10-Q 1 form10q.txt FORM 10-Q 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, 2002 ------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- Commission File Number: O-19065 ------- 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 ------- ------- The number of shares of common stock outstanding as of July 26, 2002, is 14,513,319 shares. SANDY SPRING BANCORP, INC. INDEX
PAGE ----------------------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Consolidated Balance Sheets at June 30, 2002, and December 31, 2001.............................................. 1 Consolidated Statements of Income for the Three and Six Month Periods Ended June 30, 2002 and 2001.................................... 2 Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2002 and 2001.................................... 4 Consolidated Statements of Changes in Stockholders' Equity for the Six Month Periods Ended June 30, 2002 and 2001.................................... 6 Notes to Consolidated Financial Statements........................................ 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... 8 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................................16 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............................16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................16 SIGNATURES................................................................................17
PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Sandy Spring Bancorp and Subsidiaries CONSOLIDATED BALANCE SHEETS
June 30, December 31, (Dollars in thousands, except per share data) 2002 2001 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 35,253 $ 45,609 Federal funds sold 44,438 10,774 Interest-bearing deposits with banks 842 840 Residential mortgage loans held for sale 8,677 16,682 Investments available-for-sale (at fair value) 665,311 732,629 Investments held-to-maturity -- fair value of $237,031 (2002) and $165,015 (2001) 232,956 164,921 Other equity securities 17,817 16,929 Total loans and leases 1,057,664 995,919 Less: allowance for credit losses (14,911) (12,653) ----------- ----------- Net loans and leases 1,042,753 983,266 Premises and equipment, net 33,836 32,584 Accrued interest receivable 15,531 15,163 Goodwill 7,642 7,642 Other intangible assets 15,256 16,584 Other assets 38,473 38,211 ----------- ----------- Total assets $ 2,158,785 $ 2,081,834 =========== =========== LIABILITIES Noninterest-bearing deposits $ 289,735 $ 277,592 Interest-bearing deposits 1,120,118 1,109,867 ----------- ----------- Total deposits 1,409,853 1,387,459 Short-term borrowings 461,592 411,132 Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000 Other long-term borrowings 79,184 79,116 Accrued interest payable and other liabilities 9,515 18,454 ----------- ----------- Total liabilities 1,995,144 1,931,161 STOCKHOLDERS' EQUITY Common stock -- par value $1.00; shares authorized 50,000,000; shares issued and outstanding 14,508,451 (2002) and 14,483,564 (2001) 14,508 14,484 Surplus 20,803 20,347 Retained earnings 120,690 111,906 Accumulated other comprehensive income 7,640 3,936 ----------- ----------- Total stockholders' equity 163,641 150,673 ----------- ----------- Total liabilities and stockholders' equity $ 2,158,785 $ 2,081,834 =========== ===========
See Notes to Consolidated Financial Statements. 1 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ----------------------- (In thousands, except per share data) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------ ----------------------- Interest income: Interest and fees on loans and leases $ 18,239 $ 20,305 $ 35,962 $ 41,301 Interest on loans held for sale 154 208 327 340 Interest on deposits with banks 9 35 17 55 Interest and dividends on securities: Taxable 9,909 9,274 19,168 18,025 Exempt from federal income taxes 2,585 1,975 4,997 3,888 Interest on federal funds sold 136 475 256 782 ------------------------ ----------------------- Total interest income 31,032 32,272 60,727 64,391 Interest expense: Interest on deposits 4,996 9,548 10,320 19,647 Interest on short-term borrowings 3,907 4,409 7,630 8,868 Interest on long-term borrowings 2,047 2,050 4,119 4,070 ------------------------ ----------------------- Total interest expense 10,950 16,007 22,069 32,585 ------------------------ ----------------------- Net interest income 20,082 16,265 38,658 31,806 Provision for credit losses 985 492 2,170 984 ------------------------ ----------------------- Net interest income after provision for credit losses 19,097 15,773 36,488 30,822 Noninterest income: Securities (losses) gains (3) 0 230 130 Service charges on deposit accounts 1,953 1,807 3,831 3,554 Gains on sales of mortgage loans 741 747 1,479 1,268 Fees on sales of investment products 556 465 1,196 906 Trust department income 605 479 1,174 914 Insurance agency commissions 790 0 1,776 0 Income from bank owned life insurance 432 411 867 798 Other income 1,611 1,564 2,930 2,825 ------------------------ ----------------------- Total noninterest income 6,685 5,473 13,483 10,395 Noninterest expenses: Salaries and employee benefits 9,429 6,833 18,726 13,517 Occupancy expense of premises 1,558 1,224 2,864 2,461 Equipment expenses 956 875 1,765 1,691 Marketing 574 331 976 648 Outside data services 634 669 1,247 1,325 Goodwill amortization 0 166 0 333 Amortization of other intangible assets 664 669 1,329 1,358 Other expenses 2,302 2,448 4,509 4,754 ------------------------ ----------------------- Total noninterest expenses 16,117 13,215 31,416 26,087 ------------------------ ----------------------- Income before income taxes 9,665 8,031 18,555 15,130 Income tax expense 2,507 2,164 4,841 3,958 ------------------------ ----------------------- Net income $ 7,158 $ 5,867 $ 13,714 $ 11,172 ======================== =======================
