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, 2005
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
Sandy Spring Bancorp, Inc.
--------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
------------------------ ------------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
------- ----------
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES X NO
------- -------
The number of shares of common stock outstanding as of July 26, 2005 is
14,618,599 shares.
SANDY SPRING BANCORP, INC.
INDEX
PAGE
- ---------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
June 30, 2005 and December 31, 2004......................................................1
Consolidated Statements of Income for the Three Month and Six
Month Periods Ended June 30, 2005 and 2004...............................................2
Consolidated Statements of Cash Flows for the Six
Month Periods Ended June 30, 2005 and 2004 ..............................................4
Consolidated Statements of Changes in Stockholders' Equity for the
Six Month Periods Ended June 30, 2005 and 2004...........................................6
Notes to Consolidated Financial Statements...............................................7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK .................................................................23
ITEM 4. CONTROLS AND PROCEDURES................................................................23
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS............................23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................24
ITEM 6. EXHIBITS...............................................................................24
SIGNATURES.....................................................................................25
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands, except per share data) 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $54,258 $43,728
Federal funds sold 33,934 5,467
Interest-bearing deposits with banks 9,120 610
Residential mortgage loans held for sale (at fair value) 20,052 16,211
Investments available-for-sale (at fair value) 262,792 346,903
Investments held-to-maturity -- fair value of $311,636 (2005) and
$312,661 (2004) 302,362 305,293
Other equity securities 12,751 13,912
Total loans and leases 1,517,780 1,445,525
Less: allowance for loan and lease losses (15,673) (14,654)
---------------- ----------------
Net loans and leases 1,502,107 1,430,871
Premises and equipment, net 45,678 42,054
Accrued interest receivable 11,770 11,674
Goodwill 8,554 7,335
Other intangible assets 8,865 9,866
Other assets 76,062 75,419
---------------- ----------------
Total assets $2,348,305 $2,309,343
================ ================
LIABILITIES
Noninterest-bearing deposits $467,630 $423,868
Interest-bearing deposits 1,313,992 1,308,633
---------------- ----------------
Total deposits 1,781,622 1,732,501
Short-term borrowings 279,424 231,927
Subordinated debentures 35,000 35,000
Other long-term borrowings 29,333 94,608
Accrued interest payable and other liabilities 19,632 20,224
---------------- ----------------
Total liabilities 2,145,011 2,114,260
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 50,000,000; shares issued
and outstanding 14,614,739 (2005) and 14,628,511 (2004) 14,615 14,629
Additional paid in capital 20,815 21,522
Retained earnings 165,970 156,315
Accumulated other comprehensive income 1,894 2,617
---------------- ----------------
Total stockholders' equity 203,294 195,083
---------------- ----------------
Total liabilities and stockholders' equity $2,348,305 $2,309,343
================ ================
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
(In thousands, except per share data) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans and leases $22,411 $16,826 $43,452 $33,195
Interest on loans held for sale 223 212 390 350
Interest on deposits with banks 22 2 26 5
Interest and dividends on securities:
Taxable 2,957 5,509 6,285 12,065
Exempt from federal income taxes 3,415 3,515 7,009 7,102
Interest on federal funds sold 204 88 257 147
---------------- -------------- ------------ ----------------
TOTAL INTEREST INCOME 29,232 26,152 57,419 52,864
Interest Expense:
Interest on deposits 4,855 2,994 9,043 5,724
Interest on short-term borrowings 2,099 3,699 4,117 7,450
Interest on long-term borrowings 751 1,690 1,532 3,382
---------------- -------------- ------------ ----------------
TOTAL INTEREST EXPENSE 7,705 8,383 14,692 16,556
---------------- -------------- ------------ ----------------
NET INTEREST INCOME 21,527 17,769 42,727 36,308
Provision for loan and lease losses 900 0 1,000 0
---------------- -------------- ------------ ----------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES 20,627 17,769 41,727 36,308
Noninterest Income:
Securities gains 825 109 840 337
Service charges on deposit accounts 1,984 1,881 3,655 3,749
Gains on sales of mortgage loans 889 1,028 1,620 1,797
Fees on sales of investment products 640 666 1,085 1,295
Trust department income 944 984 1,816 1,738
Insurance agency commissions 1,224 1,030 3,035 2,151
Income from bank owned life insurance 559 558 1,114 1,132
Visa check fees 550 497 1,041 921
Other income 1,438 1,526 2,687 2,749
---------------- -------------- ------------ ----------------
TOTAL NONINTEREST INCOME 9,053 8,279 16,893 15,869
Noninterest Expenses:
Salaries and employee benefits 11,454 10,230 22,743 20,107
Occupancy expense of premises 1,964 1,815 3,888 3,443
Equipment expenses 1,294 1,324 2,616 2,514
Marketing 406 482 694 995
Outside data services 701 766 1,441 1,487
Amortization of intangible assets 505 487 1,001 973
Other expenses 2,829 2,996 5,207 5,295
---------------- -------------- ------------ ----------------
TOTAL NONINTEREST EXPENSES 19,153 18,100 37,590 34,814
---------------- -------------- ------------ ----------------
Income Before Income Taxes 10,527 7,948 21,030 17,363
Income Tax Expense 2,730 1,555 5,377 3,669
---------------- -------------- ------------ ----------------
NET INCOME $7,797 $6,393 $15,653 $13,694
================ ============== ============ ================
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -----------------------------
(In thousands, except per share data) 2005 2004 2005 2004
- ------------------------------------------------------------------------------------------------------------------------------
Basic Net Income Per Share $0.53 $0.44 $1.07 $0.95
Diluted Net Income Per Share 0.53 0.43 1.06 0.93
Dividends Declared Per Share 0.21 0.19 0.41 0.38
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
June 30,
-----------------------------------
2005 2004
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $15,653 $13,694
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,349 3,206
Provision for loan and lease losses 1,000 0
Deferred Income Tax (benefits) (1,402) (354)
Origination of loans held for sale (138,169) (156,736)
Proceeds from sales of loans held for sale 135,948 157,754
Gains on sales of loans held for sale (1,620) (1,797)
Securities gains (840) (337)
Net (increase) decrease in accrued interest receivable (96) 636
Net increase in other assets (70) (770)
Net (decrease) increase in accrued expenses and other liabilities (592) 1,629
Other - net 560 698
-------------- ---------------
Net cash provided by operating activities 13,721 17,623
Cash flows from investing activities:
Net increase in interest-bearing deposits with banks (8,510) (12)
Purchases of investments held-to-maturity 0 (22,109)
Proceeds from sales of other equity securities 1,161 1,259
Purchases of investments available-for-sale (25,600) (316,378)
Proceeds from sales of investments available-for-sale 66,963 166,480
Proceeds from the sales of other real estate owned 108 153
Proceeds from maturities, calls and principal payments of investments
held-to-maturity 2,632 37,207
Proceeds from maturities, calls and principal payments of investments
available-for-sale 42,301 209,160
Net increase in loans and leases (72,328) (113,918)
Expenditures for premises and equipment (6,075) (5,087)
-------------- ---------------
Net cash provided by (used in) investing activities 652 (43,245)
Cash flows from financing activities:
Net increase in deposits 49,121 119,722
Net increase (decrease) in short-term borrowings 7,222 (29,062)
Retirement of long-term borrowings (25,000) 0
Common stock purchased and retired (1,437) (20)
Proceeds from issuance of common stock 716 583
Dividends paid (5,998) (5,515)
-------------- ---------------
Net cash provided by financing activities 24,624 85,708
-------------- ---------------
Net increase in cash and cash equivalents 38,997 60,086
Cash and cash equivalents at beginning of period 49,195 49,067
-------------- ---------------
Cash and cash equivalents at end of period $88,192 $109,153
============== ===============
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended
June 30,
-------------------------------------
(Dollars in thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest payments $14,717 $16,630
Income tax payments 6,480 3,909
Noncash Financing Activities:
Transfers from loans to other real estate owned 73 0
Reclassification of borrowings from long-term to short-term 40,275 275
See Notes to Consolidated Financial Statements.
