 1.22%
Balance sheet risk inherent in the lending function is presented as follows
at the dates indicated:
March 31, December 31,
1997 1996
Non-accrual loans $1,276 $1,291
Loans 90 days past due 2,133 3,337
Restructured loans 25 27
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Total Nonperforming Loans* 3,434 4,655
Other real estate owned 300 0
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TOTAL NONPERFORMING ASSETS $3,734 $4,655
=============== =================
Nonperforming assets to total assets 0.38% 0.48%
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*Those performing loans considered potential problem loans, as defined and
identified by management, amounted to approximately $4,413 at March 31, 1997,
compared to $3,440 at December 31, 1996. 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.
9
PART II - OTHER INFORMATION
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
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27 Financial Data Schedule
(b) Reports on Form 8-K.
On April 16, 1997, Bancorp filed a Current Report of Form 8-K reporting,
under Item 5 of such form, announcing a stock repurchase program authorized by
the Board of Directors. The program is discussed above in Note 2 to the
Consolidated Financial Statements on page 4 and in Management's Discussion and
Analysis in the section entitled "The Company" on page 5.
10
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
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Hunter R. Hollar
President and Chief Executive Officer
Date: May , 1997
By: /s/ James H. Langmead
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James H. Langmead
Vice President and Treasurer
Date: May 9, 1997
11