See Notes to Consolidated Financial Statements. 2 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended Six Months Ended June 30, June 30, 1 --------------------------- --------------------------- (In thousands, except per share data) 2002 2001 2002 2001 ---------------------------------------------------------------------------- --------------------------- Basic Net Income Per Share $ 0.50 $ 0.41 $ 0.95 $ 0.78 Diluted Net Income Per Share 0.48 0.41 0.93 0.78 Dividends Declared Per Share 0.17 0.15 0.34 0.29
*Per share data have been adjusted to give retroactive effect to a 3-for-2 stock split declared on November 28, 2001. See Notes to Consolidated Financial Statements. 3 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ------------------------- (Dollars in thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 13,714 $ 11,172 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 2,982 3,170 Provision for credit losses 2,170 984 Deferred income taxes 1,163 313 Origination of loans held for sale (106,418) (109,686) Proceeds from sales of loans held for sale 115,902 108,175 Gains on sales of loans held for sale (1,479) (1,268) Securities gains (230) (130) Net increase in accrued interest receivable (368) (652) Net increase in other assets (1,550) (13,825) Net decrease in accrued expenses (8,939) (1,638) Other - net (1,717) (1,753) --------- --------- Net cash provided (used) by operating activities 15,230 (5,138) Cash Flows from Investing Activities: Net increase in interest-bearing deposits with banks (2) (81) Purchases of investments held-to-maturity (94,999) (44,905) Purchases of other equity securities (887) (2,742) Purchases of investments available-for-sale (391,405) (344,520) Proceeds from sales of investments available-for-sale 220,343 35,468 Proceeds from maturities, calls and principal payments of investments held-to-maturity 27,005 16,345 Proceeds from maturities, calls and principal payments of investments available-for-sale 244,434 254,244 Proceeds from sales of other real estate owned 0 426 Net increase in loans and leases receivable (61,774) (23,568) Expenditures for premises and equipment (3,109) (2,489) --------- --------- Net cash used by investing activities (60,394) (111,822) Cash Flows from Financing Activities: Net increase in deposits 22,394 61,729 Net increase in short-term borrowings 50,360 69,594 Proceeds from long-term borrowings 168 30,143 Proceeds from issuance of common stock 480 1,177 Dividends paid (4,930) (4,112) --------- --------- Net cash provided by financing activities 68,472 158,531 --------- --------- Net increase in cash and cash equivalents 23,308 41,571 Cash and cash equivalents at beginning of year 56,383 46,329 --------- --------- Cash and cash equivalents at end of quarter* $ 79,691 $ 87,900 ========= =========
4 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended June 30, ---------------------------- (Dollars in thousands) 2002 2001 ----------------------------------------------------------------------------------------------------------- Supplemental Disclosures: Interest payments $22,516 $32,193 Income tax payments 6,302 5,415 Noncash Investing Activities: Transfers from loans to other real estate owned 29 32 Reclassification of borrowings from long-term to short-term 100 100
*Cash and cash equivalents include amounts of "Cash and due from banks" and "Federal funds sold" on the Consolidated Balance Sheets. See Notes to Consolidated Financial Statements. 5 Sandy Spring Bancorp and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum- ulated Other Compre- Total hensive Stock- (Dollars in thousands, except per share data) Common Retained Income holders' Stock Surplus Earnings (loss) Equity ------------------------------------------------------------------------------------------------------------------------------ Balances at January 1, 2002 $ 14,484 $ 20,347 $ 111,906 $ 3,936 $ 150,673 Comprehensive income: Net income 13,714 13,714 Other comprehensive loss, net of tax and reclassification adjustment 3,704 3,704 -------- Total comprehensive income 17,418 Cash dividends - $0.34 per share (4,930) (4,930) Common stock issued pursuant to: Stock option plan - 17,916 shares 18 269 287 Employee stock purchase plan -- 7,139 shares 6 187 193 -------- -------- --------- -------- --------- Balances at June 30, 2002 $ 14,508 $ 20,803 $ 120,690 $ 7,640 $ 163,641 ======== ======== ========= ======== ========= Balances at January 1, 2001 $ 9,553 $ 22,511 $ 97,641 $ (2,147) $ 127,558 Comprehensive income: Net income 11,172 11,172 Other comprehensive income, net of tax and reclassification adjustment 6,673 6,673 --------- Total comprehensive income 17,845 Cash dividends - $0.29 per share (4,112) (4,112) Common stock issued pursuant to: Stock option plan - 7,565 shares 8 162 170 Dividend reinvestment and stock purchase plan - 32,582 shares 32 975 1,007 -------- -------- --------- -------- --------- Balances at June 30, 2001 $ 9,593 $ 23,648 $ 104,701 $ 4,526 $ 142,468 ======== ======== ========= ======== =========