5
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum-
ulated
Other Total
Additional Compre- Stock-
Common Paid-in Retained hensive holders'
(Dollars in thousands, except per share data) Stock Capital Earnings Income Equity
- --------------------------------------------- ----------- ------------ ------------ ------------ -----------
Balances at January 1, 2005 $14,629 $21,522 $156,315 $2,617 $195,083
Comprehensive income:
Net income 15,653 15,653
Other comprehensive loss, net of tax
effects and reclassification adjustment (723) (723)
-----------
Total comprehensive income
14,930
Cash dividends - $0.41 per share (5,998) (5,998)
Common stock issued pursuant to:
Director stock purchase plan- 1,693 shares 2 54 56
Stock option plan - 18,861 shares 19 356 375
Employee stock purchase plan - 11,175
shares 11 274 285
Stock repurchases - 45,500 shares (46) (1,391) (1,437)
----------- ------------ ------------ ------------ -----------
Balances at June 30, 2005 $14,615 $20,815 $165,970 $1,894 $203,294
=========== ============ ============ ============ ===========
Balances at January 1, 2004 $14,496 $18,970 $153,280 $6,703 $193,449
Comprehensive income:
Net income 13,694 13,694
Other comprehensive loss, net of tax
effects and reclassification adjustment (6,101) (6,101)
-----------
Total comprehensive income
7,593
Cash dividends - $0.38 per share (5,515) (5,515)
Common stock issued pursuant to:
Director stock purchase plan- 1,120 shares 1 39 40
Stock option plan - 12,480 shares 13 256 269
Employee stock purchase plan - 8,977
shares 9 265 274
Stock repurchases - 550 shares (1) (19) (20)
----------- ------------ ------------ ------------ -----------
Balances at June 30, 2004 $14,518 $19,511 $161,459 $602 $196,090
=========== ============ ============ ============ ===========
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - General
The foregoing financial statements are unaudited. 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 2004 Annual
Report to Shareholders. There have been no significant changes to the Company's
Accounting Policies as disclosed in the 2004 Annual Report. The results shown in
this interim report are not necessarily indicative of results to be expected for
the full year 2005.
The accounting and reporting policies of Sandy Spring Bancorp (the
"Company") and its wholly-owned subsidiary, Sandy Spring Bank (the "Bank"),
together with its subsidiaries, Sandy Spring Insurance Corporation and The
Equipment Leasing Company, conform to accounting principles generally accepted
in the United States of America and to general practices within the financial
services industry. Certain reclassifications have been made to amounts
previously reported to conform to current classifications.
Consolidation has resulted in the elimination of all significant
intercompany accounts and transactions.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks and federal funds sold, all with original maturities of
three months or less.
New Accounting Pronouncements
On September 30, 2004, the FASB issued FASB Staff Position ("FSP")
Emerging Issues Task Force ("EITF") Issue No. 03-1-1 delaying the effective date
of paragraphs 10-18 of EITF 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments," which provides guidance
for determining the meaning of "other-than-temporarily impaired" and its
application to certain debt and equity securities within the scope of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The guidance requires that
investments which have declined in value due to credit concerns or solely due to
changes in interest rates must be recorded as other-than-temporarily impaired
unless the Company can assert and demonstrate its intention to hold the security
for a period of time, up to its contractual maturity, sufficient to allow for a
recovery of fair value up to or beyond the cost of the investment. The delay of
the effective date of EITF 03-1 will be superceded concurrent with the final
issuance of proposed FSP Issue 03-1-a. Proposed FSP Issue 03-1-a is intended to
provide implementation guidance with respect to all securities analyzed for
impairment under paragraphs 10-18 of EITF 03-1.
In June 2005, the FASB decided to not provide additional guidance on
the meaning of other-than-temporary impairment. The FASB will issue proposed FSP
Issue 03-1-a as final. The final FSP, to be retitled FSP FAS 115-1, "The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments"
will replace the guidance set forth in paragraphs 10-18 of EITF 03-1 with
references to existing guidance. Management continues to closely monitor how the
provisions of EITF 03-1 and proposed FSP FAS 115-1 might affect the Company.
Based on management's current evaluation, they do not anticipate that any
material financial statement impact will result from the new accounting
pronouncements.
In December 2004, the FASB published FASB Statement No. 123 (revised 2004),
"Share-Based Payment" ("FAS 123 (R)" or the "Statement"). FAS 123 (R) requires
that compensation cost relating to share-based payment transactions, including
grants of employee stock options, be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. FAS 123 (R) permits entities to use any option-pricing model
that meets the fair value objective in the Statement.
In April 2005 the Securities and Exchange Commission adopted a new rule that
delays the effective date of FAS 123 (R) to fiscal years beginning after June
15, 2005. The impact of this Statement on the Company in 2006 and beyond will
depend upon various factors, among them being the Company's future compensation
strategy. The pro forma compensation costs presented (in note 2 below) and in
prior filings for the Company have been calculated using a binomial option
pricing model and may not be indicative of amounts that should be expected in
future periods. No decisions have been made as to whether the Company will apply
the modified prospective or retrospective method of application.
In May 2005, the FASB published FASB Statement No. 154, "Accounting Changes and
Error Corrections" ("FAS 154" or the "Statement"). FAS 154 provides guidance on
the accounting for and reporting of accounting changes and error corrections. It
establishes, unless impracticable, retrospective application as the required
method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to a newly adopted accounting principle. The
Statement also provides guidance for determining whether retrospective
application of a change in accounting principle is impracticable and for
reporting a change when retrospective application is impracticable. The
reporting of a correction of an error by restating previously issued financial
statements is also addressed by this Statement. FAS 154 is effective for
accounting changes and corrections of errors made in 2006. Management does not
expect the adoption of this Statement to have a material impact on the Company's
consolidated financial statements.
7
Note 2 - Stock Option Plan
At June 30, 2005, the Company had options outstanding under two
stock-based employee compensation plans, the 1992 Stock Option Plan and the 1999
Stock Option Plan (both expired but having outstanding options that may still be
exercised). The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees", and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effects on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", to
stock-based employee compensation for the periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------
(In thousands, except per share data) 2005 2004 2005 2004
------------------------------------- --------------- ------------- -------------- ------------------
Net income, as reported $ 7,797 $ 6,393 $ 15,653 $ 13,694
Less pro forma stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (272) (310) (550) (620)
------------ ----------- ------------ -------------
Pro forma net income $ 7,525 $ 6,083 $ 15,103 $ 13,074
============ =========== ============ =============
Net income per share:
Basic - as reported $ 0.53 $ 0.44 $ 1.07 $ 0.95
Basic - pro forma $ 0.51 $ 0.42 $ 1.03 $ 0.90
Diluted - as reported $ 0.53 $ 0.43 $ 1.06 $ 0.93
Diluted - pro forma $ 0.51 $ 0.41 $ 1.02 $ 0.89
The Company has established the Sandy Spring Bancorp 2005 Omnibus Stock Plan
(the "2005 Stock Plan") which replaced the 1999 Stock Option Plan and authorizes
awards for up to 1,800,000 shares of Company stock over its ten-year term. No
awards have yet been granted under the 2005 Stock Plan. The 2005 Stock Plan is
administered by a committee (the "Committee") of at least three members of the
Board of Directors who are independent directors. The Committee may make grants
that qualify as incentive stock options under the Internal Revenue Code, other
stock options, stock appreciation rights, and restricted stock to directors and
key employees designated by the Committee.
Note 3 - Per Share Data
The calculations of net income per common share for the three month and
six month periods ended June 30 are as shown in the following table. Basic net
income per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation method is derived by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding adjusted for the dilutive effect of
outstanding stock options.
(Dollars and amounts in thousands, except Three Months Ended Six Months Ended
Per share data) June 30, June 30,
- ----------------------------------------- ---------------------------- -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Basic:
Net income available to common stockholders $ 7,797 $ 6,393 $15,653 $13,694
Average common shares outstanding 14,621 14,514 14,629 14,510
Basic net income per share $ 0.53 $ 0.44 $1.07 $ 0.95
============= ============== ============ ================
Diluted:
Net income available to common stockholders $ 7,797 $ 6,393 $15,653 $13,694
Average common shares outstanding 14,621 14,514 14,629 14,510
Stock option adjustment 99 212 111 218
------------- -------------- ------------ ----------------
Average common shares outstanding-diluted 14,720 14,726 14,740 14,728
Diluted net income per share $ 0.53 $ 0.43 $ 1.06 $ 0.93
============= ============== ============ ================
8
Options for 367,585 shares and 188,768 shares of common stock were not
included in computing diluted net income per share for the three and six month
periods ended June 30, 2005 and 2004 respectively, because their effects are
antidilutive.
Note 4-Pension, Profit Sharing, and Other Employee Benefit Plans
Defined Benefit Pension Plan
The Company has a qualified, noncontributory, defined benefit pension
plan covering substantially all employees. Benefits equal the sum of two parts:
(a) the benefit accrued as of December 31, 2000, based on the formula of 1.5% of
the highest five year average salary as of that date times years of service as
of that date, plus (b) 1.75% of each year's earnings after December 31, 2000
(1.75% of career average earnings). In addition, if the participant's age plus
years of service as of January 1, 2001, equal at least 60 and the participant
had at least 15 years of service at that date, he or she will receive an
additional benefit of 1% of year 2000 earnings for each of the first 10 years of
service completed after December 31, 2000. Early retirement is also permitted by
the Plan at age 55 after 10 years of service. The Company's funding policy is to
contribute at least the minimum amount necessary to keep the plan fully funded.
