FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 2001
Commission File Number 0-19065
SANDY SPRING BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1532952
---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
17801 Georgia Avenue, Olney, Maryland 20832
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 301-774-6400.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
-------------------------------------------
(Title of Class)
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 such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's Common Stock is traded on the NASDAQ National Market under the
symbol SASR. The aggregate market value of approximately 13,847,000 shares of
Common Stock of the registrant issued and outstanding held by nonaffiliates on
February 25, 2002 was approximately $420 million based on the closing sales
price of $30.51 per share of the registrant's Common Stock on that date. For
purposes of this calculation, the term "affiliate" refers to all directors and
executive officers of the registrant.
As of the close of business on February 25, 2002, 14,490,632 shares of the
registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III: Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 17, 2002 (the "Proxy Statement").
1
SANDY SPRING BANCORP, INC.
INDEX
Forward Looking Statements 2
Form 10-K Cross Reference Sheet 3
Sandy Spring Bancorp, Inc. 4
About this Report 4
Five Year Summary of Selected Financial Data 5
Securities Listing, Prices and Dividends 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-21
Consolidated Financial Statements 22-25
Notes to the Consolidated Financial Statements 26-46
Management's Statement of Responsibility 47
Report of Independent Auditors 48
Other Material Required by Form 10-K:
Description of Business 48-54
Properties 55-56
Exhibits, Financial Statements, and Reports on Form 8-K 56-58
Signatures 58
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FORWARD-LOOKING STATEMENTS
Sandy Spring Bancorp makes forward-looking statements in the Management's
Discussion and Analysis of Operations and Financial Condition and other
portions of this Annual Report on Form 10-K 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 potential loan and lease losses and market
risk; and statements of the ability to achieve financial and other goals.
These forward-looking statements are subject to significant uncertainties
because they are based upon or are affected by: management's estimates and
projections of future interest rates and other economic conditions; future
laws and regulations; and a variety of other matters. Because of these
uncertainties, the actual future results may be materially different from
the results indicated by these forward-looking statements. In addition, the
Company's past results of operations do not necessarily indicate its future
results.
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2
SANDY SPRING BANCORP, INC.
FORM 10-K CROSS REFERENCE SHEET OF MATERIAL INCORPORATED BY REFERENCE
The following table shows the location in this Annual Report on Form 10-K or the
accompanying Proxy Statement of the information required to be disclosed by
United States Securities and Exchange Commission ("SEC") Form 10-K. Where
indicated below, information has been incorporated by reference in this Report
from the Proxy Statement that accompanies it. Other portions of the Proxy
Statement are not included in this Report. This Report is not part of the Proxy
Statement. References are to pages in this report unless otherwise indicated.
ITEM OF FORM 10-K LOCATION
PART I
Item 1. Business "Forward-Looking Statements" on page 4, "Sandy Spring Bancorp, Inc."
and "About this Report" on page 6, and "Business" on pages 50
through 56.
Item 2. Properties "Properties" on pages 57 and 58.
Item 3. Legal Proceedings Note 19 "Litigation" on page 44.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable. No matter was submitted to a vote of security holders
during the fourth quarter of 2001.
PART II
Item 5. Market for Registrant's Common Equity "Securities Listing, Prices, and Dividends" on page 8.
and Related Stockholder Matters
Item 6. Selected Financial Data "Five Year Summary of Selected Financial Data" on page 7.
Item 7. Management's Discussion and Analysis of "Forward-Looking Statements" on page 4,
Financial Condition and Results of Operations "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 9 through 23.
Item 7A. Quantitative and Qualitative Disclosures "Forward-Looking Statements" on page 4 and "Market Risk
about Market Risk Management" on pages 21 through 23.
Item 8. Financial Statements and Supplementary Data Pages 24 through 50.
Item 9. Changes in and Disagreements with Accountants Not applicable. During the past two years or any subsequent period
on Accounting and Financial Disclosure there has been no change in or reportable disagreement with the
certifying accountants for Sandy Spring Bancorp, Inc., or any of its
subsidiaries.
PART III
Item 10. Directors and Executive Officers of the Registrant The material labeled "Election of Directors -- Information as to
Nominees and Continuing Directors" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement
is incorporated in this Report by reference.
Information regarding executive officers is included under the
caption "Executive Officers" on page 56 of this Report.