See Notes to Consolidated Financial Statements. 6 Sandy Spring Bancorp and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - General The foregoing financial statements are unaudited; however, in the opinion of Management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. These statements should be read in conjunction with the financial statements and accompanying notes included in Sandy Spring Bancorp's 2001 Annual Report to Shareholders. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2002. The accounting and reporting policies of Sandy Spring Bancorp (the "Company") conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Certain reclassifications have been made to amounts previously reported to conform with current classifications. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. Note 2 - Per Share Data The calculations of net income per common share for the 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, --------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Basic: Net income available to common stockholders $ 7,158 $ 5,867 $13,714 $11,172 Average common shares outstanding 14,503 14,366 14,497 14,349 Basic net income per share $ 0.50 $ 0.41 $ 0.95 $ 0.78 ========================================================== Diluted: Net income available to common stockholders $ 7,158 $ 5,867 $13,714 $11,172 Average common shares outstanding 14,503 14,366 14,497 14,349 Stock option adjustment 222 141 217 126 ---------------------------------------------------------- Average common shares outstanding-diluted 14,725 14,507 14,714 14,475 Diluted net income per share $ 0.48 $ 0.41 $ 0.93 $ 0.78 ==========================================================
7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management's discussion and analysis contains forward-looking statements that are subject to risks and uncertainties. These forward-looking statements include: statements of goals, intentions and expectations; estimates of risks and of future costs, benefits, and liquidity; assessments of potential loan and lease losses and 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 and other economic conditions; future laws and regulations; and a variety of other matters. Because of these uncertainties, the actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate its future results. THE COMPANY The Company is the registered bank holding company for Sandy Spring Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates thirty-one community offices in Montgomery, Howard, Prince George's, Anne Arundel and Frederick Counties in Maryland, together with an insurance subsidiary and an equipment leasing company. The Company offers a broad range of financial services to consumers and businesses in this market area. Through June 30, 2002, year-to-date average commercial loans and leases and commercial real estate loans accounted for approximately 44% of the Company's loan and lease portfolio, and year-to-date average consumer and residential real estate loans accounted for approximately 56%. Based upon the most recent data available, consumer deposits account for approximately 78% of total average deposits while approximately two-thirds of the Company's revenues are derived from consumer loans, consumer deposits and other services. The Company has established a strategy of independence, and intends to establish or acquire additional offices, banking organizations, and nonbanking organizations as appropriate opportunities may arise. A. FINANCIAL CONDITION The Company's total assets were $2,158,785,000 at June 30, 2002, compared to $2,081,834,000 at December 31, 2001, increasing $76,951,000 or 3.7% during the first six months of 2002. Earning assets increased $89,011,000 or 4.6% to $2,027,705,000 at June 30, 2002, from $1,938,694,000 at December 31, 2001. Total loans and leases, excluding loans held for sale, rose 6.2% or $61,745,000 during the first six months of 2002, to $1,057,664,000. During this period, consumer loans increased by $23,844,000 (up 11.1%) due primarily to home equity products. Commercial loans and leases also increased, by $22,103,000 (up 5.0%), reflecting growth in commercial loans not secured by real estate, accompanied by essentially level commercial real estate and construction balances and a small decline in lease receivables. Finally, residential real estate loans rose $15,798,000 (up 4.6%), reflecting higher residential mortgage loans partially offset by a small decrease in residential construction. Residential mortgage loans held for sale decreased by $8,005,000 from December 31, 2001, to $8,677,000 at June 30, 2002. Table 1 -- Analysis of Loans and Leases The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated:
(In thousands) June 30, 2002 % December 31, 2001 % --------------------------------------------------------------------------------------------------------------- Residential real estate $ 355,595 34% $ 339,797 34% Commercial loans and leases 463,643 44 441,540 44 Consumer 238,426 22 214,582 22 -------------------------------------------------------------- Total Loans and Leases 1,057,664 100% 995,919 100% === === Less: Allowance for credit losses (14,911) (12,653) ----------- --------- Net loans and leases $ 1,042,753 $ 983,266 =========== =========