The plan invests primarily in a diversified portfolio of managed fixed income
and equity funds. Contributions provide not only for benefits attributed to
service to date, but also for the benefit expected to be earned in the coming
year. The Company, with input from its actuaries, estimates that the 2005
contribution will be approximately $2.0 million which will maintain the pension
plan's fully funded status.
Net periodic benefit cost for the three and six month periods ended
June 30, 2005 and 2004 includes the following components:
Three months Ended Six months Ended
- -------------------------------------------------------------------------------------------------------------------
June 30, June 30,
(In thousands) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned $405 $395 $811 $790
Interest cost on projected benefit obligation 273 232 546 464
Expected return on plan assets (287) (259) (574) (519)
Amortization of prior service cost (16) (16) (32) (31)
Recognized net actuarial loss 84 82 168 164
---- ---- ---- ----
Net periodic benefit cost $459 $434 $919 $868
==== ==== ==== ====
Cash and Deferred Profit Sharing Plan
The Company has a qualified Cash and Deferred Profit Sharing Plan that
includes a 401(k) provision with a Company match. The profit sharing component
is non-contributory and covers all employees after ninety days of service. The
401(k) plan provision is voluntary and also covers all employees after ninety
days of service. Employees contributing under the 401(k) provision receive a
matching contribution up to the first 4% of compensation based on years of
service and subject to employee contribution limitations. The Company match
includes a vesting schedule with employees becoming 100% vested after four years
of service. The Plan permits employees to purchase shares of Sandy Spring
Bancorp common stock with their profit sharing allocations, 401 (k)
contributions, Company match, and other contributions under the Plan. The
Company had expenses related to the qualified Cash and Deferred Profit Sharing
Plan of $1.3 million and $393,000 for the six month periods ended June, 2005 and
2004, respectively and $663,000 and $152,000 for the three month periods ended
June 30, 2005 and 2004, respectively.
The Company also has a performance based compensation benefit which is
integrated with the Cash and Deferred Profit Sharing Plan and which provides
incentives to employees based on the Company's financial results as measured
against key performance indicator goals set by management. The Company had
expenses (benefits) related to the performance based compensation benefit of
$1.4 million and $14,000 for the six month periods ended June 30, 2005 and 2004,
respectively and $673,000 and $(61,000) for the three month periods ended June
30, 2005 and 2004, respectively.
The Company has Supplemental Executive Retirement Agreements (SERAs)
with its executive officers, providing for retirement income benefits as well as
pre-retirement death benefits. Retirement benefits payable under SERAs, if any,
are integrated with other pension plan and Social Security retirement benefits
expected to be received by the executives. The Company is accruing the present
value of these benefits over the remaining years to the executives' retirement
dates. The Company had expenses related to the SERAs of $277,000 and $115,000
for the six month periods ended June 30, 2005 and 2004, respectively and
$142,000 and $119,000 for the three month periods ended June 30, 2005 and 2004,
respectively.
9
The Company has an Executive Health Insurance Plan that provides for
payment of defined medical and dental insurance costs and out of pocket expenses
for selected executives and their families. Benefits, which are paid during both
employment and retirement, are subject to a $6,500 limitation for each executive
per year. The Company had expenses related to the Executive Health Insurance
Plan of $128,000 for both of the six month periods ended June 30, 2005 and 2004,
respectively and $64,000 for both of the three month periods ended June 30, 2005
and 2004.
Note 5 - Unrealized Losses on Investments
Shown below is information that summarizes the gross unrealized losses
and their related fair values for the Company's available-for-sale and
held-to-maturity investment portfolios.
Gross unrealized losses and fair value by length of time that the
individual available-for-sale securities have been in a continuous unrealized
loss position at June 30, 2005 and 2004 are as follows:
Continuous unrealized losses
(In thousands) existing for:
-----------------------------
Less than 12 More than 12 Total Unrealized
Available for sale as of June 30, 2005 Fair Value months months Losses
------------------ ---------------- -------------- ----------------
U.S. Agency $ 128,912 $ 234 $ 1,314 $ 1,548
State and municipal 4,325 0 17 17
Mortgage-backed 6,626 1 59 60
----------- ----------- ----------- ------------
$ 139,863 $ 235 $ 1,390 $ 1,625
=========== =========== =========== ============
Continuous unrealized losses
(In thousands) existing for:
-----------------------------
Less than 12 More than 12 Total Unrealized
Available for sale as of June 30, 2004 Fair Value months months Losses
------------------ ---------------- -------------- ----------------
U.S. Agency $ 417,798 $ 5,532 $ 800 $ 6,332
State and municipal 12,515 469 0 469
Mortgage-backed 11,627 446 0 446
Corporate Bonds 1,772 28 0 28
----------- ----------- ----------- ------------
$ 443,712 $ 6,475 $ 800 $ 7,275
=========== =========== =========== ============
Approximately 100% and 99% of the bonds carried in the
available-for-sale investment portfolio with continuous losses as of June 30,
2005 and 2004, respectively are rated AAA. The securities representing the
unrealized losses in the available-for-sale portfolio as of June 30, 2005 and
2004 all have modest duration risk (1.64 years in 2005 and 2.83 years in 2004),
low credit risk, and minimal loss (approximately 1% in 2005 and 2% in 2004) when
compared to book value. The unrealized losses that exist are the result of
market changes in interest rates since the original purchase. These factors
coupled with the fact that the Company has both the intent and ability to hold
these investments for a period of time sufficient to allow for any anticipated
recovery in fair value substantiates that the unrealized losses in the
available-for-sale portfolio are temporary.
Gross unrealized losses and fair value by length of time that the
individual held-to-maturity securities have been in a continuous unrealized loss
position a June 30, 2005 and 2004 are as follows:
10
Continuous unrealized losses
(In thousands) existing for:
-----------------------------
Less than 12 More than 12 Total Unrealized
Held to Maturity as of June 30, 2005 Fair Value months months Losses
------------------ ---------------- -------------- ----------------
U.S. Agency $ 0 $ 0 $ 0 $ 0
State and municipal 31,135 28 172 200
----------- ----------- ----------- ------------
$ 31,135 $ 28 $ 172 200
=========== =========== =========== ============
Continuous unrealized losses
(In thousands) existing for:
-----------------------------
Less than 12 More than 12 Total Unrealized
Held to Maturity as of June 30, 2004 Fair Value months months Losses
------------------ ---------------- -------------- ----------------
U.S. Agency $ 43,220 $ 1,127 $ 0 $ 1,127
State and municipal 113,232 2,993 77 3,070
----------- ----------- ----------- ------------
$ 156,452 $ 4,120 77 $ 4,197
=========== =========== =========== ============
Approximately 81% and 85% of the bonds carried in the held-to-maturity
investment portfolio with continuous unrealized losses as of June 30, 2005 and
2004, respectively, are rated AAA and 19% and 15% as of June 30, 2005 and 2004,
respectively, are rated AA1. The securities representing the unrealized losses
in the held-to-maturity portfolio all have modest duration risk (2.54 years in
2005 and 4.33 years in 2004), low credit risk, and minimal losses (approximately
1% in 2005 and 3% in 2004) when compared to book value. The unrealized losses
that exist are the result of market changes in interest rates since the original
purchase. These factors coupled with the Company's intent and ability to hold
these investments for a period of time sufficient to allow for any anticipated
recovery in fair value substantiates that the unrealized losses in the
held-to-maturity portfolio are temporary.
Note 6 - Segment Reporting
The Company operates in three operating segments--Community Banking,
Insurance, and Leasing. Only Community Banking meets the threshold for
reportable segment reporting; however, the Company is disclosing separate
information for all three operating segments. Each of the operating segments is
a strategic business unit that offers different products and services. The
Insurance and Leasing segments are businesses that were acquired in separate
transactions where management at the time of acquisition was retained. The
accounting policies of the segments are the same as those described in Note 1 to
the consolidated financial statements. However, the segment data reflect
intersegment transactions and balances.
The Community Banking segment is conducted through Sandy Spring Bank
and involves delivering a broad range of financial products and services,
including various loan and deposit products to both individuals and businesses.
Parent company income is included in the Community Banking segment, as the
majority of parent company activities are related to this segment. Major revenue
sources include net interest income, gains on sales of mortgage loans, trust
income, fees on sales of investment products and service charges on deposit
accounts. Expenses include personnel, occupancy, marketing, equipment and other
expenses. Included in Community Banking expenses are noncash charges associated
with amortization of intangibles related to acquired entities totaling $446,000
for both of the quarters ended June 30, 2005 and 2004. For the first six months
ended June 30, 2005 and 2004 such amortization totaled $892,000 in both periods.
The Insurance segment is conducted through Sandy Spring Insurance
Corporation, a subsidiary of the Bank, and offers annuities as an alternative to
traditional deposit accounts. Sandy Spring Insurance Corporation operates the
Chesapeake Insurance Group, a general insurance agency located in Annapolis,
Maryland, and Wolfe and Reichelt Insurance Agency, located in Burtonsville,
Maryland. Major sources of revenue are insurance commissions from commercial
lines and personal lines. Expenses include personnel and support charges.
