SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ____________________
Commission File Number: O-19065
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Sandy Spring Bancorp, Inc.
-----------------------------------------------------
(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 April 25, 2003
is 14,505,234 shares.
Explanatory Note to Amended Report on Form 10-Q/A
On May 13, 2003, Sandy Spring Bancorp, Inc. (the "Company") filed its
Quarterly report on Form 10-Q for the period ended March 31, 2003. In November
2003, the Company discovered that accrued interest expense on certain Federal
Home Loan Bank ("FHLB") advances had been understated, on a cumulative basis,
beginning in the first quarter of 1997. This accrual error was the result of a
mistake in the interest calculation formula for certain types of FHLB advances,
and was discovered as part of the Company's auditing process. The maximum effect
on diluted earnings per share in any affected year is less than one cent.
This amended Quarterly Report on Form-10Q/A corrects and restates the
Company's consolidated financial statements and other financial information for
all periods shown to properly reflect the effects of the error, that resulted in
an overstatement of interest expense. The financial statement items affected by
the correction are accrued interest payable and other liabilities, retained
earnings, interest on short-term borrowings, income tax expense, net income,
basic and diluted earnings per share, totals and other amounts that are
calculated using those items, and the related footnotes. Related corrections
also have been made to Management's Discussion and Analysis of Financial
Condition and Results of Operations.
SANDY SPRING BANCORP, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at
March 31, 2003 and December 31, 2002........................................... 1
Consolidated Statements of Income for the Three
Month Periods Ended March 31, 2003 and 2002 ................................... 2
Consolidated Statements of Cash Flows for the Three
Month Periods Ended March 31, 2003 and 2002.................................... 4
Consolidated Statements of Changes in Stockholders' Equity for the
Three Month Periods Ended March 31, 2003 and 2002.............................. 6
Notes to Consolidated Financial Statements..................................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK............................................................ 17
ITEM 4. CONTROLS AND PROCEDURES...................................................... 17
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................................ 18
SIGNATURES........................................................................... 18
CERTIFICATIONS........................................................................19
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(Dollars in thousands, except per share data) 2003 2002
---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 49,066 $ 38,998
Federal funds sold 23,356 9,135
Interest-bearing deposits with banks 837 813
Residential mortgage loans held for sale (at fair value) 28,587 38,435
Investments available-for-sale (at fair value) 751,030 685,586
Investments held-to-maturity -- fair value of $333,505 (2003) and
$346,862 (2002) 327,589 340,860
Other equity securities 21,237 19,812
Total loans and leases 1,050,316 1,063,853
Less: allowance for credit losses (15,023) (15,036)
----------- -----------
Net loans and leases 1,035,293 1,048,817
Premises and equipment, net 36,256 36,007
Accrued interest receivable 19,372 14,957
Goodwill 7,642 7,642
Other intangible assets 13,262 13,927
Other assets 57,993 52,415
----------- -----------
Total assets $ 2,371,520 $ 2,307,404
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 345,217 $ 320,583
Interest-bearing deposits 1,210,296 1,171,629
----------- -----------
Total deposits 1,555,513 1,492,212
Short-term borrowings 489,210 488,214
Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 88,521 90,500
Accrued interest payable and other liabilities 21,422 23,454
----------- -----------
Total liabilities 2,189,666 2,129,380
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 50,000,000; shares
issued and outstanding 14,503,157 (2003) and 14,536,094 (2002)
14,503 14,536
Additional paid in capital 19,880 21,128
Retained earnings 137,648 131,939
Accumulated other comprehensive income 9,823 10,421
----------- -----------
Total stockholders' equity 181,854 178,024
----------- -----------
Total liabilities and stockholders' equity $ 2,371,520 $ 2,307,404
