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 June 30, 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
Sandy Spring Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Maryland 52-1532952
------------------------ ---------------------------------------
(State of incorporation) (I.R.S. Employer Identification Number)
17801 Georgia Avenue, Olney, Maryland 20832 301-774-6400
------------------------------------- ----- ------------
(Address of principal office) (Zip Code) (Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated
filer(as defined in Rule 12b-2 of the Exchange Act).
YES X NO
---
The number of shares of common stock outstanding as of July 31, 2003 is
14,476,283 shares.
EXPLANATORY NOTE TO AMENDED REPORT ON FORM 10-Q/A
On August 13, 2003, Sandy Spring Bancorp, Inc. (the "Company") filed
its Quarterly report on Form-10Q for the period ended June 30, 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 specific 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 10-Q/A corrects and restates the
Company's consolidated financial statements and other financial information for
all the periods shown to properly reflect the effects of the under-accrual. 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
June 30, 2003, and December 31, 2002..................................... 1
Consolidated Statements of Income for the Three and
Six Month Periods Ended June 30, 2003 and 2002........................... 2
Consolidated Statements of Cash Flows for the
Six Month Periods Ended June 30, 2003 and 2002........................... 4
Consolidated Statements of Changes in Stockholders' Equity for the
Six Month Periods Ended June 30, 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................................................. 18
ITEM 4. CONTROLS AND PROCEDURES........................................... 19
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 19
SIGNATURES................................................................ 20
CERTIFICATIONS.............................................................. 21
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(Dollars in thousands, except per share data) 2003 2002
------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 46,740 $ 38,998
Federal funds sold 67,765 9,135
Interest-bearing deposits with banks 665 813
Residential mortgage loans held for sale (at fair value) 29,016 38,435
Investments available-for-sale (at fair value) 764,164 685,586
Investments held-to-maturity -- fair value of $265,353 (2003) and
$346,862 (2002) 253,318 340,860
Other equity securities 19,978 19,812
Total loans and leases 1,069,688 1,063,853
Less: allowance for credit losses (15,033) (15,036)
----------- -----------
Net loans and leases 1,054,655 1,048,817
Premises and equipment, net 37,851 36,007
Accrued interest receivable 14,904 14,957
Goodwill 7,642 7,642
Other intangible assets 12,597 13,927
Other assets 58,069 52,415
----------- -----------
Total assets $ 2,367,364 $ 2,307,404
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 373,429 $ 320,583
Interest-bearing deposits 1,216,715 1,171,629
----------- -----------
Total deposits 1,590,144 1,492,212
Short-term borrowings 446,770 488,214
Guaranteed preferred beneficial interests in the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 88,433 90,500
Accrued interest payable and other liabilities 18,392 23,454
----------- -----------
Total liabilities 2,178,739 2,129,380
STOCKHOLDERS' EQUITY
Common stock -- par value $1.00; shares authorized 50,000,000; shares issued
and outstanding 14,465,144 (2003) and 14,536,094 (2002) 14,465 14,536
Additional paid in capital 18,655 21,128
Retained earnings 143,780 131,939
Accumulated other comprehensive income 11,725 10,421
----------- -----------
Total stockholders' equity 188,625 178,024
----------- -----------
Total liabilities and stockholders' equity $ 2,367,364 $ 2,307,404
=========== ===========
See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
(In thousands, except per share data) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Interest Income:
Interest and fees on loans and leases $ 16,252 $ 18,240 $ 32,871 $ 35,962
Interest on loans held for sale 263 154 571 327
Interest on deposits with banks 4 9 7 17
Interest and dividends on securities:
Taxable 7,880 9,909 16,612 19,168
Exempt from federal income taxes 3,483 2,585 6,951 4,997
Interest on federal funds sold 109 136 215 256
-------- -------- -------- --------
TOTAL INTEREST INCOME 27,991 31,033 57,227 60,727
Interest Expense:
Interest on deposits 3,728 4,996 7,661 10,320
Interest on short-term borrowings 4,497 3,947 9,127 7,664
Interest on long-term borrowings 1,519 2,047 3,029 4,119