The Leasing segment is conducted through The Equipment Leasing Company,
a subsidiary of the Bank, that provides leases for such items as computers,
telecommunications systems and equipment, medical equipment and point-of-sale
systems for retail businesses. Equipment leasing is conducted through vendors
located primarily in states along the east coast from New Jersey to Florida and
in Illinois. The typical lease is a "small ticket" by industry standards,
averaging less than $30,000, with individual leases generally not exceeding
$250,000. Major revenue sources include interest income. Expenses include
personnel and support charges.
11
Information about operating segments and reconciliation of such information to
the consolidated financial statements follows:
(In thousands) Community Inter-Segment
Banking Insurance Leasing Elimination Total
- ---------------------------- ----------------- ----------------- ------------------- ------------------- -----------------
Quarter ended
June 30, 2005
Interest income $ 28,870 $ 6 $ 444 $ (88) $ 29,232
Interest expense 7,712 0 81 (88) 7,705
Provision for loan
and lease losses 900 0 0 0 900
Noninterest income 7,479 1,400 360 (186) 9,053
Noninterest expenses 18,000 1,138 201 (186) 19,153
------------ -------- --------- ---------- ------------
Income (loss) before
income taxes 9,737 268 522 0 10,527
Income tax expense 2,418 106 206 0 2,730
------------ -------- --------- ---------- ------------
Net income (loss) $ 7,319 $ 162 $ 316 $ 0 $ 7,797
============ ======== ========= ========== ============
Assets $ 2,346,079 $ 9,921 $ 23,782 $ (31,477) $ 2,348,305
Quarter ended
June 30, 2004
Interest income $ 25,895 $ 1 $ 375 (119) $ 26,152
Interest expense 8,384 0 118 (119) 8,383
Provision for loan
and lease losses 0 0 0 0 0
Noninterest income 6,846 1,242 319 (128) 8,279
Noninterest expense 17,085 933 210 (128) 18,100
------------ -------- --------- ---------- ------------
Income before income
taxes 7,272 310 366 0 7,948
Income tax expense 1,287 123 145 0 1,555
------------ -------- --------- ---------- ------------
Net income $ 5,985 $ 187 $ 221 $ 0 $ 6,393
============ ======== ========= ========== ============
Assets $ 2,422,997 $ 8,328 $ 18,921 $ (26,047) $ 2,424,199
(In thousands) Community Inter-Segment
Banking Insurance Leasing Elimination Total
- ---------------------------- ----------------- ----------------- ------------------- ------------------- -----------------
Year to Date
June 30, 2005
Interest income $ 56,782 $ 13 $ 852 $ (228) $ 57,419
Interest expense 14,705 0 215 (228) 14,692
Provision for loan
and lease losses 1,000 0 0 0 1,000
Noninterest income 13,333 3,344 584 (368) 16,893
Noninterest expenses 35,290 2,254 414 (368) 37,590
------ ----- --- ---- ------
Income (loss) before
income taxes 19,120 1,103 807 0 21,030
Income tax expense 4,621 437 319 0 5,377
------ ----- --- ---- ------
Net income (loss) $ 14,499 666 $ 488 $ 0 $ 15,653
====== === === = ======
Assets $ 2,346,079 $ 9,921 $ 23,782 $ (31,477) $ 2,348,305
Year to Date
June 30, 2004
Interest income $ 52,280 $ 3 $ 837 (256) $ 52,864
Interest expense 16,559 0 253 (256) 16,556
Provision for loan
and ease losses 0 0 0 0 0
Noninterest income 13,000 2,593 522 (246) 15,869
Noninterest expense 32,855 1,783 422 (246) 34,814
------ ----- --- ---- ------
Income before income
taxes 15,866 813 684 0 17,363
Income tax expense 3,075 323 271 0 3,669
------ ----- --- ---- ------
Net income $ 12,791 $ 490 $ 413 $ 0 $ 13,694
====== === === = ======
Assets $ 2,422,997 $ 8,328 $ 18,921 $ (26,047) $ 2,424,199
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Sandy Spring Bancorp makes forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Form 10-Q that are subject to risks and
uncertainties. These forward-looking statements include: statements of goals,
intentions, earnings expectations, and other expectations; estimates of risks
and of future costs and benefits; assessments of probable loan and lease losses;
assessments of market risk; and statements of the ability to achieve financial
and other goals. These forward-looking statements are subject to significant
uncertainties because they are based upon or are affected by: management's
estimates and projections of future interest rates, market behavior, and other
economic conditions; future laws and regulations; and a variety of other matters
which, by their nature, are subject to significant uncertainties. Because of
these uncertainties, Sandy Spring Bancorp's actual future results may differ
materially from those indicated. In addition, the Company's past results of
operations do not necessarily indicate its future results.
THE COMPANY
The Company is the registered bank holding company for Sandy Spring
Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates
thirty-one community offices in Anne Arundel, Carroll, Frederick, Howard,
Montgomery, and Prince George's Counties in Maryland, together with an insurance
subsidiary and an equipment leasing company.
The Company offers a broad range of financial services to consumers and
businesses in this market area. Through June 30, 2005, year-to-date average
commercial loans and leases and commercial real estate loans accounted for
approximately 43% of the Company's loan and lease portfolio, and year-to-date
average consumer and residential real estate loans accounted for approximately
57%. The Company has established a strategy of independence, and intends to
establish or acquire additional offices, banking organizations, and nonbanking
organizations as appropriate opportunities may arise.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP") in the United States of
America and follow general practices within the industry in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements could reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. The estimates used in management's assessment of the adequacy of
the allowance for loan and lease losses require that management make assumptions
about matters that are uncertain at the time of estimation. Differences in these
assumptions and differences between the estimated and actual losses could have a
material effect.
13
NON-GAAP FINANCIAL MEASURE
The Company has for many years used a traditional efficiency ratio that
is a non-GAAP financial measure as defined in Commission Regulation G and Item
10 of U.S. Securities and Exchange Commission Regulation S-K. This traditional
efficiency ratio is used as a measure of operating expense control and
efficiency of operations. Management believes that its traditional ratio better
focuses attention on the operating performance of the Company over time than
does a GAAP-based ratio, and that it is highly useful in comparing
period-to-period operating performance of the Company's core business
operations. It is used by management as part of its assessment of its
performance in managing noninterest expenses. However, this measure is
supplemental, and is not a substitute for an analysis of performance based on
GAAP measures. The reader is cautioned that the traditional efficiency ratio
used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios
reported by other financial institutions.
In general, the efficiency ratio is noninterest expenses as a
percentage of net interest income plus total noninterest income. This is a GAAP
financial measure. Noninterest expenses used in the calculation of the
traditional, non-GAAP efficiency ratio exclude intangible asset amortization.
Income for the traditional ratio is increased for the favorable effect of
tax-exempt income, and excludes securities gains and losses, which can vary
widely from period to period without appreciably affecting operating expenses.
The traditional measure is different from the GAAP-based efficiency ratio. The
GAAP-based measure is calculated using noninterest expense and income amounts as
shown on the face of the Consolidated Statements of Income. The traditional and
GAAP-based efficiency ratios are presented and reconciled in Table 1.
Table 1 - GAAP based and traditional efficiency ratios
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------------------------------------------------------
June 30, June 30,
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Noninterest expenses-GAAP based $ 19,153 $ 18,100 $ 37,590 $ 34,814
Net interest income plus noninterest income-
GAAP based 30,580 26,048 59,620 52,177
Efficiency ratio-GAAP based 62.63% 69.49% 63.05% 66.72%
============== ============== ============= ========
Noninterest expenses-GAAP based $ 19,153 $ 18,100 $ 37,590 $ 34,814
Less non-GAAP adjustment:
Amortization of intangible assets 505 487 1,001 973
-------------- -------------- ------------- --------
Noninterest expenses-traditional ratio 18,648 17,613 36,589 33,841
Net interest income plus noninterest income-
GAAP based 30,580 26,048 59,620 52,177
Plus non-GAAP adjustment:
Tax-equivalency 1,766 1,919 3,475 3,884
Less non-GAAP adjustments:
Securities gains (losses) 825 109 840 337
-------------- -------------- ------------- --------
Net interest income plus noninterest
Income - traditional ratio 31,521 27,858 62,255 55,724
Efficiency ratio - traditional 59.16% 63.22% 58.77% 60.73%
============== ============== ============= ========
A. FINANCIAL CONDITION
The Company's total assets were $2,348,305,000 at June 30, 2005,
compared to $2,309,343,000 at December 31, 2004, increasing $38,962,000 or 2%
during the first six months of 2005. Earning assets increased by 1%, to
$2,158,791,000 at June 30, 2005, from $2,133,921,000 at December 31, 2004.