=========== ===========
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
----------------------
(In thousands, except per share data) 2003 2002
--------------------------------------------------------------------------
Interest Income:
Interest and fees on loans and leases $16,619 $17,722
Interest on loans held for sale 308 173
Interest on deposits with banks 3 8
Interest and dividends on securities:
Taxable 8,732 9,259
Exempt from federal income taxes 3,468 2,412
Interest on federal funds sold 106 120
-------------------
TOTAL INTEREST INCOME 29,236 29,694
Interest Expense:
Interest on deposits 3,933 5,324
Interest on short-term borrowings 4,630 3,717
Interest on long-term borrowings 1,510 2,072
-------------------
TOTAL INTEREST EXPENSE 10,073 11,113
-------------------
NET INTEREST INCOME 19,163 18,581
Provision for Credit Losses 0 1,185
-------------------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 19,163 17,396
Noninterest Income:
Securities gains 8 233
Service charges on deposit accounts 1,984 1,878
Gains on sales of mortgage loans 1,575 738
Fees on sales of investment products 521 640
Trust department income 720 569
Insurance agency commissions 1,019 986
Income from bank owned life insurance 609 435
Other income 1,339 1,319
-------------------
TOTAL NONINTEREST INCOME 7,775 6,798
Noninterest Expenses:
Salaries and employee benefits 9,450 9,296
Occupancy expense of premises, net 1,584 1,306
Equipment expenses 1,041 809
Marketing 454 402
Outside data services 645 613
Amortization of intangible assets 665 665
Other expenses 2,136 2,207
-------------------
TOTAL NONINTEREST EXPENSES 15,975 15,298
-------------------
Income Before Income Taxes 10,963 8,896
Income Tax Expense 2,635 2,336
-------------------
NET INCOME $ 8,328 $ 6,560
===================
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended
March 31,
-------------------------
(In thousands, except per share data) 2003 2002
-----------------------------------------------------------------------
Basic Net Income Per Share $ 0.57 $ 0.45
Diluted Net Income Per Share 0.56 0.45
Dividends Declared Per Share 0.18 0.17
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------
2003 2002
-----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 8,328 $ 6,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,540 1,470
Provision for credit losses 0 1,185
Origination of loans held for sale (113,655) (53,406)
Proceeds from sales of loans held for sale 125,078 60,012
Gains on sales of loans held for sale (1,575) (738)
Securities gains (8) (233)
Net (increase) decrease in accrued interest receivable (4,415) 925
Net increase in other assets (5,606) (882)
Net decrease in accrued expenses (2,241) (6,759)
Other - net 1,357 370
--------- ---------
Net cash provided by operating activities 8,803 8,504
Cash flows from investing activities:
Net increase in interest-bearing deposits with banks (24) (2)
Purchases of investments held-to-maturity (5,354) (36,516)
Purchases of other equity securities (1,425) 0
Purchases of investments available-for-sale (371,082) (136,472)
Proceeds from sales of investments available-for-sale 50,027 117,248
Proceeds from maturities, calls and principal payments of investments held-to-maturity 18,591 0
Proceeds from maturities, calls and principal payments of investments available-for-sale 254,109 101,534
Net decrease (increase) in loans and leases 13,537 (23,671)
Expenditures for premises and equipment (1,239) (1,148)
--------- ---------
Net cash (used in) provided by investing activities (42,860) 20,973
Cash flows from financing activities:
Net increase in deposits 63,301 5,908
Net (decrease) increase in short-term borrowings (29,555) 992
Proceeds from long-term borrowings 28,500 96
Common stock purchased and retired (1,579) 0
Proceeds from issuance of common stock 298 203
Dividends paid (2,619) (2,463)
--------- ---------
Net cash provided by financing activities 58,346 4,736
--------- ---------
Net increase in cash and cash equivalents 24,289 34,213
Cash and cash equivalents at beginning of period 48,133 56,383
--------- ---------
Cash and cash equivalents at end of period $ 72,422 $ 90,596
========= =========
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended
March 31,
------------------------
(Dollars in thousands) 2003 2002
----------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest payments $10,010 $11,617
Income tax payments 2,295 531
Noncash Financing Activities:
Reclassification of borrowings from long-term to short-term 30,479 100
See Notes to Consolidated Financial Statements.