8 The total investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities of $916,084,000 increased slightly from December 31, 2001. Available-for-sale securities decreased by $67,318,000 or 9.2%, while held-to-maturity securities increased by $68,035,000 or 41.3% during the first two quarters of 2002. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $33,666,000 during the first six months of 2002, reaching $45,280,000 at June 30, 2002. Total deposits were $1,409,853,000 at June 30, 2002, increasing $22,394,000 or 1.6% from $1,387,459,000 at December 31, 2001. Regular savings rose $43,576,000 (up 39.8%) to comprise 11% of total deposits at second quarter end, compared to 8% at year-end 2001. Partially offsetting this increase, money market savings decreased $20,424,000 (down 5.2%) to 26% of total deposits from 28%. In addition, time deposits of $100,000 or more declined $10,359,000 (down 8.6%), while the other major categories of deposits recorded changes of less than 5%. Over this period, the overall net increase in deposits did not keep pace with the funding requirements of loan growth. Total borrowings were $575,776,000 at June 30, 2002, which was $50,528,000 above December 31, 2001. Virtually all of this increase occurred in short-term borrowings, most of which were associated with leverage programs, under which borrowed funds are invested in securities to enhance the Company's overall earnings performance. At June 30, 2002, short and long term borrowings under the leverage programs amounted to $335,100,000, compared to $285,100,000 at December 31, 2001. These leverage programs achieved net interest margins of approximately 0.97% for the six months ended June 30, 2002 and 0.99% for the same period in 2001, which equated to diluted earnings per share of approximately $0.06 and $0.05 for the respective periods. Table 2 -- Analysis of Deposits The following table presents the trends in the composition of deposits at the dates indicated:
(In thousands) June 30, 2002 % December 31, 2001 % ----------------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits $ 289,735 21% $ 277,592 20% Interest-bearing deposits: Demand 174,545 12 166,603 12 Money market savings 375,871 26 396,295 28 Regular savings 152,985 11 109,409 8 Time deposits less than $100,000 306,302 22 316,786 23 Time deposits $100,000 or more 110,415 8 120,774 9 -------------------------------------------------------------------- Total interest-bearing 1,120,118 79 1,109,867 80 -------------------------------------------------------------------- Total deposits $1,409,853 100% $1,387,459 100% ====================================================================
MARKET RISK MANAGEMENT By employing simulation analysis through use of computer models, the Company intends to effectively manage the potential adverse impacts that changing interest rates may have on its short-term earnings, long- term value, and liquidity. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. At June 30, 2002, as at December 31, 2001, the simulation of a hypothetical, parallel change of plus and minus 200 basis points in U.S. Treasury interest rates was not practical, due to historically low prevailing interest yields and rates. (See Table 3.) Therefore, the Company again chose to apply a plus 200 basis point change and a minus 100 basis point change when evaluating its interest rate risk position. Measured from June 30, 2002, the simulation analysis indicates that net interest income would decline by 2% over a twelve month period given a decrease in interest rates of 100 basis points, compared to a policy limit of 15%. In terms of equity capital on a fair value basis, a 100 basis point decrease in interest rates is estimated to reduce the fair value of capital (as computed) by 6%, as compared to a policy limit of 25%. 9 LIQUIDITY Liquidity is measured using an approach designed to take into account loan and lease payments, maturities, calls and paydowns of securities, earnings, growth, mortgage banking activities, leverage programs, sophistication of investment activities, investment portfolio liquidity, and other factors. Through this approach, implemented by the funds management committee under formal policy guidelines, the Company's liquidity position is measured weekly, looking forward thirty, sixty and ninety days. The measurement is based upon the asset-liability management model's projection of a funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds, leverage limitations and core growth. Resulting projections as of June 30, 2002, show short-term investments exceeding short-term borrowings by $136,661,000 (substantially above $2,400,000 at December 31, 2001) over the subsequent 90 days. This excess of liquidity over projected requirements for funds indicates that the Company can continue to increase its loans and other earning assets without incurring additional borrowing. The Company also has external sources of funds, which can be drawn upon when required. The main source of external liquidity is an available line of credit for $622,012,000 with the Federal Home Loan Bank of Atlanta, of which approximately $319,384,000 was outstanding at June 30, 2002. Other external sources of liquidity available to the Company in the form of lines of credit granted by the Federal Reserve, correspondent banks and other institutions totaled $255,796,000 at June 30, 2002, against which there were outstandings of approximately $75,000,000. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position is appropriate at June 30, 2002. CAPITAL MANAGEMENT The Company recorded a total risk-based capital ratio of 14.69% at June 30, 2002, compared to 14.10% at December 31, 2001; a tier 1 risk-based capital ratio of 13.38%, compared to 12.98%; and a capital leverage ratio of 8.03%, compared to 7.73%. Capital adequacy, as measured by these ratios, was well above regulatory requirements. Management believes the level of capital at June 30, 2002, is appropriate. Stockholders' equity for June 30, 2002, totaled $163,641,000, representing an increase of $12,968,000 or 8.6% from $150,673,000 at December 31, 2001. Accumulated other comprehensive income, a component of stockholders' equity comprised of net unrealized gains and losses on available-for-sale securities, increased by $3,704,000 from December 31, 2001 to June 30, 2002. This increase reflected the effects of lower interest rates at second quarter-end 2002, compared to year-end 2001, on the market values of these securities. Excluding accumulated other comprehensive income, the increase in total stockholders' equity was 6.3%. Internal capital generation (net income less dividends) was responsible for $8,784,000 of the increase in total stockholders' equity during the first six months of 2002. When internally formed capital is annualized and expressed as a percentage of average total stockholders' equity, the resulting rate was 11.5% for the first half of 2002, compared to 10.1% for the year ended December 31, 2001. External capital formation (equity created through the issuance of stock under the employee stock purchase and stock option plans) totaled $480,000 during the first six months of 2002. There were no share repurchases over the period. Dividends for the first six months of the year were $0.34 per share in 2002, compared to $0.29 per share in 2001, representing, when expressed as a percentage of diluted net income per share, dividend payout ratios of 36.56% and 37.18%, respectively. B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2002 AND 2001 Net income for the first six months of the year increased $2,542,000 or 22.8% to $13,714,000 in 2002 from $11,172,000 in 2001, representing annualized returns on average equity of 17.93% and 16.72%, respectively. Second quarter year-to-date diluted earnings per share were $0.93 in 2002, compared to $0.78 in 2001. 10 Sandy Spring Bancorp and Subsidiaries Table 3 - Consolidated Average Balances, Yields and Rates
Six Months Ended June 30, (Dollars in thousands and tax equivalent) 2002 2001 -------------------------------------------------------------------------------------------------------------------------- Average Average Average Average Balance Yield/Rate Balance Yield/Rate ---------------------------------------------------------------- Assets Total loans and leases $ 1,028,393 7.10% $ 988,013 8.48% Total securities 896,444 6.09 707,058 6.91 Other earning assets 32,297 1.68 35,410 4.73 ----------- ----------- TOTAL EARNING ASSETS 1,957,134 6.55% 1,730,481 7.76% Non-earning assets 135,005 135,257 ----------- ----------- Total assets $ 2,092,139 $ 1,865,738 =========== =========== Liabilities and Stockholders' Equity Interest-bearing demand deposits $ 170,944 0.27% $ 151,528 0.98% Money market savings deposits 387,347 1.18 350,463 3.81 Regular savings deposits 134,246 1.01 103,140 1.69 Time deposits 422,963 3.41 413,157 5.58 ----------- ----------- Total interest-bearing deposits 1,115,500 1.87 1,018,288 3.89 Short-term borrowings 430,782 3.55 354,094 5.02 Long-term borrowings 114,138 7.22 112,725 7.22 ----------- ----------- Total interest-bearing liabilities 1,660,420 2.67 1,485,107 4.41 ---- ---- Noninterest-bearing demand deposits 265,172 233,149 Other noninterest-bearing liabilities 12,335 12,766 Stockholders' equity 154,212 134,716 ----------- ----------- Total liabilities and stockholders' equity $ 2,092,139 $ 1,865,738 =========== =========== Net interest spread 3.88% 3.35% ==== ==== Net interest margin (1) 4.28% 3.97% ==== ==== Ratio of average earning assets to Average interest-bearing liabilities 117.87% 116.52% =========== ===========
(1) Net interest margin = net interest income / total interest-earning assets 11 RESULTS OF OPERATIONS (continued) For the six month period ending June 30, operating (non-GAAP) net income increased $2,417,000 or 20.2% to $14,378,000 in 2002 (which would result in a $0.05 greater diluted earnings per share amount than shown above on a GAAP net income basis) from $11,961,000 in 2001 (which would result in a $0.01 greater diluted earnings per share amount). These results exclude securities gains ($230,000 in 2002 versus $130,000 in 2001), the gain on the sale of the credit card portfolio ($256,000 in 2001), goodwill amortization ($333,000 in 2001), and the amortization of intangible assets ($1,329,000 in 2002 versus $1,358,000 in 2001). The net interest margin increased by 31 basis points to 4.28% for the six months ended June 30, 2002, from 3.97% for the like period of 2001, while the net interest spread increased by 53 basis points, to 3.88% from 3.35%. First half interest rate performance improved