Item 11. Executive Compensation The material labeled "Corporate Governance and Other Matters,"
"Executive Compensation," "Report of the Human Resources Committee,"
and "Stock Performance Comparisons" in the Proxy Statement is
incorporated in this Report by reference.
Item 12. Security Ownership of Certain Beneficial The material labeled "Stock Ownership of Directors and
Owners and Management Executive Officers" in the Proxy Statement is incorporated
in this Report by reference.
Item 13. Certain Relationships and Related Transactions The material labeled "Transactions and Relationships with Management"
in the Proxy Statement is incorporated in this Report by reference.
3
ITEM OF FORM 10-K LOCATION
PART IV
Item 14. Exhibits, Financial Statement Schedules, "Exhibits, Financial Statements, and Reports on Form 8-K"
and Reports on Form 8-K on pages 58 through 60.
SIGNATURES "Signatures" on page 60.
SANDY SPRING BANCORP, INC.
Sandy Spring Bancorp, Inc. is the holding company for Sandy Spring Bank and its
principal subsidiaries, Sandy Spring Insurance Corporation and The Equipment
Leasing Company. Sandy Spring Bancorp is the third largest publicly traded
banking company headquartered in Maryland. Sandy Spring is a community banking
organization that focuses its lending and other services on businesses and
consumers in the local market area. Independent and community-oriented, Sandy
Spring Bank traces its origin to 1868 and offers a broad range of commercial
banking, retail banking and trust services through 30 community offices and 45
ATMs located in Anne Arundel, Howard, Montgomery, and Prince George's counties
in Maryland.
ABOUT THIS REPORT
This report comprises the entire 2001 Form 10-K, other than exhibits, as filed
with the SEC. The 2001 annual report to shareholders, including this report, and
the annual proxy materials for the 2002 annual meeting are being distributed
together to the shareholders. Please see page 60 for information regarding how
to obtain copies of exhibits and additional copies of the Form 10-K.
This report is attached to the annual proxy statement for convenience of use and
to decrease costs, but is not part of the proxy materials.
THE SEC HAS NOT APPROVED OR DISAPPROVED THIS REPORT OR PASSED UPON ITS ACCURACY
OR ADEQUACY.
4
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data) 2001 2000 1999 1998 1997
RESULTS OF OPERATIONS:
Interest income $ 127,870 $ 118,680 $ 94,387 $ 84,272 $ 75,565
Interest expense 61,043 61,260 42,128 38,749 34,486
Net interest income 66,827 57,420 52,259 45,523 41,079
Provision for credit losses 2,470 2,690 1,216 552 986
Net interest income after provision
for credit losses 64,357 54,730 51,043 44,971 40,093
Noninterest income, excluding
securities gains 21,490 17,251 12,230 11,270 8,495
Securities gains 346 277 101 853 637
Noninterest expenses 54,618 47,601 39,528 34,053 29,442
Income before taxes 31,575 24,657 23,846 23,041 19,783
Income tax expense 8,429 5,887 6,330 6,936 6,588
Net income 23,146 18,770 17,516 16,105 13,195
PER SHARE DATA:(1)
Net income - basic $ 1.61 $ 1.31 $ 1.21 $ 1.11 $ 0.90
Net income - diluted 1.59 1.31 1.21 1.11 0.89
Dividends declared 0.61 0.54 0.50 0.42 0.31
Book value (at year end) 10.40 8.90 7.51 7.71 7.18
Tangible book value (at year end)(2) 8.73 7.25 6.10 7.63 7.07
FINANCIAL CONDITION (AT YEAR END):
Assets $2,081,834 $1,773,001 $1,591,281 $1,343,471 $1,121,333
Deposits 1,387,459 1,242,927 1,165,372 954,571 853,011
Loans and leases 995,919 967,817 826,125 624,412 558,893
Securities 914,479 666,927 630,039 613,579 464,734
Stockholders' equity 150,673 127,558 108,720 110,937 104,675
PERFORMANCE RATIOS (FOR THE YEAR):
Return on average equity 16.36% 16.79% 15.91% 15.02% 13.25%
Return on average assets 1.19 1.12 1.26 1.36 1.28
Net interest margin 3.97 4.02 4.35 4.40 4.42
Efficiency ratio(3) 55.15 56.48 56.07 55.95 56.74
Dividends declared per share
to diluted net income per share 38.36 41.22 41.32 37.84 34.83
CAPITAL AND CREDIT QUALITY RATIOS:
Average equity to average assets 7.27% 6.68% 7.92% 9.02% 9.65%
Allowance for credit losses to loans and leases 1.27 1.19 1.00 1.18 1.26
Nonperforming assets to total assets 0.38 0.16 0.13 0.13 0.26
Net charge-offs to average loans and leases 0.14 0.08 0.05 0.04 0.07
(1) Per share data have been adjusted to give retroactive effect to a 3-for-2
stock split declared on November 28, 2001.