5
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum-
ulated
Other
Compre- Total
Additional hensive Stock-
Common Paid-in Retained Income holders'
(Dollars in thousands, except per share data) Stock Capital Earnings (loss) Equity
----------------------------------------------------------------------------------------------------------------
Balances at January 1, 2003, as previously
reported $ 14,536 $ 21,128 $132,607 $ 10,421 $178,692
Less adjustments for the cumulative effect
on prior years of the understatement of
accrued interest on borrowings from the
Federal Home Loan Bank (668) (668)
-------- -------- -------- -------- --------
Balances at January 1, 2003, as adjusted 14,536 21,128 131,939 10,421 178,024
Comprehensive income:
Net income 8,328 8,328
Other comprehensive loss, net of tax
effects and reclassification adjustment (598) (598)
--------
Total comprehensive income 7,730
Cash dividends - $0.18 per share (2,619) (2,619)
Common stock issued pursuant to:
Stock option plan - 12,501 shares 13 171 184
Employee stock purchase plan - 4,122
shares 4 110 114
Stock repurchases - 49,560 shares (50) (1,529) (1,579)
-------- -------- -------- -------- --------
Balances at March 31, 2003 $ 14,503 $ 19,880 $137,648 $ 9,823 $181,854
======== ======== ======== ======== ========
Balances at January 1, 2002, as previously
reported $ 14,484 $ 20,347 $111,906 $ 3,936 $150,673
Less adjustments for the cumulative effect
on prior years of the understatement of
accrued interest on borrowings from the
Federal Home Loan Bank (540) (540)
-------- -------- -------- -------- --------
Balances at January 1, 2002, as adjusted 14,484 20,347 111,366 3,936 150,133
Comprehensive income:
Net income 6,560 6,560
Other comprehensive income, net of tax effects
and reclassification adjustment (3,539) (3,539)
--------
Total comprehensive income 3,021
Cash dividends - $0.17 per share (2,463) (2,463)
Common stock issued pursuant to:
Stock option plan - 7,134 shares 7 106 113
Employee stock purchase plan - 3,420 shares 3 87 90
-------- -------- -------- -------- --------
Balances at March 31, 2002 $ 14,494 $ 20,540 $115,463 $ 397 $150,894
======== ======== ======== ======== ========
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 2002 Annual
Report to Shareholders. There have been no significant changes to the Company's
Accounting Policies as disclosed in the 2002 Annual Report. The results shown in
this interim report are not necessarily indicative of results to be expected for
the full year 2003.
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 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 (which have original maturities
of three months or less).
Note 2 - Stockholders' Equity
On March 26, 2003, the Board of Directors authorized the repurchase of
up to 5%, or approximately 727,000 shares, of the Company's outstanding common
stock, par value $1.00 per share, in connection with shares expected to be
issued under the Company's stock option and employee benefit plans and for other
corporate purposes. The share repurchases are expected to be made primarily on
the open market from time to time until March 31, 2005, or earlier termination
of the repurchase program by the Board. Repurchases under the program will be
made in the discretion of management based upon market, business, legal,
accounting and other factors. Bancorp purchased the equivalent of 49,560 shares
of its common stock under a share repurchase program, which expired on March 31,
2003.
Note 3 - Stock Option Plan
At March 31, 2003, the Company had options outstanding under two
stock-based employee compensation plans, the 1992 stock option plan (expired but
having outstanding options that may still be exercised) and the 1999 stock
option plan. 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.
7
Note 3 - Stock Option Plan (continued)
Three Months Ended
March 31,
---------------------
(In thousands, except per share data) 2003 2002
---------------------------------------------------------------------------------------------------
Net income, as reported $ 8,328 $ 6,560
Less pro forma stock-based employee compensation expense
determined under fair value based method, net of related tax effects (244) (304)
---------------------
Pro forma net income $ 8,084 $ 6,256
=====================
Net income per share:
Basic - as reported $ 0.57 $ 0.45
Basic - pro forma $ 0.55 $ 0.43
Diluted - as reported $ 0.56 $ 0.45
Diluted - pro forma $ 0.55 $ 0.43
Note 4 - Per Share Data
The calculations of net income per common share for the three month
periods ended March 31 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.
Three Months Ended
March 31,
(Dollars and amounts in thousands, except ---------------------
Per share data) 2003 2002
---------------------------------------------------------------------------------------------------
Basic:
Net income available to common stockholders $ 8,328 $ 6,560
Average common shares outstanding 14,537 14,490
Basic net income per share $ 0.57 $ 0.45
=====================
Diluted:
Net income available to common stockholders $ 8,328 $ 6,560
Average common shares outstanding 14,537 14,490
Stock option adjustment 207 219
---------------------
Average common shares outstanding-diluted 14,744 14,709
Diluted net income per share $ 0.56 $ 0.45
=====================
Options for 140,729 shares of common stock were not included in computing
diluted net income per share for the three months ended March 31, 2002 because
their effects are antidilutive. There was no such effect for the three months
ended March 31, 2003.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Sandy Spring Bancorp makes forward-looking statements in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations that are subject to risks and uncertainties. These forward-looking
statements include: statements of goals, intentions, and expectations; estimates
of risks and of future costs and benefits; assessments of probable 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 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
twenty-nine community offices in Anne Arundel, 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 March 31, 2003, 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 75% of total average deposits, while approximately 60% of the
Company's revenues are derived from consumer loans, consumer deposits and other
retail 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.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP)
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 Company makes use of estimates in applying its accounting
policies. A change in such estimates may have a material impact on the
presentation of the Company's financial condition, changes in financial
condition, or results of operations for a reporting period. The estimates used
in management's assessment of the adequacy of the allowance for credit 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 such a material effect.