Total loans and leases, excluding loans held for sale, increased 5% or
$72,255,000 during the first six months of 2005, to $1,517,780,000. During this
period, all three major loan categories showed increases. These increases
occurred in residential real estate loans, which increased by $20,890,000 or 4%,
attributable in large part to residential mortgage loan growth, consumer loans
which increased by $14,435,000 or 5%, primarily reflecting higher home equity
lines and commercial loans and leases which increased by $36,930,000 or 6%, due
predominantly to growth in commercial loans secured by real estate. Residential
mortgage loans held for sale increased by $3,841,000 from December 31, 2004, to
$20,052,000 at June 30, 2005.
14
Table 2 - Analysis of Loans and Leases
The following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In thousands) June 30, 2005 % December 31, 2004 %
- ---------------------------------------------- -------------------------- ------------- ----------------------------- ---------
Residential real estate $530,694 35% $509,804 35%
Commercial loans and leases 663,549 44 626,619 43
Consumer 323,537 21 309,102 22
---------- ---- ---------- ----
Total Loans and Leases 1,517,780 100% 1,445,525 100%
==== ====
Less: Allowance for loan and lease losses (15,673) (14,654)
---------- ----------
Net loans and leases $1,502,107 $1,430,871
========== ==========
========================== =============================
The total investment portfolio decreased by 13% or $88,203,000 from
December 31, 2004, to $577,905,000 at June 30, 2005, primarily to support loan
growth. The decrease was driven primarily by a decline of $84,111,000 or 24% of
available-for-sale securities. The aggregate of federal funds sold and
interest-bearing deposits with banks increased by $36,977,000 during the first
six months of 2005, reaching $43,054,000 at June 30, 2005. This increase was due
to sales and calls of investment securities in order to fund expected loan
volume.
Table 3 - Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
(In thousands) June 30, 2005 % December 31, 2004 %
- ---------------------------------------------- -------------------------- ------------- ----------------------------- ---------
Noninterest-bearing deposits $467,630 26% $423,868 25%
Interest-bearing deposits:
Demand 233,623 13 241,378 14
Money market savings 377,059 21 371,517 21
Regular savings 214,760 12 228,301 13
Time deposits less than $100,000 282,809 16 275,671 16
Time deposits $100,000 or more 205,741 12 191,766 11
---------- --- ---------- ---
Total interest-bearing 1,313,992 74 1,308,633 75
---------- --- ---------- ---
Total deposits $1,781,622 100% $1,732,501 100%
========== === ========== ===
Total deposits were $1,781,622,000 at June 30, 2005, increasing
$49,121,000 or 3% from $1,732,501,000 at December 31, 2004. First half 2005
growth of 10% was achieved in 2005 for noninterest-bearing demand deposits (up
$43,762,000), 1% for money market savings (up $5,542,000), 3% for time deposits
in denominations of less than $100,000 (up $7,138,000) and 7% for time deposits
in denominations exceeding $100,000 (up $13,975,000). Over the same period,
decreases of 6% were recorded for interest-bearing regular savings (down
$13,541,000), and 3% for interest bearing demand deposits (down $7,755,000).
These fluctuations in balances were due primarily to rising rates and new
certificate of deposit products introduced during the first half of 2005. The
increase in noninterest-bearing demand deposits was due primarily to the
Company's increased emphasis on client relationship management under "The
Difference" strategy.
Total borrowings were $343,757,000 at June 30, 2005, which represented
a decrease of $17,778,000 or 5% from December 31, 2004, primarily reflecting
management's efforts to reduce the overall cost of funds.
MARKET RISK AND INTEREST RATE SENSITIVITY
OVERVIEW
The Company's net income is largely dependent on its 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.
15
The Company's Board of Directors has established a comprehensive
interest rate risk management policy, which is administered by Management's
Asset Liability Management Committee ("ALCO"). The policy establishes limits of
risk, which are quantitative measures of the percentage change in net interest
income (a measure of net interest income at risk) and the fair value of equity
capital (a measure of economic value of equity ("EVE") at risk) resulting from a
hypothetical change in U.S. Treasury interest rates for maturities from one day
to thirty years. The Company measures the potential adverse impacts that
changing interest rates may have on its short-term earnings, long-term value,
and liquidity by employing simulation analysis through the use of computer
modeling. The simulation model captures optionality factors such as call
features and interest rate caps and floors imbedded in investment and loan
portfolio contracts. 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, lease, and deposit products.
The Company prepares a current base case and eight alternative
simulations, at least once a quarter, and reports the analysis to the Board of
Directors. In addition, more frequent forecasts are produced when interest rates
are particularly uncertain or when other business conditions so dictate.
If a measure of risk produced by the alternative simulations of the
entire balance sheet violates policy guidelines, ALCO is required to develop a
plan to restore the measure of risk to a level that complies with policy limits
within two quarters.
The Company's interest rate risk management goals are (1) to increase
net interest income at a growth rate consistent with the growth rate of total
assets, and (2) to minimize fluctuations in net interest margin as a percentage
of earning assets. Management attempts to achieve these goals by balancing,
within policy limits, the volume of floating-rate liabilities with a similar
volume of floating-rate assets; by keeping the average maturity of fixed-rate
asset and liability contracts reasonably matched; by maintaining a pool of
administered core deposits; and by adjusting pricing rates to market conditions
on a continuing basis.
The balance sheet is subject to quarterly testing for eight alternative
interest rate shock possibilities to indicate the inherent interest rate risk.
Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points
("bp"), although the Company may elect not to use particular scenarios that it
determines are impractical in a current rate environment. It is management's
goal to structure the balance sheet so that net interest earnings at risk over a
twelve-month period and the economic value of equity at risk do not exceed
policy guidelines at the various interest rate shock levels.
The Company augments its quarterly interest rate shock analysis with
alternative external interest rate scenarios on a monthly basis. These
alternative interest rate scenarios may include non-parallel rate ramps and
non-parallel yield curve twists.
ANALYSIS OF POSSIBLE OUTCOMES
Measures of net interest income at risk produced by simulation analysis
are indicators of an institution's short-term performance in alternative rate
environments. These measures are typically based upon a relatively brief period,
usually one year. They do not necessarily indicate the long-term prospects or
economic value of the institution.
ESTIMATED CHANGES IN NET INTEREST INCOME
-------------------------------------- ------------- -------------- ------------- ------------ ----------- ----------------
CHANGE IN NET INTEREST INCOME: + 400 BP + 300 BP + 200 BP + 100 BP - 100 BP - 200 BP
-------------------------------------- ------------- -------------- ------------- ------------ ----------- ----------------
POLICY LIMIT 30% 25% 20% 15% 15% 20%
June 2005 +1.43 -0.17 -0.77 -0.01 -2.64 -8.56
December 2004 +0.97 -0.06 -0.48 +0.62 -2.45 Not Measured
As shown above, measures of net interest income at risk remained at
approximately the same levels as December 31, 2004, at all interest rate shock
levels. All measures remained well within prescribed policy limits. Although
assumed to be unlikely, our largest exposure is at the -200bp level, with a
measure of -8.56%. This is also well within our prescribed policy limit of 20%.
The -200bp shock level was not measured at December 31, 2004, because it was
determined to be impractical due to the rate environment at that time. The
maintenance of the net interest income sensitivity is consistent with
management's decision to reduce the size and duration of the investment
portfolio in the second quarter of 2005 in anticipation of rising interest rates
in the future and to support the funding of loan growth.
16
The measures of equity value at risk indicate the ongoing economic
value of the Company by considering the effects of changes in interest rates on
all of the Company's cash flows, and discounting the cash flows to estimate the
present value of assets and liabilities. The difference between these discounted
values of the assets and liabilities is the economic value of equity, which, in
theory, approximates the fair value of the Company's net assets.
ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
---------------------------------------- -------------- ------------- ------------ ------------ ------------ ----------------
DECREASE IN ECONOMIC VALUE OF EQUITY: + 400 BP + 300 BP + 200 BP + 100 BP - 100 BP -200 BP
---------------------------------------- -------------- ------------- ------------ ------------ ------------ ----------------
POLICY LIMIT 60% 40% 22.5% 10.0% 12.5% 22.5%
June 2005 -8.46 -5.59 -2.29 -0.44 -3.16 -9.43
December 2004 -22.44 -17.07 -9.98 -2.12 -1.04 Not Measured
Measures of the economic value of equity (EVE) at risk improved over
year-end 2004 in all but the -100bp interest rate shock level. A reduction in
the size of the investment portfolio, as well as core deposit balance growth and
an increase in core deposit estimated lives were key contributors to the
improved risk position. The -200bp shock level was not measured at December 31,
2004, because it was determined to be impractical due to the rate environment at
that time. The economic value of equity exposure at +200bp is now -2.29%
compared to -9.98% at year-end 2004, and is well within the policy limit of
22.5%, as are measures at all other shock levels.