in 2002, compared to 2001, as the Company achieved a smaller decline in average earning asset yield than in average funding rate. The net interest margin includes the favorable effects of funding interest-earning assets from noninterest-bearing sources. The level of such funding was slightly greater for the first half of 2002, compared to the first half of 2001. However, the benefit derived from zero interest rate funding of earning assets is not as great when interest rates fall, since then, as in 2002, alternative funding with interest-bearing liabilities becomes less expensive. NET INTEREST INCOME Net interest income for the first six months of the year was $38,658,000 in 2002, an increase of 21.5% from $31,806,000 in 2001, due to a higher volume of average earning assets and a greater net interest margin. On a tax-equivalent basis, net interest income increased by 22.6%, to $41,796,000 in 2002 from $34,104,000 in 2001. The effects of average balances, yields and rates are presented in table 3 above. For the first six months, tax-equivalent interest income decreased by $2,824,000 or 4.2% in 2002, compared to 2001. Average earning assets rose 13.1% over the prior year period, while the average yield earned on those assets decreased by 121 basis points to 6.55%. Comparing the first six months of 2002 versus 2001, average total loans and leases grew by 4.1% to $1,028,393,000 (52.5% of average earning assets, versus 57.1% a year ago), while recording a 138 basis point decline in average yield to 7.10%. Average residential real estate loans increased by 8.7% (attributable primarily to construction lending), and average consumer loans increased by 5.9% (attributable to home equity products). Average commercial loans and leases decreased by 0.2% (reflecting declines in construction and leasing, largely offset by increases in real estate and other commercial). Over the same period, average total securities rose by 26.8% to $896,444,000 (45.8% of average earning assets, versus 40.9% a year ago), while the average yield earned on those assets decreased by 82 basis points to 6.09%. Interest expense for the first six months of the year decreased significantly by $10,516,000 or 32.3% in 2002, compared to 2001. Average interest-bearing liabilities rose 11.8% over the prior year period, while the average rate paid on these funds decreased by 174 basis points to 2.67%. All major deposit categories and short-term borrowings grew in conjunction with declines in average rate, while long-term borrowings remained essentially level in both volume and average rate. Most important was the significant decline in deposit rates. This was due primarily to effects of sharply reduced core deposit interest rates on adjustable rate products, and of time deposit maturities with run off or repricing, as well as new accounts, at the lower rates. CREDIT RISK MANAGEMENT During the first six months of the year, the provision for credit losses increased to $2,170,000 in 2002 from $984,000 in 2001. The provision reflects the impact of continued growth in loans, increases in watch listed credits, the seasoning of substantial loan growth over the past eighteen months, considerations associated with the general economic environment, and other factors considered in Bancorp's allowance methodology. Recognition of the downturn in economic activity resulted in increased need for reserves to allow for a higher level of adversely risk rated credits and adverse effects of economic conditions on certain segments of the loan and lease portfolio. While the Company's level of nonperforming loans and net credit losses in the table below shows a stable trend, overall trends in watch listed credits have seen increases as measured at June 30, 2002 compared to December 31, 2001. Substandard and special mention loans have potential or well-defined weaknesses, respectively, which cause some concerns about collectibility, although they may continue to perform according to their terms. 12 Table 4 -- 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, 2002 December 31, 2001 ------------------------------------------------------------------------------------------------------------- Balance, January 1 $ 12,653 $ 11,530 Provision for credit losses 2,170 2,470 Loan charge-offs: Residential real estate (3) (23) Commercial loans and leases (134) (1,180) Consumer (33) (225) -------- -------- Total charge-offs (170) (1,428) Loan recoveries: Residential real estate 0 0 Commercial loans and leases 247 54 Consumer 11 27 -------- -------- Total recoveries 258 81 -------- -------- Net recoveries (charge-offs) 88 (1,347) -------- -------- Balance, period end $ 14,911 $ 12,653 ======== ======== Net recoveries (charge-offs) to average loans and leases (annual basis) 0.02% (0.14)% Allowance to total loans and leases 1.41% 1.27%
The following table presents nonperforming assets at the dates indicated:
June 30 December 31, 2002 2001 -------------------------------------------------------------------------------------------------------- Non-accrual loans and leases $ 5,730 $ 5,904 Loans and leases 90 days past due 1,761 1,903 -------- -------- Total nonperforming loans and leases* 7,491 7,807 Other real estate owned 79 50 -------- -------- Total nonperforming assets $ 7,570 $ 7,857 ======== ======== Nonperforming assets to total assets 0.35% 0.38% --------------------------------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which Bancorp classifies as substandard), as defined and identified by management, amounted to approximately $5,927,000 at June 30, 2002, compared to $4,126,000 at December 31, 2001. These are credits where known information about the borrowers' possible credit problems causes management to have doubts as to their ability to comply with the present repayment terms, which could result in their reclassification as nonperforming credits in the future. 13 CREDIT RISK MANAGEMENT (CONTINUED) The Company has experienced net recoveries during the first six months of 2002 of $88,000, compared to net charge-offs of $934,000 for the same period of 2001, but does not expect this favorable trend to continue, as indicated above. The Company's loan and lease portfolio (the "credit portfolio") is subject to varying degrees of credit risk. Credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. The Company maintains an allowance for credit losses (the "allowance") to absorb losses inherent in the credit portfolio. The allowance is based on careful, continuous review and evaluation of the credit portfolio, along with ongoing, quarterly assessments of the probable losses inherent in that portfolio, and, to a lesser extent, in unused commitments to provide financing. Management believes that the allowance is adequate. However, its determination requires significant judgement, and estimates of probable losses inherent in the credit portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Sandy Spring Bank, periodically review the credit portfolio and the allowance. Such review may result in additional provisions based on their judgements of information available at the time of each examination. During the first six months of 2002, there were no changes in estimation methods or assumptions that affected the allowance methodology. The allowance for credit losses was 1.41% of total loans and leases at June 30, 2002 and 1.27% at December 31, 2001. Nonperforming loans and leases decreased by $316,000 to $7,491,000 while nonperforming assets decreased by $287,000 to $7,570,000 from December 31, 2001 to June 30, 2002. Expressed as a percentage of total assets, nonperforming assets decreased to 0.35% at June 30, 2002 from 0.38% at December 31, 2001. The allowance for credit losses represented 199% of nonperforming loans and leases at June 30, 2002, compared to coverage of 162% at December 31, 2001. Significant variation in this coverage ratio may occur from period to period because the amount of nonperforming loans and leases depends largely on the condition of a small number of individual credits and borrowers relative to the total loan and lease portfolio. Other real estate owned totaled $79,000 at June 30, 2002, compared to $50,000 at December 31, 2001. The balance of impaired loans and leases was $5,231,000 at June 30, 2002, with specific reserves against those loans of $41,000, compared to $5,589,000 at December 31, 2001, with reserves of $91,000. Nonperforming and impaired loans and leases at June 30, 2002, and at December 31, 2001, included a problem credit of a single borrower in the amount of approximately $5,125,000 which is well collateralized, with no loss expected. NONINTEREST INCOME AND EXPENSES Total noninterest income was $13,483,000 for the six-month period ended June 30, 2002, a 29.7% or $3,088,000 increase from the same period in 2001. Excluding non-recurring securities gains ($230,000 in 2002 versus $130,000 in 2001) and the sale of the credit card portfolio ($256,000 in 2001), the increase in operating noninterest income was 32.4% or $3,244,000. Most of this change was due to similar amounts of growth in service charges on deposit accounts, mortgage banking revenues, income from trust operations and revenues from the sales of investment products, along with $1,776,000 of insurance agency commissions generated by the insurance subsidiary acquired in December 2001. Noninterest income performance reported above reflects management's desire to both grow and diversify its sources of noninterest income. Total noninterest expenses were $31,416,000 for the six-month period ended June 30, 2002, a 20.4% or $5,329,000 increase from the same period of 2001. These results include goodwill amortization (none in 2002 due to adoption of Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" effective January 1, 2002, versus $333,000 in 2001) and intangible asset amortization ($1,329,000 in 2002 versus $1,358,000 in 2001). Excluding these items, the increase in operating noninterest expenses was 23.3% or $5,691,000. The Company incurs additional costs in order to enter new markets, provide new 14 services, and support the growth of the Company. Management controls its operating expenses, however, with the goal of maximizing profitability over time. Most of the rise in operating expenses during the first half of the year occurred in salaries and benefits (up 38.5% or $5,209,000), reflecting increases in staff, merit raises and higher incentive compensation. Since June 30, 2001, the Company has opened three new branches (including its first branch in Frederick County), consolidated two branches into one, and added an insurance subsidiary. As a result, average full-time equivalent employees increased by 76 persons (representing