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 9,744 10,990 19,817 22,103
-------- -------- -------- --------
NET INTEREST INCOME 18,247 20,043 37,410 38,624
Provision for Credit Losses 0 985 0 2,170
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 18,247 19,058 37,410 36,454
Noninterest Income:
Securities gains (losses) 543 (3) 551 230
Service charges on deposit accounts 2,037 1,953 4,021 3,831
Gains on sales of mortgage loans 1,603 741 3,178 1,479
Fees on sales of investment products 666 556 1,187 1,196
Trust department income 758 605 1,478 1,174
Insurance agency commissions 922 790 1,941 1,776
Income from bank owned life insurance 710 432 1,319 867
Income from an early termination of a sublease 1,077 0 1,077 0
Other income 1,716 1,611 3,055 2,930
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 10,032 6,685 17,807 13,483
Noninterest Expenses:
Salaries and employee benefits 9,514 9,430 18,964 18,726
Occupancy expense of premises, net 1,533 1,558 3,117 2,864
Equipment expenses 1,099 956 2,140 1,765
Marketing 509 574 963 976
Outside data services 660 634 1,305 1,247
Amortization of intangible assets 664 664 1,329 1,329
Other expenses 2,626 2,302 4,762 4,509
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSES 16,605 16,118 32,580 31,416
-------- -------- -------- --------
Income Before Income Taxes 11,674 9,625 22,637 18,521
Income Tax Expense 2,938 2,491 5,573 4,827
-------- -------- -------- --------
NET INCOME $ 8,736 $ 7,134 $ 17,064 $ 13,694
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ------------------------
(In thousands, except per share data) 2003 2002 2003 2002
-----------------------------------------------------------------------------------------------------------
Basic Net Income Per Share $ 0.61 $ 0.50 $ 1.18 $ 0.95
Diluted Net Income Per Share 0.60 0.48 1.16 0.93
Dividends Declared Per Share 0.18 0.17 0.36 0.34
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
June 30,
-------------------------
2003 2002
-----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 17,064 $ 13,694
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,051 2,982
Provision for credit losses 0 2,170
Deferred income taxes 572 1,163
Origination of loans held for sale (230,952) (106,418)
Proceeds from sales of loans held for sale 243,549 115,902
Gains on sales of loans held for sale (3,178) (1,479)
Securities gains (551) (230)
Income from an early termination of a sublease (1,077) 0
Net decrease (increase) in accrued interest receivable 53 (368)
Net increase in other assets (5,597) (1,550)
Net decrease in accrued expenses (6,154) (8,919)
Other - net 811 (1,717)
--------- ---------
Net cash provided by operating activities 17,591 15,230
Cash flows from investing activities:
Net decrease (increase) in interest-bearing deposits with banks 148 (2)
Purchases of investments held-to-maturity (7,622) (94,999)
Purchases of other equity securities (166) (887)
Purchases of investments available-for-sale (881,245) (391,405)
Proceeds from sales of investments available-for-sale 71,760 220,343
Proceeds from maturities, calls and principal payments of investments 95,174 27,005
held-to-maturity
Proceeds from maturities, calls and principal payments of investments 732,093 244,434
available-for-sale
Net increase in loans and leases (6,022) (61,774)
Proceeds from an early termination of a sublease 750 0
Expenditures for premises and equipment (2,601) (3,109)
--------- ---------
Net cash provided by (used by) investing activities 2,269 (60,394)
Cash flows from financing activities:
Net increase in deposits 97,932 22,394
Net (decrease) increase in short-term borrowings (72,153) 50,360
Proceeds from long-term borrowings 28,500 168
Common stock purchased and retired (2,999) 0
Proceeds from issuance of common stock 455 480
Dividends paid (5,223) (4,930)
--------- ---------
Net cash provided by financing activities 46,512 68,472
--------- ---------
Net increase in cash and cash equivalents 66,372 23,308
Cash and cash equivalents at beginning of period 48,133 56,383
--------- ---------
Cash and cash equivalents at end of period $ 114,505 $ 79,691
========= =========
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Six Months Ended
June 30,
---------------------------
2003 2002
-------------------------------------------------------------------------------------------------------
Supplemental Disclosures:
Interest payments $ 19,988 $ 22,516
Income tax payments 5,108 6,302
Noncash Investing and Financing Activities:
Transfers from loans to other real estate owned 187 29
Increase in premises and equipment from an early
termination of a sublease 1,168 0
Reclassification of borrowings from long-term to short-term 30,709 100
See Notes to Consolidated Financial Statements.