NON-GAAP FINANCIAL MEASURE
The Company has for many years used a traditional efficiency ratio that
is a non-GAAP financial 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
9
ratio, and 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 noninterest income. This is a GAAP
financial measure. Noninterest expenses used in the calculation of the
traditional, non-GAAP efficiency ratio exclude amortization of goodwill and
intangibles and non-recurring expenses. Income for the traditional ratio is
increased for the favorable effect of tax-exempt income, and excludes securities
gains and losses, which vary widely from period to period without appreciably
affecting operating expenses, and non-recurring gains. The 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. As shown in Table 1, both first quarter
efficiency ratios, GAAP based and traditional, improved in 2003, compared to
2002.
Table 1 - GAAP based and traditional efficiency ratios
Three Months Ended
-----------------------------------------------------------------------
March 31,
-----------------------------------------------------------------------
(Dollars in thousands) 2003 2002
-----------------------------------------------------------------------
Noninterest expenses-GAAP based $15,975 $15,298
Net interest income plus noninterest income-
GAAP based 26,938 25,379
Efficiency ratio-GAAP based 59.30% 60.28%
======= =======
Noninterest expenses-GAAP based $15,975 $15,298
Less non-GAAP adjustments:
Amortization of intangible assets 665 665
--------------------
Noninterest expenses-traditional ratio 15,310 14,633
Net interest income plus noninterest income-
GAAP based 26,938 25,379
Plus non-GAAP adjustment:
Tax-equivalency 2,046 1,469
Less non-GAAP adjustments:
Securities gains 8 233
--------------------
Net interest income plus noninterest
Income - traditional ratio 28,976 26,615
Efficiency ratio - traditional 52.84% 54.98%
======= =======
A. FINANCIAL CONDITION
The Company's total assets were $2,371,520,000 at March 31, 2003,
compared to $2,307,404,000 at December 31, 2002, increasing $64,116,000 or 3%
during the first three months of 2003. Earning assets increased $44,458,000 or
2% to $2,202,952,000 at March 31, 2003, from $2,158,494,000 at December 31,
2002.
Total loans and leases, excluding loans held for sale, decreased 1% or
$13,537,000 during the first three months of 2003, to $1,050,316,000. During
this period, all three major loan categories showed declines, primarily
residential real estate loans, which decreased by $11,735,000 or 3%,
attributable to lower residential mortgage loans and residential construction
loans. Commercial loans and leases decreased by $995,000, reflecting in large
part a decrease in commercial loans not secured by real estate, while consumer
loans decreased by $807,000, due primarily to home equity loans. Finally,
residential mortgage loans held for sale decreased by $9,848,000 from December
31, 2002, to $28,587,000 at March 31, 2003.
10
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) March 31, 2003 % December 31, 2002 %
-----------------------------------------------------------------------------------------------------
Residential real estate $ 342,938 33% $ 354,673 33%
Commercial loans and leases 475,019 45 476,014 45
Consumer 232,359 22 233,166 22
--------------------------------------------------------------
Total Loans and Leases 1,050,316 100% 1,063,853 100%
=== ===
Less: Allowance for credit losses (15,023) (15,036)
----------- -----------
Net loans and leases $ 1,035,293 $ 1,048,817
=========== ===========
The total investment portfolio surpassed the loan portfolio as the
largest type of earning asset on the balance sheet during the first quarter of
2003, increasing by 5% or $53,598,000 from December 31, 2002, to $1,099,856 at
March 31, 2003. The increase was driven primarily by $65,444,000 or 10% higher
available-for-sale securities. Other equity securities rose a small amount over
the same period, up $1,425,000 or 7%, while held-to-maturity securities
decreased by $13,271,000 or 4%. The aggregate of federal funds sold and
interest-bearing deposits with banks, short-term investments, increased by
$14,245,000 during the first three months of 2003, reaching $24,193,000 at March
31, 2003.