LIQUIDITY
Liquidity is measured using an approach designed to take into account
loan and lease payments, maturities, calls and pay -downs of securities,
earnings, growth, mortgage banking activities, investment portfolio liquidity,
and other factors. Through this approach, implemented by the funds management
subcommittee of ALCO under formal policy guidelines, the Company's liquidity
position is measured weekly, looking forward at thirty day intervals out to 180
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 and core growth. Resulting
projections as of June 30, 2005 showed short-term investments exceeding
short-term borrowings over the subsequent 90 days by $28,651,000, which
increased from a shortfall of $34,799,000 at December 31, 2004. This excess of
liquidity over projected requirements for funds indicates that the Company can
increase its loans and other earning assets without incurring additional
borrowing.
The Company also has external sources of funds, which can be drawn upon
when required. The main source of external liquidity is a line of credit for
$683,897,000 from the Federal Home Loan Bank of Atlanta, of which $139,833,000
was outstanding at June 30, 2005. 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 $263,507,000 at June 30,
2005, against which there were outstandings of $25,000,000. Based upon its
liquidity analysis, including external sources of liquidity available,
management believes the liquidity position is appropriate at June 30, 2005.
The following is a schedule of significant commitments at June 30,
2005:
(In thousands)
Commitments to extend credit:
Unused lines of credit (home equity and business) $368,992
Other commitments to extend credit $161,647
Standby letters of credit $36,587
---------
$567,226
========
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 13.90% at June
30, 2005, compared to 13.82% at December 31, 2004; a tier 1 risk-based capital
ratio of 12.97%, compared to 12.92%; and a capital leverage ratio of 9.56%,
compared to 8.67%. Capital adequacy, as measured by these ratios, was well above
regulatory requirements. Management believes the level of capital at June 30,
2005, is appropriate.
Stockholders' equity for June 30, 2005, totaled $203,294,000,
representing an increase of $8,211,000 or 4% from $195,083,000 at December 31,
2004. Accumulated other comprehensive income, a component of stockholders'
equity comprised of unrealized gains and losses on available-for-sale
securities, net of taxes, decreased by 28% or $723,000 to $1,894,000 at June 30,
2005from December 31, 2004.
17
Internal capital generation (net income less dividends) added
$9,655,000 to total stockholders' equity during the first six months of 2005.
When internally formed capital is annualized and expressed as a percentage of
average total stockholders' equity, the resulting rate was 10% compared to 2%
reported for the full-year 2004.
External capital formation (equity created through the issuance of
stock under the employee stock purchase plan, stock option plan and the director
stock purchase plan) totaled $716,000 during the six month period ended June 30,
2005. However, share repurchases amounted to $1,437,000 from December 31, 2004
through June 30, 2005, for a net decrease in stockholders' equity from these
sources of $721,000.
Dividends for the first six months of the year were $0.41 per share in
2005, compared to $0.38 per share in 2004, for respective dividend payout ratios
(dividends declared per share to diluted net income per share) of 39% versus
41%.
B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2005 AND JUNE 30, 2004
Net income for the first six months of the year increased $1,959,000 or
14% to $15,653,000 in 2005 from $13,694,000 in 2004, representing annualized
returns on average equity of 15.91% and 14.03%, respectively. First half-year
diluted earnings per share (EPS) were $1.06 in 2005, compared to $0.93 in 2004.
The primary factor driving the growth in net income was the increase in
the net interest margin that was due primarily to the balance sheet
repositioning completed in the fourth quarter of 2004. This increase was
somewhat offset by a higher provision for loan and lease losses and by an
increase in noninterest expenses resulting from increased salary and employee
benefit expenses.
The net interest margin increased by 71 basis points to 4.39% for the
six months ended June 30, 2005, from 3.68% for the same period of 2004, as the
net interest spread increased by 67 basis points. These results reflect to a
large extent the balance sheet repositioning accomplished in the fourth quarter
of 2004.
TABLE 4 - CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax equivalent)
For the six months ended June 30,
2005 2004
------------------------------------------------------------------------------
Average Average
Average Annualized Yield/Rate Average Annualized Yield/Rate
Balance Interest (1) Balance Interest (1)
------------------------------------------------------------------------------
Assets
Total loans and leases (2) $1,486,785 $88,218 5.93% $1,218,625 $67,346 5.53%
Total securities 616,646 33,906 5.50 944,038 46,157 4.89
Other earning assets 20,523 567 2.76 31,486 304 0.97
--------------------------- ---------------------------
TOTAL EARNING ASSETS 2,123,954 122,691 5.78% 2,194,149 113,807 5.19%
Nonearning assets 176,297 163,187
-------------- -------------
Total assets $2,300,251 $2,357,336
============== =============
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 238,547 $619 0.26% $ 227,254 $655 0.29%
Money market savings deposits 375,643 5,071 1.35 371,988 2,018 0.54
Regular savings deposits 221,716 727 .33 202,253 719 0.36
Time deposits 473,146 11,819 2.50 420,101 8,119 1.93
--------------------------- ---------------------------
Total interest-bearing deposits 1,309,052 18,236 1.39 1,221,596 11,511 0.94
Short-term borrowings 277,387 8,226 2.97 426,907 18,026 4.22
Long-term borrowings 67,626 3,059 4.52 115,000 3,445 3.00
--------------------------- ---------------------------
Total interest-bearing liabilities 1,654,065 29,521 1.78 1,763,503 32,982 1.87
------------- ---------
Noninterest-bearing demand deposits 428,454 376,361
Other noninterest-bearing liabilities 19,352 21,233
Stockholders' equity 198,380 196,239
-------------- -------------
Total liabilities and stockholders' $2,300,251 $2,357,336
equity ============== =============
Net interest spread
4.00% 3.32%
============= ==============
Net interest margin (3) 4.39% 3.68%
============= ==============
Ratio of average earning assets to
Average interest-bearing liabilities 128.41% 124.42%
============== =============
18
(1) Interest income includes the effects of taxable-equivalent adjustments
(reduced by the nondeductible portion of interest expense) using the
appropriate federal income tax rate of 35% and, where applicable, the
marginal state income tax rate of 7.00% (or a combined marginal federal and
state rate of 39.55%), to increase tax-exempt interest income to a
taxable-equivalent basis. The net taxable-equivalent adjustment amounts
utilized in the above table (on an annual basis) to compute yields were
$7,008,000 and $7,810,000 for the six months ended June 30, 2005 and 2004,
respectively.
(2) Non-accrual loans are included in the average balances.
(3) Net interest margin = annualized net interest income on a tax-equivalent
basis divided by total interest-earning assets.
NET INTEREST INCOME
Net interest income for the first six months of the year was
$42,727,000 in 2005, an increase of 18% from $36,308,000 in 2004, due primarily
to the balance sheet repositioning completed in the fourth quarter of 2004 and a
22% increase in average loans compared to the first six months of 2004. Non-GAAP
tax-equivalent net interest income, which takes into account the benefit of tax
advantaged investment securities, also increased by 15%, to $46,202,000 in 2005
from $40,191,000 in 2004. Average balances, yields and rates for the six months
ended June 30, 2005 and 2004 are presented in Table 4. The effects of changes in
interest rates and average balances are presented in Table 5.
For the first six months, total interest income increased by $4,555,000
or 9% in 2005, compared to 2004. On a non-GAAP tax-equivalent basis, interest
income increased by 7%. Average earning assets declined by 3% versus the prior
period, to $2,123,954,000 from $2,194,149,000, while the average yield earned on
those assets increased by 59 basis points to 5.78%. Comparing the first six
months of 2005 versus 2004, average total loans and leases grew by 22% to
$1,486,785,000 (70% of average earning assets, versus 56% a year ago), while
recording a 40 basis point increase in average yield to 5.93%. Average
residential real estate loans increased by 17% (reflecting increases in both
mortgage and construction lending); average consumer loans increased by 22%
(attributable primarily to home equity line growth); and, average commercial
loans and leases grew by 26% (due to increases in all categories of commercial
loans and leases). Over the same period, average total securities decreased by
35% to $616,646,000 (29% of average earning assets, versus 43% a year ago),
while the average yield earned on those assets increased, by 61 basis points to
5.50%. The growth in loans was due primarily to the Bank's strategic plan which
calls for continued redeployment of assets from the investment portfolio to fund
loan growth.
Interest expense for the first six months of the year decreased by
$1,864,000 or 11% in 2005, compared to 2004. Average total interest-bearing
liabilities decreased by 6% over the prior year period, while the average rate
paid on these funds also decreased, by 9 basis points to 1.78%. As shown in
Table 4, interest-bearing demand deposits, regular savings deposits and
short-term borrowings recorded declines in average rate. These declines were
partially offset by increases in the rates paid on money market savings
deposits, time deposits and long-term borrowings. These changes in average rates
reflect the current environment of rising interest rates together with the
Company's efforts to grow deposits under its client relationship management
strategy.