5
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accum-
ulated
Other Total
Additional Compre- Stock-
Common Paid-in Retained hensive holders'
(Dollars in thousands, except per share data) Stock Capital Earnings Income Equity
----------------------------------------------------------------------------------------------------------------
Balances at January 1, 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)
-------- -------- -------- --------
Balance at January 1, 2003, as adjusted 14,536 21,128 131,939 10,421 178,024
Comprehensive income:
Net income 17,064 17,064
Other comprehensive income, net of
tax effects and
reclassification adjustment 1,304 1,304
--------
Total comprehensive income 18,368
Cash dividends - $0.36 per share (5,223) (5,223)
Common stock issued pursuant to:
Stock option plan - 16,123 shares 16 220 236
Employee stock purchase plan -
7,987 shares 8 211 219
Stock repurchases - 95,060 shares (95) (2,904) (2,999)
-------- -------- -------- -------- --------
Balances at June 30, 2003 $ 14,465 $ 18,655 $143,780 $ 11,725 $188,625
======== ======== ======== ======== ========
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)
-------- -------- -------- -------- --------
Balance at January 1, 2002, as adjusted 14,484 20,347 111,366 3,936 150,133
Comprehensive income:
Net income 13,694 13,694
Other comprehensive income, net of
tax effects and reclassification
adjustment 3,704 3,704
--------
Total comprehensive income 17,398
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 $120,130 $ 7,640 $163,081
======== ======== ======== ======== ========
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 at 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 prior share repurchase program, which expired on
March 31, 2003.
Note 3 - Stock Option Plan
At June 30, 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 Six Months Ended
June 30, June 30,
----------------------------------------
(In thousands, except per share data) 2003 2002 2003 2002
-----------------------------------------------------------------------------------
Net income, as reported $ 8,736 $ 7,134 $17,064 $13,694
Less pro forma stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (248) (304) (497) (608)
----------------------------------------
Pro forma net income $ 8,488 $ 6,830 $16,567 $13,086
========================================
Net income per share:
Basic - as reported $ 0.61 $ 0.50 $ 1.18 $ 0.95
Basic - pro forma $ 0.59 $ 0.47 $ 1.14 $ 0.90
Diluted - as reported $ 0.60 $ 0.48 $ 1.16 $ 0.93
Diluted - pro forma $ 0.58 $ 0.46 $ 1.13 $ 0.89
Note 4 - Per Share Data
The calculations of net income per common share for the three and six
month periods ended June 30, are as shown in the following table. Basic net
income per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share 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,
---------------------------------------------------------------------- --------------------
2003 2002 2003 2002
-------------------- --------------------
Basic:
Net income available to common stockholders $ 8,736 $ 7,134 $17,064 $13,694
Average common shares outstanding 14,479 14,503 14,508 14,497
Basic net income per share $ 0.61 $ 0.50 $ 1.18 $ 0.95
==================== ====================
Diluted:
Net income available to common stockholders $ 8,736 $ 7,134 $17,064 $13,694
Average common shares outstanding 14,479 14,503 14,508 14,497
Stock option adjustment 197 222 202 217
-------------------- --------------------
Average common shares outstanding-diluted 14,676 14,725 14,710 14,714
Diluted net income per share $ 0.60 $ 0.48 $ 1.16 $ 0.93
==================== ====================
Options for 135,147 shares of common stock were not included in computing
diluted net income per share for the three months ended June 30, 2003 because
their effects were antidilutive. Options for 138,814 shares of common stock were
not included in computing diluted net income per share for the six months ended
June 30, 2002 because their effects were antidilutive. There was no such effect
either for the six months ended June 30, 2003 or for the three months ended June
30, 2002.
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 thirty
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 June 30, 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. Because the Company makes use of estimates,
assumptions and judgments in applying its accounting policies, changes in these
estimates, assumptions and judgments 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,
assumptions, and judgments are based on information available as of the dates
that the financial statements were prepared. As this information changes over
time, the estimates, assumptions, and judgments on which the financial
statements were based may no longer be accurate. Certain policies inherently
rely more on the use of estimates, assumptions, and judgments and are more
likely to produce 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 allowance to be established, or when the
amount of an asset or liability is contingent upon a future event. Carrying
assets and liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used to record
valuation adjustments for certain assets and liabilities are based either on
quoted market prices or are provided by other third-party sources, when
available. The estimates used in management's assessment of the adequacy of the
allowance for 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.