Total deposits were $1,555,513,000 at March 31, 2003, increasing
$63,301,000 or 4% from $1,492,212,000 at December 31, 2002. All major deposit
categories either increased or remained essentially level, comparing March 31,
2003 with December 31, 2002. Noninterest-bearing demand deposits grew by 8% or
$24,634,000 over the three-month period, while interest bearing deposits rose 3%
or $38,667,000 from a larger base.
Total borrowings were $612,731,000 at March 31, 2003, which was
essentially level with December 31, 2002, reflecting small changes within the
major categories.
Table 3 - Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
(In thousands) March 31, 2003 % December 31, 2002 %
----------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 345,217 22% $ 320,583 21%
Interest-bearing deposits:
Demand 194,387 12 185,381 12
Money market savings 403,159 26 398,539 27
Regular savings 164,227 11 153,294 10
Time deposits less than $100,000 306,978 20 308,168 21
Time deposits $100,000 or more 141,545 9 126,247 9
--------------------------------------------------------
Total interest-bearing 1,210,296 78 1,171,629 79
--------------------------------------------------------
Total deposits $1,555,513 100% $1,492,212 100%
========================================================
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 March 31, 2003, as at December 31, 2002, 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 4.) 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 March 31, 2003, the
simulation analysis indicates that net interest income would decline by 10% 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 16%, as compared to a policy limit of
25%.
11
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, investment portfolio
liquidity, and other factors. Through this approach, implemented by the funds
management sub 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 March 31, 2003 showed short-term investments
exceeding short-term borrowings over the subsequent 90 days by $240,330,000.
This position was substantially above the $21,542,000 excess at December 31,
2002, primarily due to significant calls from the investment portfolio. 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 an overall line of
credit for $708,323,000 from the Federal Home Loan Bank of Atlanta, of which
approximately $387,870,000 was outstanding at March 31, 2003. 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 $261,375,000 at March 31, 2003, against which there were outstandings of
approximately $50,000,000. Based upon its liquidity analysis, including external
sources of liquidity available, management believes the liquidity position is
appropriate at March 31, 2003.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 15.01% at
March 31, 2003, compared to 14.95% at December 31, 2002; a tier 1 risk-based
capital ratio of 13.80%, compared to 13.72%; and a capital leverage ratio of
8.18%, compared to 8.08%. Capital adequacy, as measured by these ratios, was
well above regulatory requirements. Management believes the level of capital at
March 31, 2003, is appropriate.
Stockholders' equity for March 31, 2003, totaled $181,854,000,
representing an increase of $3,830,000 or 2% from $178,024,000 at December 31,
2002. 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 $598,000 from December 31, 2002 to March
31, 2003.
Internal capital generation (net income less dividends) added
$5,709,000 to total stockholders' equity during the first three months of 2003.
When internally formed capital is annualized and expressed as a percentage of
average total stockholders' equity, the resulting rate was 13% for both the
first three months of 2003 and the year 2002.
External capital formation (equity created through the issuance of
stock under the employee stock purchase plan and the stock option plan) totaled
$298,000 during the three month period ended March 31, 2003. However, share
repurchases amounted to $1,579,000 from December 31, 2002 through March 31,
2003, for a net decrease in stockholders' equity from these sources of
$1,281,000.
Dividends for the first three months of the year were $0.18 per share -
diluted in 2003, compared to $0.17 per share - diluted in 2002, for respective
dividend payout ratios (dividends declared per share to diluted net income per
share) of 32% versus 38%.
B. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003, AND 2002
Net income for the first three months of the year increased $1,768,000
or 27% to $8,328,000 in 2003 from $6,560,000 in 2002, representing annualized
returns on average equity of 18.76% and 17.48%, respectively. First quarter
year-to-date diluted earnings per share (EPS) were $0.56 in 2003, compared to
$0.45 in 2002.
The net interest margin decreased by 23 basis points to 3.95% for the
three months ended March 31, 2003, from 4.18% for the same period of 2002, as
the net interest spread decreased by 19 basis points. The compression of the net
interest margin was caused by lower interest rates a smaller percentage of
average loans to total earning assets and a 13 basis point decline in the margin
earned in the Company's leverage programs.