(2) Total stockholders' equity, net of goodwill and intangible assets, divided
by the number of shares of common stock outstanding at year end.
(3) Noninterest expenses as a percentage of tax-equivalent net interest income
plus noninterest income. In this ratio, noninterest expenses exclude the
amortization of goodwill and intangible assets and, in 2000, the costs of
an early retirement opportunity plan. Noninterest income excludes gains on
sales of securities, the 2001 gain on the sale of the credit card
portfolio, and the 2000 gains on sale of premises and mortgage servicing
rights.
5
SECURITIES LISTING, PRICES AND DIVIDENDS
STOCK LISTING
Common shares of Sandy Spring Bancorp, Inc. are traded on the National
Association of Security Dealers (NASDAQ) National Market under the symbol SASR.
Trust preferred securities of Sandy Spring Capital Trust I are traded on the
NASDAQ National Market under the symbol SASRP.
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
59 Maiden Lane
New York, New York 10038
RECENT STOCK PRICES AND DIVIDENDS
Shareholders received quarterly cash dividends totaling $8,881,000 in 2001 and
$7,749,000 in 2000. Regular dividends have been declared for one hundred and one
consecutive years. Sandy Spring Bancorp, Inc. (the "Company") has increased its
dividends per share each year for the past twenty-one years. Since 1996,
dividends per share have risen at a compound annual growth rate of 18.6%. The
increase in dividends per share was 13.0% in 2001. On November 28, 2001, the
Board of Directors declared a 3-for-2 stock split in the form of a 50% stock
dividend intended to enhance the marketability of the stock.
The ratio of dividends per share to diluted net income per share was 38.4% in
2001, compared to 41.2% for 2000. The dividend amount is established by the
Board of Directors each quarter. In making its decision on dividends, the Board
considers operating results, financial condition, capital adequacy, regulatory
requirements, shareholder returns and other factors.
Shares issued under the dividend reinvestment and stock purchase plan totaled
67,947* from January 1, 2001, through September 30, 2001, and 97,927 (146,891*)
in year 2000. On October 1, 2001, the Company replaced its dividend reinvestment
and stock purchase plan with a new plan under which share purchases are made in
the open market, rather than through the issuance of new shares. The 2001
Employee Stock Purchase Plan commenced on July 1, 2001, and 5,931* shares were
issued under this plan through December 31, 2001.
The Company adopted a new stock repurchase program on March 28, 2001, that
permits the repurchase of up to 5% (approximately 718,000* shares) of its
outstanding common stock. The new program replaces the Company's previous
repurchase program which expired in 2001. Repurchases are made in connection
with shares expected to be reissued under the Company's dividend reinvestment
(until October 1, 2001, as discussed above), stock option and benefit plans, as
well as for other corporate purposes. No shares were repurchased in 2001, as
compared to 193,234 (289,851*) shares in 2000. A total of 952,409* shares have
been repurchased since 1997, when stock repurchases began, through December 31,
2001.
The number of common shareholders of record was approximately 2,300 as of
February 13, 2002.
QUARTERLY STOCK INFORMATION*
2001 2000
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STOCK PRICE RANGE PER SHARE Stock Price Range Per Share
Quarter LOW HIGH DIVIDEND Low High Dividend
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1st $ 15.17 $ 21.67 $ 0.14 $ 12.79 $ 17.33 $ 0.13
2nd 19.50 21.83 0.15 13.54 16.17 0.13
3rd 20.80 26.46 0.15 14.50 16.67 0.14
4th 25.24 32.82 0.17 14.00 15.59 0.14
------ ------
Total $ 0.61 $ 0.54
====== ======
* Adjusted to give retroactive effect to a 3-for-2 stock split declared on
November 28, 2001.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Sandy Spring Bancorp, Inc. and subsidiaries (the "Company") has doubled in size,
as measured by total assets, since 1996, reaching the milestone of $2 billion in
total assets during 2001, while achieving record earnings in both the fourth
quarter and for the year. In addition, according to the latest Bank Holding
Company Performance Report from the Federal Reserve, the Company's return on
average equity for the nine months ended September 30, 2001, was in the 82nd
percentile of all U.S. bank holding companies with assets between $1-3 billion.