Table 5 - Effect of Volume and Rate Changes on Net Interest Income
2005 vs. 2004 2004 vs. 2003
- ------------------------------------------------------------------------------------------------------------------------
Increase Due to Change Increase Due to Change
Or In Average:* Or In Average:*
(In thousands and tax equivalent) (Decrease) Volume Rate (Decrease) Volume Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest income from earning assets:
Loans and leases $ 10,297 $ 7,779 $ 2,518 $ 314 $ (3,682) $ 3,996
Securities (5,873) (6,996) 1,123 (4,396) (2,243) (2,153)
Other investments 131 (68) 199 (70) (36) (34)
------------- ----------- ---------- --------- --------- ----------
Total interest income 4,555 715 3,840 (4,152) (5,961) 1,809
Interest expense on funding of earning
assets:
Interest-bearing demand deposits (19) 16 (35) 86 47 39
Regular savings deposits 3 33 (30) 95 67 28
Money market savings deposits 1,511 10 1,501 (492) (107) (385)
Time deposits 1,824 555 1,269 (1,624) (286) (1,338)
Total borrowings (5,183) (3,460) (1,723) (1,324) (1,138) (186)
------------- ----------- ---------- --------- --------- ----------
Total interest expense (1,864) (2,846) 982 (3,259) (1,417) (1,842)
------------- ----------- ---------- --------- --------- ----------
Net interest income $ 6,419 $ 3,561 $ 2,858 $ (893) $ (4,544) $ 3,651
============= =========== ========== ========= ========= ==========
19
* Where volume and rate have a combined effect that cannot be separately
identified with either, the variance is allocated to volume and rate based on
the relative size of the variance that can be separately identified with each.
CREDIT RISK MANAGEMENT
The Company's loan and lease portfolio (the "credit portfolio") is
subject to varying degrees of credit risk. Credit risk is mitigated through
portfolio diversification, limiting exposure to any single customer, industry or
collateral type. The Company maintains an allowance for credit losses (the
"allowance") to absorb losses inherent in the loan and lease portfolio. The
allowance is based on careful, continuous review and evaluation of the loan and
lease portfolio, along with ongoing, quarterly assessments of the probable
losses inherent in that portfolio. The allowance represents an estimation made
pursuant to Statement of Financial Accounting Standards ("SFAS") No. 5,
"Accounting for Contingencies," or SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The adequacy of the allowance is determined through
careful and continuous evaluation of the credit portfolio, and involves
consideration of a number of factors, as outlined below, to establish a prudent
level. Determination of the allowance is inherently subjective and requires
significant estimates, including estimated losses on pools of homogeneous loans
and leases based on historical loss experience and consideration of current
economic trends, which may be susceptible to significant change. Loans and
leases deemed uncollectible are charged against the allowance, 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. The Company's systematic methodology for assessing the
appropriateness of the allowance includes: (1) the formula allowance reflecting
historical losses, as adjusted, by credit category and (2) the specific
allowance for risk-rated credits on an individual or portfolio basis.
The formula allowance that is based upon historical loss factors, as
adjusted, establishes allowances for the major loan and lease categories based
upon adjusted historical loss experience over the prior eight quarters, weighted
so that losses in the most recent quarters have the greatest effect. The factors
used to adjust the historical loss experience address various risk
characteristics of the Company's loan and lease portfolio including (1) trends
in delinquencies and other non-performing loans, (2) changes in the risk profile
related to large loans in the portfolio, (3) changes in the categories of loans
comprising the loan portfolio, (4) concentrations of loans to specific industry
segments, (5) changes in economic conditions on both a local and national level,
(6) changes in the Company's credit administration and loan and lease portfolio
management processes and (7) quality of the Company's credit risk identification
processes.
The specific allowance is used to allocate an allowance for internally
risk rated commercial loans where significant conditions or circumstances
indicate that a loss may be imminent. Analysis resulting in specific allowances,
including those on loans identified for evaluation of impairment, includes
consideration of the borrower's overall financial condition, resources and
payment record, support available from financial guarantors and the sufficiency
of collateral. These factors are combined to estimate the probability and
severity of inherent losses. Then a specific allowance is established based on
the Company's calculation of the potential loss embedded in the individual loan.
Allowances are also established by application of credit risk factors to other
internally risk rated loans, individual consumer and residential loans and
commercial leases having reached nonaccrual or 90-day past due status. Each risk
rating category is assigned a credit risk factor based on management's estimate
of the associated risk, complexity, and size of the individual loans within the
category. Additional allowances may also be established in special circumstances
involving a particular group of credits or portfolio within a risk category when
management becomes aware that losses incurred may exceed those determined by
application of the risk factor alone.
The amount of the allowance is reviewed monthly by the senior loan
committee, and reviewed and approved by the Board of Directors quarterly.
The provision for loan and lease losses totaled $1.0 million for the
first six months of 2005 compared to none in the same period of 2004. The
Company experienced net charge-offs (recoveries) during the first six months of
2005 and 2004 of ($19,000) and $137,000, respectively.
Management believes that the allowance is adequate. However, its
determination requires significant judgment, and estimates of probable losses
inherent in the credit portfolio can vary significantly from the amounts
actually observed. While management uses available information to recognize
probable losses, future additions to the allowance may be necessary based on
changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions.
In addition, regulatory agencies, as an integral part of their examination
process, and independent consultants engaged by the Sandy Spring Bank,
periodically review the credit portfolio and the allowance. Such review may
result in additional provisions based on these third-party judgments of
information available at the time of each examination. During the first six
months of 2005, there were no changes in estimation methods or assumptions that
affected the allowance methodology. The allowance for loan and lease losses was
1.03% of total loans and leases at June 30, 2005 and 1.01% at December 31, 2004.
The allowance increased during the first six months of 2005 by $1.0 million, to
$15,673,000 at June 30, 2005, from $14,654,000 at December 31, 2004. The
increase in the allowance during the first six months of 2005 was due to the
increased provision for loan and lease losses mentioned above which was due
primarily to growth in the size of the loan portfolio.
20
Nonperforming loans and leases increased by $1,629,000 to $3,418,000 at
June 30, 2005, from December 31, 2004, while nonperforming assets during the
same period increased by $1,611,000 to $3,418,000. Expressed as a percentage of
total assets, nonperforming assets increased to 0.15% at June 30, 2005 from
0.08% at December 31, 2004. The allowance for loan and lease losses represented
459% of nonperforming loans and leases at June 30, 2005, compared to coverage of
819% at December 31, 2004. The increase in nonperforming loans and leases was
due primarily to one residential mortgage construction loan totaling $1.3
million which was more than 90 days past its maturity date at June 30, 2005.
This loan has since been converted into a performing, salable permanent
residential mortgage loan. Significant variation in this coverage ratio may
occur from period to period because the amount of nonperforming loans and leases
depends largely on the condition of a small number of individual credits and
borrowers relative to the total loan and lease portfolio. Other real estate
owned was $0 at June 30, 2005 and $18,000 at December 31, 2004. The balance of
impaired loans and leases was $595,000 at June 30, 2005, with specific reserves
against those loans of $186,000, compared to $690,000 at December 31, 2004, with
specific reserves of $251,000.
Table 6 -- Analysis of Credit Risk
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
Six Months Ended Twelve Months Ended
June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $14,654 $14,880
Provision for loan and lease losses 1,000 0
Loan charge-offs:
Residential real estate 0 (109)
Commercial loans and leases (70) (173)
Consumer (10) (214)
------------ -----------
Total charge-offs (80) (496)
Loan recoveries:
Residential real estate 49 54
Commercial loans and leases 43 169
Consumer 7 47
------------ -----------
Total recoveries 99 270
------------ -----------
Net recoveries (charge-offs) 19 (226)
------------ -----------
Balance, period end $15,673 $14,654
============ ===========
Net recoveries (charge-offs) to average loans and
leases (annual basis) 0.01% (0.02)%
Allowance to total loans and leases 1.03% 1.01%
The following table presents nonperforming assets at the dates indicated:
June 30, 2005 December 31, 2005
- -------------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases $661 $746
Loans and leases 90 days past due 2,757 1,043
------------ -----------
Total nonperforming loans and leases* 3,418 1,789
Other real estate owned 0 18
------------ -----------
Total nonperforming assets $3,418 $1,807
============ ===========
Nonperforming assets to total assets 0.15% 0.08%
* Those performing credits considered potential problem credits (which the
Company classifies as substandard), as defined and identified by management,
amounted to approximately $7,226,000 at June 30, 2005, compared to $7,801,000 at
December 31, 2004. These are credits where known information about the
borrowers' possible credit problems causes management to have doubts as to their
ability to comply with the present repayment terms. This could result in their
reclassification as nonperforming credits in the future, but most are well
collateralized and are not believed to present significant risk of loss.