12
Sandy Spring Bancorp, Inc. and Subsidiaries
TABLE 4 - CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax equivalent)
For the three months ended March 31,
2003 2002
------------------------------------------------------
Average Average
Average Yield/Rate Average Yield/Rate
Balance (1) Balance (1)
------------------------------------------------------
Assets
Total loans and leases (2) $1,083,188 6.31% $1,012,376 7.14%
Total securities 1,039,112 5.49 882,497 5.96
Other earning assets 36,517 1.20 31,744 1.62
---------- ----------
TOTAL EARNING ASSETS 2,158,817 5.83% 1,926,617 6.51%
Nonearning assets 147,017 137,519
---------- ----------
Total assets $2,305,834 $2,064,136
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 186,114 0.28% $ 165,477 0.26%
Money market savings deposits 403,604 0.77 392,438 1.13
Regular savings deposits 157,446 0.37 122,262 1.01
Time deposits 441,221 2.66 427,391 3.62
---------- ----------
Total interest-bearing deposits 1,188,385 1.34 1,107,568 1.95
Short-term borrowings 491,032 3.78 415,658 3.59
Long-term borrowings 119,715 5.05 114,137 7.26
---------- ----------
Total interest-bearing liabilities 1,799,132 2.25 1,637,363 2.74
Noninterest-bearing demand deposits 299,638 260,575
Other noninterest-bearing liabilities 27,020 14,000
Stockholders' equity 180,044 152,198
---------- ----------
Total liabilities and stockholders' equity $2,305,834 $2,064,136
========== ==========
Net interest spread 3.58% 3.77%
====== ======
Net interest margin (3) 3.95% 4.18%
====== ======
Ratio of average earning assets to
Average interest-bearing liabilities 119.99% 117.67%
========== ==========
(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
$8,185,105 and $5,872,913 in the quarters ended March 31, 2003 and 2002,
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.
13
NET INTEREST INCOME
Net interest income for the first three months of the year was
$19,163,000 in 2003, an increase of 3% over $18,581,000 in 2002, due to a higher
volume of average earning assets, partially offset by the decline in net
interest margin. On a tax-equivalent basis, net interest income increased by 6%
to $21,209,000 in 2003, from $20,050,000 in 2002. The size of the tax-equivalent
adjustment in 2003, compared to 2002, resulting from a higher level of tax
advantaged investment securities, caused this doubling of the percentage
increase, compared to the change for unadjusted GAAP net interest income. The
effects of average balances, yields and rates are presented in the table 4.
For the first three months, total interest income decreased by $458,000
or 2% in 2003, compared to 2002. On a tax-equivalent basis, interest income
increased slightly by $119,000. Average earning assets rose 12% over the prior
period, to $2,158,817,000 from $1,926,617,000, while the average yield earned on
those assets decreased by 68 basis points to 5.83%. Comparing the first three
months of 2003 versus 2002, average total loans and leases grew by 7% to
$1,083,188,000 (50% of average earning assets, versus 53% a year ago), while
recording an 83 basis point decline in average yield to 6.31%. Average
residential real estate loans increased by 7% (reflecting an increase in
mortgage lending, partially offset by a similar percentage decline in
construction lending); average consumer loans increased by 5% (attributable to
home equity line growth); and, average commercial loans and leases grew by 8%
(due to increases in mortgages and other commercial loans, partially offset by
declines in construction and leasing). Over the same period, average total
securities rose by 18% to $1,039,112 (48% of average earning assets, versus 46%
a year ago), while the average yield earned on those assets decreased by 47
basis points to 5.49%.
Interest expense for the first three months of the year decreased by
$1,040,000 or 9% in 2003, compared to 2002. Average total interest-bearing
liabilities rose 10% over the prior year period, while the average rate paid on
these funds decreased by 49 basis points to 2.25%. As shown in Table 4, all
major deposit categories and both short and long term borrowings grew in
conjunction with declining or stable average rates.