a 16.6% increase), to 534 during the first six months of 2002, from 458 during the like period in 2001. With the exclusion of non-operating items of income and expense from earnings, the ratio of net income per average full-time-equivalent employee after completion of the first six months of the year was $27,000 in 2002 and $26,000 in 2001. INCOME TAXES The effective tax rate for the six-month period ended June 30 was 26.1% in 2002, which was essentially unchanged from 2001. C. RESULTS OF OPERATIONS - SECOND QUARTER 2002 AND 2001 Second quarter net income of $7,158,000 ($0.48 per share-diluted) in 2002 was $1,291,000 or 22.0% above net income of $5,867,000 ($0.41 per share-diluted) shown for the same quarter of 2001. Annualized returns on average equity for these periods were 18.45% in 2002 versus 17.02% in 2001. Excluding nonoperating items, non-GAAP net income for the second quarter of 2002 was $7,560,000 (which would result in a $0.04 greater diluted earnings per share amount than shown above on a GAAP net income basis), compared to $6,217,000 for the second quarter of 2001 (which would result in a $0.03 greater diluted earnings per share amount), representing an increase of 21.6%. These results exclude securities losses ($3,000 in 2002), the gain on the sale of the credit card portfolio ($256,000 in 2001), goodwill amortization ($166,000 in 2001), and the amortization of intangible assets ($664,000 in 2002 versus $669,000 in 2001). Tax-equivalent net interest income rose 24.4% during the second quarter of 2002, versus the comparable period in 2001, to $21,752,000 from $17,485,000. The size of this change was determined by the combined effects of 11.9% higher average earning assets and a 44 basis point widening of the net interest margin. The second quarter provision for credit losses increased to $985,000 in 2002 from $492,000 in 2001. Reasons for the increase are discussed above in Credit Risk Management for the year-to-date. Concerns over the economic impact on the portfolios and increases in adversely risk rated credits contributed to the additions. Net recoveries of $49,000 were recorded for the second quarter of 2002, compared to net charge-offs of $604,000 for the second quarter of 2001. Noninterest income for the second quarter increased $1,212,000 or 22.1% in 2002, compared to 2001. On an operating basis, which primarily reflects the exclusion of securities losses ($3,000 in 2002) and the gain on the sale of the credit card portfolio ($256,000 in 2001), the increase in non-GAAP noninterest income was 28.2%. This change primarily reflected growth in service charges on deposit accounts, income from trust operations and revenues from the sales of investment products, along with $790,000 of insurance agency commissions generated by the insurance subsidiary acquired in December 2001. Second quarter noninterest expenses increased 22.0% or $2,902,000 to $16,117,000 in 2002 from $13,215,000 in 2001. Excluding goodwill ($166,000 in 2001) and the amortization of intangible assets ($664,000 in 2002 and $669,000 in 2001), operating (non-GAAP) noninterest expenses rose 24.8%, with the majority attributable, as in the year-to-date comparison, to higher salaries and benefits. The second quarter effective tax rate declined to 25.9% in 2002 from 26.9% in 2001, in part reflecting an increase in tax-advantaged investment securities. 15 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See "Financial Condition - Market Risk Management" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" above. Management has determined that no additional disclosures are necessary to assess changes in information about market risk that have occurred since December 31, 2001. PART II - OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's annual shareholders' meeting held on April 17, 2002, the shareholders of the Company elected John Chirtea (with 11,761,157 votes for and 201,593 withheld), Joyce R. Hawkins (with 11,705,268 votes for and 257,482 withheld), Hunter R. Hollar (with 11,335,188 votes for and 627,562 withheld), and Craig A. Ruppert (with 11,734,879 votes for and 227,871 withheld) as directors for three year terms (Proposal I). There were no solicitations in opposition to management's nominees and all such nominees were elected. Mr. Ruppert was elected as a director at the January 2002 meeting of the Board of Directors, while the other 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. Director Thomas O. Keech chose not to stand for re-election and retired effective at the conclusion of the 2002 Annual Meeting. Proposal II to amend Bancorp's 1999 stock option plan to increase the number of shares of common stock reserved for issuance under the plan from 600,000 to 1,600,000 shares was adopted by the shareholders at the annual meeting by a vote of 7,705,391 shares in favor and 1,925,292 shares against, with 2,116,199 broker non-votes and 215,868 shares abstaining. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 99.1 Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 Exhibit 99.2 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K. None 16 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 12, 2002 By: /S/ JAMES H. LANGMEAD ---------------------------------------------------- James H. Langmead Executive Vice President and Chief Financial Officer Date: August 9, 2002 17