9
NON-GAAP FINANCIAL MEASURE
The Company has for many years used a traditional efficiency ratio that
is a non-GAAP financial measure as defined in Commission Regulation G and Item
10 of U.S. Securities and Exchange Commission Regulation S-K. This traditional
efficiency ratio is used as a measure of operating expense control and
efficiency of operations. Management believes that its traditional ratio better
focuses attention on the operating performance of the Company over time than
does a GAAP-based ratio, and that it is highly useful in comparing
period-to-period operating performance of the Company's core business
operations. It is used by management as part of its assessment of its
performance in managing noninterest expenses. However, this measure is
supplemental, and is not a substitute for an analysis of performance based on
GAAP measures. The reader is cautioned that the traditional efficiency ratio
used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios
reported by other financial institutions.
In general, the efficiency ratio is total noninterest expenses as a
percentage of net interest income plus total noninterest income. This is a GAAP
financial measure. Noninterest expenses used in the calculation of the
traditional, non-GAAP efficiency ratio exclude intangible asset amortization.
Income for the traditional ratio is increased for the favorable effect of
tax-exempt income, and excludes securities gains and losses, which vary widely
from period to period without appreciably affecting operating expenses, and
income from an early termination of a sublease in the second quarter of 2003.
The traditional measure is different from the GAAP-based efficiency ratio. The
GAAP-based measure is calculated using noninterest expense and income amounts as
shown on the face of the Consolidated Statements of Income. The traditional and
GAAP-based efficiency ratios are presented and reconciled in Table 1.
Table 1 - Reconciliation of GAAP-based and traditional efficiency ratios
Three Months Ended Six Months Ended
---------------------------------------------------------------------------------------------------------
June 30, June 30,
---------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2003 2002 2003 2002
---------------------------------------------------------------------------------------------------------
Noninterest expenses-GAAP based $ 16,605 $ 16,118 $ 32,580 $ 31,416
Net interest income plus noninterest income-
GAAP based 28,279 26,728 55,217 52,107
Efficiency ratio-GAAP based 58.72% 60.30% 59.00% 60.29%
======== ======== ======== ========
Noninterest expenses-GAAP based $ 16,605 $ 16,118 $ 32,580 $ 31,416
Less non-GAAP adjustment:
Amortization of intangible assets 664 664 1,329 1,329
----------------------- ----------------------
Noninterest expenses-traditional ratio 15,941 15,454 31,251 30,087
Net interest income plus noninterest income-
GAAP based 28,279 26,728 55,217 52,107
Plus non-GAAP adjustment:
Tax-equivalency 1,809 1,670 3,855 3,139
Less non-GAAP adjustments:
Securities gains (losses) 543 (3) 551 230
Income from an early termination of
a sublease 1,077 0 1,077 0
----------------------- ----------------------
Net interest income plus noninterest
Income - traditional ratio 28,468 28,401 57,444 55,016
Efficiency ratio - traditional 56.00% 54.41% 54.40% 54.69%
======== ======== ======== ========
A. FINANCIAL CONDITION
The Company's total assets were $2,367,364,000 at June 30, 2003,
compared to $2,307,404,000 at December 31, 2002, increasing $59,960,000 or 3%
during the first six months of 2003. Earning assets increased $46,100,000 or 2%
to $2,204,594,000 at June 30, 2003, from $2,158,494,000 at December 31, 2002.
10
Total loans and leases, which exclude loans held for sale, increased 1%
or $5,835,000 during the first six months of 2003, to $1,069,688,000. Of the
three major loan categories, only residential real estate increased during this
period, up $8,759,000 or 2%, attributable to residential mortgage loan growth.
Commercial loans and leases decreased $3,622,000 or 1%, with commercial
construction contributing the most to the decline, while consumer loans declined
slightly by $698,000. Finally, residential mortgage loans held for sale
decreased $9,419,000 from December 31, 2002, to $29,016,000 at June 30, 2003.
The generally weaker economic climate resulted in lower amounts of loan
production together with higher amounts of loan refinancing associated with
historically low interest rates.
Table 2 - Analysis of Loans and Leases
The following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In thousands) June 30, 2003 % December 31, 2002 %
------------------------------------------------------------------------------------------
Residential real estate $ 363,432 34% $ 354,673 33%
Commercial loans and leases 472,392 44 476,014 45
Consumer 233,864 22 233,166 22
-------------------------------------------------
Total Loans and Leases 1,069,688 100% 1,063,853 100%
=== ===
Less: Allowance for credit losses (15,033) (15,036)
---------- -----------
Net loans and leases $1,054,655 $1,048,817
========== ===========
The total investment portfolio decreased by 1% or $8,798,000 from
December 31, 2002, to $1,037,460,000 at June 30, 2003. The decline was driven by
$87,542,000 or 26% lower held-to-maturity investments, largely offset by an
increase of $78,578,000 (up 11%) in available-for-sale securities and a small
rise of $166,000 in other equity securities. The aggregate of federal funds sold
and interest-bearing deposits with banks, short-term investments, increased by
$58,482,000 during the first six months of 2003, reaching $68,430,000 at June
30, 2003. Increased cash flow from called investments totaling approximately
$651,000,000 and lesser growth in the loan portfolio contributed to increases in
short-term investments.