CREDIT RISK MANAGEMENT
The allowance for credit losses is an estimate of the losses that may
be sustained in the loan and lease portfolio. The allowance is based on two
basic principles of accounting: (1) SFAS No. 5, "Accounting for Contingencies",
which requires that losses be accrued when they are probable of occurring and
estimable, and (2) SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan", which requires that losses be accrued based on differences between the
loan balance and the value of collateral, the present value of future cash
flows, or values that are observable in the secondary market. Management
determines the appropriate amount of the allowance using the systematic
methodology described below.
The Company's allowance for credit losses has three basic components:
the formula allowance reflecting historical losses by credit category, the
specific allowance for risk rated credits on an individual or portfolio basis,
and the nonspecific allowance which considers risk factors not evaluated by the
other two components of the methodology. Each of these components is based upon
estimates that can and do change when the actual events occur.
The formula allowance establishes allowances for the major loan
categories based upon their respective historical loss experience over the prior
eight quarters, weighted so that losses in the most recent quarters have the
greatest impact. The use of these factors in the methodology, because of their
relationship to actual results, is intended to narrow differences between
estimated and realized losses.
The specific allowance is used to allocate an allowance for internally
risk rated loans where significant conditions or circumstances indicate that a
loss may have been incurred. 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 reserve is established based on the
Company's calculation of the loss embedded in the individual loan. Additional
allowances are 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, and
unfunded commitments. 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. Allowances may also be established in
special circumstances involving a
14
particular group of credits or portfolio within a risk rating category when
management becomes aware that losses incurred may exceed those determined by use
of the risk factor for that general credit category.
A nonspecific allowance is primarily based upon management's regular
evaluation of the following factors (which are included in federal bank
regulatory guidelines): trends in delinquencies and nonaccruals, size of credits
relative to the allowance, volume trends, concentrations, economic conditions,
credit administration and management, and the quality of the risk identification
system. Additional factors which may also be considered include changes in
underwriting standards, such as acceptance of higher loan to value ratios.
Evaluation of the potential effects of these factors on estimated losses
involves a high degree of uncertainty including the strength and timing of
economic cycles and concerns over the effects of a prolonged economic downturn
in the current cycle. The required analysis is regularly and carefully
undertaken by management, and the risk factors are revised as conditions
indicate.
The amount of the allowance is reviewed monthly by the senior loan
committee, and reviewed and approved by the Board of Directors quarterly.
During the first three months of the year, there was no provision for
credit losses in 2003, compared to $1,185,000 in 2002. The Company has
experienced net charge-offs during the first three months of 2003 of only
$13,000, compared to net recoveries of $39,000 for the same period of 2002.
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 three months of
2003, there were no changes in estimation methods that affected the allowance
methodology. The allowance for credit losses was 1.43% of total loans and leases
at March 31, 2003 and 1.41% at December 31, 2002.
The allowance decreased during the first three months of 2003 by
$13,000 (the amount of net charge-offs for the period), from $15,036,000 at
December 31, 2002 to $15,023,000 at March 31, 2003. The stability of the
allowance reflects the required reserve computed by the allowance methodology at
March 31, 2003, compared to December 31, 2002. The amount of the required
reserve was affected by the absence of loan growth during the first quarter of
2003, coupled with the absence of significant volume shifts between the loan
categories. The change in the nonspecific allowance, which is the most
significant component, was under 5%,. while changes in the formula allowance and
the specific allowance were small in amount and offset each other.
Nonperforming assets and nonperforming loans and leases both decreased
by $797,000 to $1,948,000 from December 31, 2002 to March 31, 2003. Expressed as
a percentage of total assets, nonperforming assets decreased to 0.08% at March
31, 2003 from 0.12% at December 31, 2002. The allowance for credit losses
represented 771% of nonperforming loans and leases at March 31, 2003, compared
to coverage of 548% at December 31, 2002. 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. There was
no other real estate owned on the balance sheet at either March 31, 2003, or at
December 31, 2002. The balance of impaired loans and leases was $258,000 at
March 31, 2003, with specific reserves against those loans of $20,000, compared
to $170,000 at December 31, 2002, with no reserves.