Comparing December 31, 2001, balances to December 31, 2000, total assets were
$2.1 billion versus $1.8 billion, a 17% increase. Total deposits increased 12%
to $1.4 billion, while total loans and leases grew to $996 million from $968
million, a 3% increase. During the same period, stockholders' equity increased
to $151 million, which was 7.2% of total assets.
Net income for the year ended December 31, 2001, was $23.1 million ($1.59 per
diluted share), as compared to $18.8 million ($1.31 per diluted share) for the
prior year, an increase of 23%. Operating earnings of $24.7 million ($1.70 per
diluted share) in 2001 were 26% greater than $19.6 million ($1.36 per diluted
share) in 2000. Operating earnings exclude non-recurring income and expenses and
the amortization of goodwill and intangible assets. During 2001, non-operating
items consisted of a $0.3 million pre-tax gain on the sale of investments ($0.01
per diluted share), a $0.3 million pre-tax gain on the sale of the credit card
portfolio ($0.01 per diluted share) and $3.2 million of pre-tax expense ($0.13
per diluted share) for the amortization of goodwill and intangible assets. In
2000, non-operating items consisted of a $1.5 million pre-tax gain ($0.06 per
diluted share) on the sale of a building, a $0.3 million pre-tax gain on the
sale of investments ($0.01 per diluted share), a $0.4 million pre-tax gain on
the sale of mortgage servicing rights ($0.02 per diluted share), a $0.7 million
pre-tax cost of an early retirement option plan ($0.03 per diluted share), and
$2.8 million of pre-tax expense ($0.12 per diluted share) for the amortization
of goodwill and intangible assets. All per share data have been adjusted for the
3-for-2 stock split declared on November 28, 2001.
The Company's results in 2001, versus 2000, reflected significant growth in
average earning assets and a slight decline in net interest margin, resulting in
higher net interest income, the largest revenue category. In addition,
noninterest income continued to increase and diversify, both important goals of
management. Expressed as a percentage of total revenue, noninterest income
increased to 24% from 14% five years ago. With respect to operating cost
management, the Company's efficiency ratio improved to 55.15% in 2001 from
ratios of greater than 56% for the prior two years. The return on average equity
was 16.36% in 2001, as compared to 16.79% in 2000, and 15.91% in 1999.
Asset quality, as measured by the following ratios, continued to be favorable,
as compared to the asset quality reported by other banking companies.
Nonperforming assets represented 0.38% of total assets at year end 2001, versus
0.16% at year end 2000. This increase was due to higher nonperforming loans and
leases in the fourth quarter of 2001, reflecting a problem credit of a single
borrower which is well collateralized. The ratio of net charge-offs to average
loans and leases was 0.14% in 2001, as compared to 0.08% for the prior year. At
year end, the allowance for credit losses equaled 162% of nonperforming loans
and leases.