Total deposits were $1,590,144,000 at June 30, 2003, increasing
$97,932,000 or 7% from $1,492,212,000 at December 31, 2002. All major deposit
categories either increased or remained essentially level, comparing June 30,
2003 with December 31, 2002. Noninterest-bearing demand deposits grew by 16% or
$52,846,000 over the six-month period, while interest-bearing deposits rose 4%
or $45,086,000 from a much larger base.
Total borrowings were $570,203,000 at June 30, 2003, which represented
a decrease of $43,511,000 or 7% from December 31, 2002, primarily reflecting a
decline in short-term borrowings.
Table 3 - Analysis of Deposits
The following table presents the trends in the composition of deposits at the
dates indicated:
(In thousands) June 30, 2003 % December 31, 2002 %
------------------------------------------------------------------------------------------
Noninterest-bearing deposits $ 373,429 23% $ 320,583 21%
Interest-bearing deposits:
Demand 199,530 13 185,381 12
Money market savings 402,670 25 398,539 27
Regular savings 175,846 11 153,294 10
Time deposits less than $100,000 300,956 19 308,168 21
Time deposits $100,000 or more 137,713 9 126,247 9
--------------------------------------------------
Total interest-bearing 1,216,715 77 1,171,629 79
--------------------------------------------------
Total deposits $1,590,144 100% $1,492,212 100%
==================================================
11
MARKET RISK MANAGEMENT
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 by employing simulation analysis through use of computer
models. 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, 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 June 30, 2003, the
simulation analysis indicates that net interest income would decline by 12% 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 10%, as compared to a policy limit of
25%.
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 subcommittee 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, 2003 showed short-term investments
exceeding short-term borrowings over the subsequent 90 days by $310,480,000.
This position was substantially above the $21,542,000 excess at December 31,
2002, due in large part 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 a line of credit for
$707,185,000 from the Federal Home Loan Bank of Atlanta, of which approximately
$362,854,000 was outstanding at June 30, 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 $262,237,000
at June 30, 2003, against which there were outstandings of approximately
$25,000,000. Based upon its liquidity analysis, including external sources of
liquidity available, management believes the liquidity position is appropriate
at June 30, 2003.
CAPITAL MANAGEMENT
The Company recorded a total risk-based capital ratio of 15.26% at June
30, 2003, compared to 14.95% at December 31, 2002; a tier 1 risk-based capital
ratio of 14.05%, compared to 13.72%; and a capital leverage ratio of 8.33%,
compared to 8.08%. Capital adequacy, as measured by these ratios, was well above
regulatory requirements. Management believes the level of capital at June 30,
2003, is appropriate.
Stockholders' equity for June 30, 2003, totaled $188,625,000,
representing an increase of $10,601,000 or 6% 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, increased by $1,304,000 from December 31, 2002 to June
30, 2003.
Internal capital generation (net income less dividends) added
$11,841,000 to total stockholders' equity during the first six 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 six 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
$455,000 during the six month period ended June 30, 2003. However, share
repurchases amounted to $2,999,000 from December 31, 2002 through June 30, 2003,
for a net decrease in stockholders' equity from these sources of $2,544,000.
Dividends for the first six months of the year were $0.36 per share in
2003, compared to $0.34 per share in 2002, for respective dividend payout ratios
(dividends declared per share to diluted net income per share) of 31% versus
37%.