15
Table 5 -- Analysis of Credit Risk
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
Three Months Ended Twelve Months Ended
March 31, 2003 December 31, 2002
-----------------------------------------------------------------------------------
Balance, January 1 $ 15,036 $ 12,653
Provision for credit losses 0 2,865
Loan charge-offs:
Residential real estate 0 (165)
Commercial loans and leases (7) (467)
Consumer (27) (158)
-------- --------
Total charge-offs (34) (790)
Loan recoveries:
Residential real estate 2 0
Commercial loans and leases 16 284
Consumer 3 24
-------- --------
Total recoveries 21 308
-------- --------
Net charge-offs (13) (482)
-------- --------
Balance, period end $ 15,023 $ 15,036
======== ========
Net charge-offs to average loans and
0.00% 0.05%
Leases (annual basis)
Allowance to total loans and leases 1.43% 1.41%
The following table presents nonperforming assets at the dates indicated:
March 31 December 31,
2003 2002
--------------------------------------------------------------------------------
Non-accrual loans and leases $ 567 $ 588
Loans and leases 90 days past due 1,381 2,157
-------- --------
Total nonperforming loans and leases* 1,948 2,745
Other real estate owned 0 0
-------- --------
Total nonperforming assets $ 1,948 $ 2,745
======== ========
Nonperforming assets to total assets 0.08% 0.12%
--------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which Bancorp
classifies as substandard), as defined and identified by management, amounted to
approximately $5,843,000 at March 31, 2003, compared to $5,962,000 at December
31, 2002. Although 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, most are well
collateralized and are not believed to present significant risk of loss.
16
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $7,775,000 for the three-month period
ended March 31, 2003, a 14% or $977,000 increase from the same period of 2002.
Excluding securities gains ($8,000 in 2003 versus $233,000 in 2002), the
increase in noninterest income was 18% or $1,202,000. The primary reason for
this growth was a 113% increase in mortgage banking revenues due mainly to the
sizable volume of refinancings resulting from the continued low interest rate
environment. Other contributors to the increase included income from trust
operations (up $151,000), insurance commissions (up $33,000), and income from
Bank Owned Life Insurance (up $174,000). Noninterest income performance reported
above reflects management's desire to both grow and diversify its sources of
noninterest income.
Total noninterest expenses were $15,975,000 for the three-month period
ended March 31, 2003, a 4% or $677,000 increase from the first quarter of 2002.
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 quarter of the
year occurred in occupancy expenses (up 21% or $278,000) and equipment expenses
(up 29% or $232,000). The increase in occupancy expenses was due primarily to
lower rental income, and the opening of a new branch in Frederick County in
March 2002 which was open for the full first quarter of 2003. The increase in
equipment expenses was due mainly to upgrades in several software systems and
new items processing equipment. Salaries and benefits increased 2% or $154,000
versus the prior year period. This increase was attributable to increases in
staff, merit raises, and higher commission compensation, partially offset by a
decline in profit sharing expense. Average full-time equivalent employees
increased to 548 during the first three months of 2003, from 524 during the like
period in 2002, a 5% increase. The ratio of net income per average
full-time-equivalent employee after completion of the first three months of the
year was $15,000 in 2003 and $13,000 in 2002.
INCOME TAXES
The effective tax rate was 24.0% for the three-month period ended March
31, 2003 compared to 26.3% for the prior year period. This decline was due
primarily to an increase in tax-advantaged investments.
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,
2002.
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the filing of this report, the
Company's management, under the supervision and with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-14 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 (including corrective actions with
regard to significant or material weaknesses) in the Company's internal controls
or in other factors subsequent to the date of the evaluation that could
significantly affect those controls.
17
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10(a) Employment Agreement by and among Sandy Spring Bancorp,
Sandy Spring Bank, and Hunter R. Hollar*
10(b) Supplemental Executive Retirement Agreement by and between
Sandy Spring Bank, and Hunter R. Hollar*
31 Rule 13a-14(a) /15d-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
---------
* Incorporated by reference to the exhibit of the same number to the Form 10-Q
for the quarterly period ended March 31, 2003.
(b) Reports on Form 8-K.
(1) On March 27, 2003, the Company reported, under Item 5, the
establishment of a new share repurchase plan to replace the
plan expiring on March 31, 2003.
(2) On April 10, 2003, the Company reported, under Item 4, a
change in its certifying accountant.
(3) On April 14, 2003, the Company furnished, under Item 9 and
Item 12, its news release including results of operations and
financial condition and related information concerning
non-GAAP financial measures.
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: December 17, 2003
By: /S/ JAMES H. LANGMEAD
------------------------------------------------------
James H. Langmead
Executive Vice President and Chief Financial Officer
Date: December 17, 2003
18