21
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $16,893,000 for the six-month period ended
June 30, 2005, a 6% or $1,024,000 increase from the same period of 2004. Net
securities gains, which are included in noninterest income, were $840,000 in
2005 versus $337,000 in 2004. Excluding net securities gains, noninterest income
increased 3% or $521,000 over the prior year period. The increase in noninterest
income for the first six months of 2005 was due primarily to an increase of
$884,000 or 41% in insurance agency commissions, resulting from higher premiums
from existing commercial property and casualty lines ($543,000) and the
acquisition of a small insurance agency ($296,000) in December, 2004. In
addition, Visa check fees increased $120,000 or 13% reflecting a growing volume
of electronic checking transactions. These increases were somewhat offset by a
decline of $177,000, or 10%, in gains on sales of mortgage loans due mainly to a
decline in mortgage refinancing volumes. Fees on sales of investment products
also declined $210,000, or 16%, due largely to an increased emphasis on the sale
of investment products that pay annual fees as opposed to one-time up-front
fees. This strategy provides a more consistent long-term source of income and is
consistent with the Bank's long-term client relationship management goals.
Total noninterest expenses were $37,590,000 for the six-month period
ended June 30, 2005, an 8% or $2,776,000 increase from the first half-year of
2004. The Company incurs additional costs in order to enter new markets, provide
new services, and support the growth of the Company. Management controls its
operating expenses, however, with the goal of maximizing profitability over
time. Most of the rise in noninterest expenses during the first half-year of
2005 occurred in salaries and employee benefits which increased $2,636,000 or
13% as a result of higher incentive compensation costs and increased benefits
expenses. Occupancy and equipment expenses increased $547,000 or 9%, principally
as a result of the opening of the Bank's Columbia Center office facility in the
second quarter of 2004. Average full-time equivalent employees decreased to 577
during the first six months of 2005, from 602 during the like period in 2004, a
4% decrease. This decrease in staffing levels was due primarily to the Company's
efforts to limit the growth of noninterest expenses. The ratio of net income per
average full-time-equivalent employee after completion of the first six months
of the year was $27,000 in 2005 and $23,000 in 2004.
INCOME TAXES
The effective tax rate increased to 25.6% for the six-month period
ended June 30, 2005, from 21.1% for the prior year period. This increase was
primarily due to a decline in the amount of state tax-advantaged investments as
a result of the balance sheet deleveraging accomplished in the fourth quarter of
2004 and a continued reduction in such investments in 2005 primarily to fund
loan growth.
C. RESULTS OF OPERATIONS - SECOND QUARTER 2005 AND 2004
Second quarter net income of $7,797,000 ($0.53 per share-diluted) in
2005 was $1,404,000 or 22% above net income of $6,393,000 ($0.43 per
share-diluted) shown for the same quarter of 2004. Annualized returns on average
equity for these periods were 15.63% in 2005 versus 13.07% in 2004.
Second quarter net interest income was $21,527,000 in 2005, an increase
of 21% from $17,769,000 in 2004, reflecting an 83 basis point increase in net
interest margin due largely to the balance sheet repositioning completed in the
fourth quarter of 2004 and a 21% increase in average loans and leases. Non-GAAP
tax-equivalent net interest income, which takes into account the benefit of tax
advantaged investment securities, increased by 18%.
The provision for loan and lease losses totaled $900,000 in the second
quarter of 2005 compared to none in the second quarter of 2004. This increase
was due to growth in the size of the loan portfolio. The Company experienced net
charge-offs (recoveries) during the second quarter of 2005 and 2004 of ($35,000)
and $132,000 respectively.
22
Second quarter noninterest income was $9,053,000 in 2005, representing
a 9% or $774,000 increase from the same period of 2004. Net securities gains,
which are included in noninterest income, were $825,000 in the second quarter of
2005 versus $109,000 in the second quarter of 2004. Excluding net securities
gains, noninterest income remained virtually level with the prior year period.
Compared to the second quarter of 2004, the second quarter of 2005 reflected an
increase of $194,000 or 19% in insurance agency commissions due primarily to
higher premiums from commercial property and casualty lines ($42,000) and the
acquisition of a small insurance agency ($77,000) in December, 2004. This
increase was offset by a decline of $139,000 or 14% in gains on sales of
mortgage loans in the second quarter of 2005 versus the same quarter of 2004.
Second quarter noninterest expenses increased 6% or $1,053,000 to
$19,153,000 in 2005 from $18,100,000 in 2004. This increase was mainly the
result of increases in salaries and employee benefits of $1,224,000 or 12% due
primarily to higher incentive compensation costs and increased benefits
expenses.
The second quarter effective tax rate increased to 25.9%, from the
19.6% recorded in the second quarter of 2004. This increase was primarily due to
the balance sheet repositioning completed in the fourth quarter of 2004 and a
21% increase in average loans and leases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Financial Condition - Market Risk and Interest Rate Sensitivity"
in Management's Discussion and Analysis of Financial Condition and Results of
Operations, above, which is incorporated herein by reference. Management has
determined that no additional disclosures are necessary to assess changes in
information about market risk that have occurred since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, evaluated as of the last day of the period covered by this report, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
adequate. There were no significant changes in the Company's internal controls
over financial reporting (as defined in Rule 13a-15 under the Securities Act of
1934) during the quarter ended June 30, 2005, that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY
SECURITIES
The following table provides information on the Company's purchases of its
common stock during the six months ended June 30, 2005.
Issuer Purchases of Equity Securities (1)
- -----------------------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum Number
Shares Purchased as that May Yet Be
Part of Publicly Purchased Under the
(a) Total Number of (b) Average Price Announced Plans or Plans or Programs
Period Shares Purchased Paid per Share Programs (2)(3)
- -----------------------------------------------------------------------------------------------------------------------------
January 2005 0 NA 0 622,592
- -----------------------------------------------------------------------------------------------------------------------------
February 2005 0 NA 0 622,592
- -----------------------------------------------------------------------------------------------------------------------------
March 2005 0 NA 0 622,592
- -----------------------------------------------------------------------------------------------------------------------------
April 2005 20,500 31.95 20,500 602,092
- -----------------------------------------------------------------------------------------------------------------------------
May 2005 25,000 31.25 25,000 577,092
- -----------------------------------------------------------------------------------------------------------------------------
June 2005 0 NA 0 577,092
- -----------------------------------------------------------------------------------------------------------------------------
23
(1) Includes purchases of the Company's stock made by or on behalf of the
Company or any affiliated purchasers of the Company as defined in Securities and
Exchange Commission Rule 10b-18.
(2) On May 24, 2005, the Company publicly announced a stock repurchase program
that permits the repurchase of up to 5%, or approximately 732,000 shares, of its
outstanding common stock. The current program replaced a similar plan that
expired on March 31, 2005. Repurchases under the program may be made on the open
market and in privately negotiated transactions from time to time until March
31, 2007, or earlier termination of the program by the Board. The repurchases
are made in connection with shares expected to be issued under the Company's
stock option and benefit plans, as well as for other corporate purposes.
(3) Indicates the number of shares remaining under the plan at the end of the
indicated month.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual shareholders' meeting held on April 20, 2005, the
shareholders of the Company elected three directors by the following vote:
Nominee For Withheld
- -----------------------------------------------------
John Chirtea 10,187,376 870,535
Hunter R. Hollar 10,560,253 497,658
Craig A. Ruppert 10,557,929 499,982
There were no solicitations in opposition to management's nominees and all such
nominees were elected. All three director-nominees were incumbent directors
previously elected by the shareholders to three-year terms. Directors continuing
in office are Susan D. Goff, Robert L. Mitchell, Robert L. Orndorff, Jr., David
E. Rippeon, Solomon Graham, Gilbert L. Hardesty, Charles F. Mess, Lewis R.
Schumann, and W. Drew Stabler.
Also at the annual meeting, the shareholders ratified the appointment of
McGladrey & Pullen, LLP, as the independent auditors for 2005 by the following
vote:
Broker
For Against Withheld Non Votes
---------------------------------------------------------------
10,714,467 121,257 222,186 0
Also at the annual meeting, the shareholders approved the 2005 Omnibus Stock
Plan by the following vote:
Broker
For Against Withheld Non Votes
----------------------------------------------------------------
5,193,499 3,268,371 112,932 2,483,109
Item 6. EXHIBITS
Exhibits.
Exhibit 31(a) and (b) Rule 13a-14(a) / 15d-14(a) Certifications
Exhibit 32 (a) and (b) 18 U.S.C. Section 1350 Certifications
24
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, 2005
By: /S/ PHILIP J. MANTUA
--------------------
Philip J. Mantua
Executive Vice President and Chief Financial Officer
Date: August 4, 2005
25