12
Sandy Spring Bancorp, Inc. and Subsidiaries
TABLE 4 - CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax equivalent)
For the six months ended June 30,
2003 2002
----------------------------------------------------
Average Average Average Average
Yield/Rate Yield/Rate
Balance (1) Balance (1)
----------------------------------------------------
Assets
Total loans and leases (2) $1,080,749 6.22% $1,028,393 7.10%
Total securities 1,049,040 5.27 896,444 6.09
Other earning assets 38,387 1.15 32,297 1.68
---------- ----------
TOTAL EARNING ASSETS 2,168,176 5.67% 1,957,134 6.55%
Nonearning assets 150,095 135,005
---------- ----------
Total assets $2,318,271 $2,092,139
========== ==========
Liabilities and Stockholders' Equity
Interest-bearing demand deposits $ 192,468 0.25% $ 170,944 0.27%
Money market savings deposits 402,550 0.75 387,347 1.18
Regular savings deposits 163,187 0.33 134,246 1.01
Time deposits 443,508 2.57 422,963 3.41
---------- ----------
Total interest-bearing deposits 1,201,713 1.29 1,115,500 1.87
Short-term borrowings 477,097 3.86 430,782 3.59
Long-term borrowings 121,607 5.02 114,138 7.28
---------- ----------
Total interest-bearing liabilities 1,800,417 2.22 1,660,420 2.68
--------- ---------
Noninterest-bearing demand deposits 311,097 265,172
Other noninterest-bearing liabilities 24,830 12,881
Stockholders' equity 181,927 153,666
---------- ----------
Total liabilities and stockholders' equity $2,318,271 $2,092,139
========== ==========
Net interest spread 3.45% 3.87%
--======= =========
Net interest margin (3) 3.84% 4.28%
--======= =========
Ratio of average earning assets to
Average interest-bearing liabilities 120.43% 117.87%
========== ==========
(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 to compute yields were $7,774,000 and $6,330,000
in the six month periods ended June 30, 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
B. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Net income for the first six months of the year increased $3,370,000 or
25% to $17,064,000 in 2003 from $13,694,000 in 2002, representing annualized
returns on average equity of 18.91% and 17.97%, respectively. Diluted earnings
per share (EPS) for the first six months of each year were $1.16 in 2003,
compared to $0.93 in 2002.
The net interest margin decreased by 44 basis points to 3.84% for the
six months ended June 30, 2003, from 4.28% for the same period of 2002, as the
net interest spread decreased by 42 basis points. The compression of the net
interest margin was the result of lower interest rates given the Company's asset
sensitive risk position, a smaller percentage of average loans to total earning
assets, and a 44 basis point decline (from 97 basis points to 53 basis points)
in the margin earned in the Company's leverage programs.
NET INTEREST INCOME
Net interest income for the first six months of the year was
$37,410,000 in 2003, a decrease of 3% from $38,624,000 in 2002, reflecting a
decline in net interest margin partially offset by a higher volume of average
earning assets. Non-GAAP tax-equivalent net interest income, which takes into
account the benefit of tax advantaged investment securities, decreased by 1% to
$41,265,000 in 2003, from $41,763,000 in 2002. The effects of average balances,
yields and rates are presented in Table 4.
For the first six months, total interest income decreased by $3,500,000
or 6% in 2003, compared to 2002. On a non-GAAP tax-equivalent basis, interest
income increased by 4%. Average earning assets rose 11% over the prior period,
to $2,168,176,000 from $1,957,134,000, while the average yield earned on those
assets decreased by 88 basis points to 5.67%. Comparing the first six months of
2003 versus 2002, average total loans and leases grew by 5% to $1,080,749,000
(50% of average earning assets, versus 53% a year ago), while recording an 88
basis point decline in average yield to 6.22%. Average residential real estate
loans increased by 6% (reflecting an increase in mortgage lending, partially
offset by a similar percentage decline in construction lending); average
commercial loans and leases grew by 6% (due to increases in mortgages and other
commercial loans, partially offset by declines in construction and leasing),
and, average consumer loans increased by 2% (attributable to home equity line
growth). Over the same period, average total securities rose by 17% to
$1,049,040,000 (48% of average earning assets, versus 46% a year ago), while the
average yield earned on those assets decreased by 82 basis points to 5.27%.
Interest expense for the first six months of the year decreased by
$2,286,000 or 10% in 2003, compared to 2002. Average total interest-bearing
liabilities rose 8% over the prior year period, while the average rate paid on
these funds decreased by 46 basis points to 2.22%. As shown in Table 4, all
major deposit categories and both short and long term borrowings grew in
conjunction with generally declining or stable average rates.
CREDIT RISK MANAGEMENT
The Company's loan and lease portfolio (the "credit portfolio") is
subject to varying degrees of credit risk. Credit risk is mitigated through
portfolio diversification, 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.
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 on impaired loans 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.
14
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 that are classified as nonaccrual or are 90-day past due, 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 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 weights given to these 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 six months of the year, there was no provision for
credit losses in 2003, compared to $2,170,000 in 2002. The Company has
experienced net charge-offs during the first six months of 2003 of only $3,000,
compared to net recoveries of $88,000 for the same period of 2002.
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 Sandy Spring Bank,
periodically review the credit portfolio and the allowance. Such reviews may
result in additional provisions based on these third-party judgments of
information available at the time of each examination. During the first six
months of 2003, there were no changes in estimation methods that affected the
allowance methodology. The allowance for credit losses was 1.41% of total loans
and leases at June 30, 2003 and at December 31, 2002.
The allowance decreased during the first six months of 2003 by $3,000
(the amount of net charge-offs for the period), from $15,036,000 at December 31,
2002 to $15,033,000 at June 30, 2003. The stability of the allowance reflects
the required reserve computed by the allowance methodology at June 30, 2003,
compared to December 31, 2002. The amount of the required reserve was affected
by minimal loan growth, no significant shift in risk concentration within the
loan and lease portfolio, the decline in the specific reserve for a single
commercial construction credit, and lower balances of watch list loans.
15
Table 5 -- 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, 2003 December 31, 2002
--------------------------------------------------------------------------------
Balance, January 1 $ 15,036 $ 12,653
Provision for credit losses 0 2,865
Loan charge-offs:
Residential real estate (63) (165)
Commercial loans and leases (11) (467)
Consumer (39) (158)
-------- --------
Total charge-offs (113) (790)
Loan recoveries:
Residential real estate 76 0
Commercial loans and leases 29 284
Consumer 5 24
-------- --------
Total recoveries 110 308
-------- --------
Net charge-offs (3) (482)
-------- --------
Balance, period end $ 15,033 $ 15,036
======== ========
Net charge-offs to average loans and
0.00% 0.05%
Leases (annual basis)
Allowance to total loans and leases 1.41% 1.41%
The following table presents nonperforming assets at the dates indicated:
June 30, December 31,
2003 2002
--------------------------------------------------------------------------------
Non-accrual loans and leases $ 479 $ 588
Loans and leases 90 days past due 900 2,157
-------- --------
Total nonperforming loans and leases* 1,379 2,745
Other real estate owned 187 0
-------- --------
Total nonperforming assets $ 1,566 $ 2,745
======== ========
Nonperforming assets to total assets 0.07% 0.12%
--------------------------------------------------------------------------------
* Those performing credits considered potential problem credits (which Bancorp
classifies as substandard), as defined and identified by management, amounted to
approximately $5,862,000 at June 30, 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
CREDIT RISK MANAGEMENT CONTINUED
Nonperforming loans and leases decreased by $1,366,000 to $1,379,000
while nonperforming assets decreased by $1,179,000 to $1,566,000 from December
31, 2002 to June 30, 2003. Expressed as a percentage of total assets,
nonperforming assets decreased to 0.07% at June 30, 2003 from 0.12% at December
31, 2002. The allowance for credit losses represented nearly 11 times
nonperforming loans and leases at June 30, 2003, compared to coverage of nearly
5.5 times 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. Other real estate
owned totaled $187,000 at June 30, 2003, compared to no such assets on the
balance sheet at December 31, 2002. The balance of impaired loans and leases was
$259,000 at June 30, 2003, with specific reserves against those loans of
$133,000, compared to $170,000 at December 31, 2002, with no reserves.
NONINTEREST INCOME AND EXPENSES
Total noninterest income was $17,807,000 for the six-month period ended
June 30, 2003, a 32% or $4,324,000 increase from the same period of 2002. On a
non-GAAP basis, noninterest income, excluding the effects of securities gains
($551,000 in 2003 versus $230,000 in 2002) and income of $1,077,000 from the
early termination of a sublease during the second quarter of 2003, increased 22%
or $2,926,000. The income from the early termination of a sublease reflects the
proceeds from a negotiated settlement with a sub-tenant of a Bank leased
facility. The Bank currently intends to renovate the vacated space for its own
use. The primary reason for the growth in total noninterest income was a
$1,699,000 increase in mortgage banking revenues to $3,178,000 due mainly to the
sizable increase in the volume of refinancings resulting from the continued low
interest rate environment. Other major contributors to the increase included
income from Bank Owned Life Insurance (up $452,000 or 52%), income from trust
operations (up $304,000 or 26%), insurance commissions (up $165,000 or 9%), and
service charges on deposit accounts (up $190,000 or 5%). Noninterest income
performance reported above reflects management's desire to both grow and
diversify its sources of noninterest income.
Total noninterest expenses were $32,580,000 for the six-month period
ended June 30, 2003, a 4% or $1,164,000 increase from the first half 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. The rise in total noninterest expenses during the first half of 2003,
compared to the same period of 2002, was principally driven by higher equipment
expenses (up 21% or $375,000) and occupancy expenses (up 9% or $253,000).
Salaries and benefits increased 1% or $238,000 versus the prior year period. The
Company opened a new branch in Urbana, Maryland in 2003. Average full-time
equivalent employees increased to 558 during the first six months of 2003, from
534 during the like period in 2002, a 4% increase. The ratio of net income per
average full-time-equivalent employee after completion of the first six months
of the year was $31,000 in 2003, which includes after-tax income from an early
termination of a sublease, and $27,000 in 2002.
INCOME TAXES
The effective tax rate was 24.6% for the six-month period ended June
30, 2003 compared to 26.1% for the prior year period. This decline reflects an
increase in tax-advantaged investments.
17
C. RESULTS OF OPERATIONS - SECOND QUARTER 2003 AND 2002
Second quarter net income of $8,736,000 ($0.60 per share-diluted) in
2003 was $1,602,000 or 22% above net income of $7,134,000 ($0.48 per
share-diluted) shown for the same quarter of 2002. Annualized returns on average
equity for these periods were 19.04% in 2003 versus 18.46% in 2002.
Second quarter net interest income was $18,247,000 in 2003, a decrease
of 9% from $20,043,000 in 2002, reflecting a 64 basis point decline in net
interest margin partially offset by a 10% higher volume of average earning
assets. Non-GAAP tax-equivalent net interest income, which takes into account
the benefit of tax advantaged investment securities, decreased by 6%.
There was no second quarter provision for credit losses in 2003,
compared to a provision of $985,000 in the same quarter of 2002. The second
quarter provision in 2002 reflected the impact of continued growth in loans,
increases in watch listed credits, the seasoning of substantial loan growth over
the prior eighteen months, considerations associated with the general economic
environment, and other factors considered in the Company's allowance
methodology. Net recoveries of $10,000 were recorded for three-month period
ended June 30, 2003, compared to net recoveries of $49,000 for the three-month
period ended June 30, 2002.
Total second quarter noninterest income was $10,032,000 in 2003,
representing a 50% or $3,347,000 increase from the same period of 2002. On a
non-GAAP basis, noninterest income, excluding the effects of securities gains
(losses) of $543,000 in 2003 versus $(3,000) in 2002, and income of $1,077,000
from the early termination of a sublease in 2003, increased 26% or $1,724,000.
Half of this increase was attributable to higher gains on sales of mortgage
loans. Virtually all of the other major sources of noninterest income also
showed significant increases, including income from bank owned life insurance,
trust department income, fees on sales of investment products and insurance
agency commissions.
Second quarter noninterest expenses increased 3% or $487,000 to
$16,605,000 in 2003 from $16,118,000 in 2002, resulting from a $143,000 or 15%
rise in equipment expenses along with small increases in many other expense
categories.
The second quarter effective tax rate was 25.2% in 2003, similar to
25.9% recorded in 2002.
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.
18
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the
participation of its Chief Executive Officer and the Chief Financial Officer,
evaluated as of the last day of the period covered by this report, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
adequate. There were no significant changes in the Company's internal controls
over financial reporting (as defined in Rule 13a-15 under the Securities Act of
1934) during the quarter ended June 30, 2003, that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 15, 2003,
the shareholders of the Company elected Susan D. Goff (with 10,110,214 votes for
and 70,377 withheld), Robert L. Mitchell (with 10,010,011 votes for and 170,580
withheld), Robert L. Orndorff, Jr. (with 10,116,893 votes for and 63,698
withheld), and David E. Rippeon (with 9,943,032 votes for and 237,559 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. All four
director-nominees were incumbent directors previously elected by the
shareholders to three-year terms. Directors continuing in office are Solomon
Graham, Gilbert L. Hardesty, Charles F. Mess, Lewis R. Schumann, W. Drew
Stabler, John Chirtea, Joyce R. Hawkins, Hunter R. Hollar, and Craig A. Ruppert.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 31 Rule 13a-14(a) /15d-14(a) Certifications
Exhibit 32 18 U.S.C. Section 1350 Certifications
(b) Reports on Form 8-K.
On July 15, 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.
19
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
20