TABLE 1 -- CHANGES IN DILUTED NET INCOME PER COMMON SHARE
2000 TO 2001 1999 to 2000
--------------------------------------------------------------------------------
Prior year diluted net income per share $ 1.31 $ 1.21
Change from differences in:
Net interest income 0.43 0.27
Provision for credit losses 0.01 (0.07)
Noninterest income 0.19 0.24
Noninterest expenses (0.31) (0.37)
Income taxes (0.02) 0.02
Shares outstanding (0.02) 0.01
------ ------
Total 0.28 0.10
------ ------
Diluted net income per share $ 1.59 $ 1.31
====== ======
7
TABLE 2 -- CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES(1)
(Dollars in thousands and tax-equivalent)
2001 2000 1999
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AVERAGE YIELD/ Average Yield/ Average Yield/
BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Loans and leases:(2)
Residential real estate(3) $ 332,693 $ 25,184 7.57% $ 290,225 $ 23,260 8.01% $ 218,537 $ 16,899 7.73%
Consumer 213,163 15,923 7.47 203,066 17,231 8.49 137,234 11,283 8.22
Commercial loans
and leases 451,801 39,457 8.73 389,936 35,553 9.12 344,204 31,014 9.01
---------- -------- ---- ---------- -------- ---------- --------
Total loans and leases 997,657 80,564 8.08 883,227 76,044 8.61 699,975 59,186 8.46
Securities:
Taxable 615,249 39,193 6.37 486,775 33,261 6.83 444,146 28,874 6.50
Nontaxable 167,234 12,068 7.22 157,552 12,765 8.10 135,952 9,575 7.04
---------- -------- ---- ---------- -------- ---------- --------
Total securities 782,483 51,261 6.55 644,327 46,026 7.14 580,098 38,449 6.63
Interest-bearing
deposits with banks 2,665 88 3.30 1,872 112 5.98 4,006 218 5.44
Federal funds sold 29,811 1,172 3.93 25,608 1,649 6.44 15,357 793 5.16
---------- -------- ---- ---------- -------- ---------- --------
TOTAL EARNING ASSETS 1,812,616 133,085 7.34% 1,555,034 123,831 7.96% 1,299,436 98,646 7.59%
Less: allowance for
credit losses (11,874) (9,044) (7,590)
Cash and due from banks 40,784 35,847 37,234
Premises and
equipment, net 31,947 31,813 28,606
Other assets 73,385 58,969 32,823
---------- ---------- ----------
Total assets $1,946,858 $1,672,619 $1,390,509
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
demand deposits $ 151,873 $ 1,191 0.78% $ 153,035 $ 1,664 1.09% $ 134,151 $ 1,860 1.39%
Regular savings deposits 104,496 1,568 1.50 105,221 2,112 2.01 104,808 2,114 2.02
Money market
savings deposits 366,759 10,894 2.97 304,501 12,816 4.21 191,836 5,710 2.98
Time deposits 426,464 21,944 5.15 427,627 23,163 5.42 394,236 19,453 4.93
---------- -------- ---------- -------- ---------- --------
Total interest-bearing
deposits 1,049,592 35,597 3.39 990,384 39,755 4.01 825,031 29,137 3.53
Short-term borrowings 384,400 17,324 4.51 274,444 15,647 5.70 233,600 11,249 4.82
Long-term borrowings 113,415 8,122 7.16 74,659 5,858 7.85 33,690 1,742 5.17
---------- -------- ---------- -------- ---------- --------
TOTAL INTEREST-
BEARING LIABILITIES 1,547,407 61,043 3.94 1,339,487 61,260 4.57 1,092,321 42,128 3.86
-------- ---- -------- ---- -------- ----
Net interest income
and spread $ 72,042 3.40% $ 62,571 3.39% $ 56,518 3.73%
======== ==== ======== ==== ======== ====
Noninterest-bearing
demand deposits 245,408 215,111 186,145
Other liabilities 12,586 6,230 1,922
Stockholders' equity 141,457 111,791 110,121
---------- ---------- ----------
Total liabilities and
stockholders' equity $1,946,858 $1,672,619 $1,390,509
========== ========== ==========
Interest income/
earning assets 7.34% 7.96% 7.59%
Interest expense/
earning assets 3.37 3.94 3.24
---- ---- ----
Net interest margin 3.97% 4.02% 4.35%
==== ==== ====
(1) Income and yields are presented on a tax-equivalent basis using the
applicable federal income tax rate.
(2) Non-accrual loans are included in the average balances.
(3) Includes residential mortgage loans held for sale. Home equity loans and
lines are classified with consumer loans.
8
NET INTEREST INCOME
The largest source of operating revenue is net interest income, which is the
difference between the interest earned on earning assets and the interest
expense paid on interest-bearing liabilities.
Net interest income for 2001 was $66,827,000, representing an increase of
$9,407,000 or 16.4% from 2000. A 9.9% increase was achieved in 2000, compared to
1999, resulting in net interest income of $57,420,000.
For purposes of this discussion and analysis, the interest earned on tax-exempt
investment securities has been adjusted to an amount comparable to interest
subject to normal income taxes. The result is referred to as tax-equivalent
interest income and tax-equivalent net interest income.
The tabular analysis of net interest income performance (entitled "Table
2-Consolidated Average Balances, Yields and Rates") reveals declining net
interest margins accompanied by substantial increases in average earning assets
each year over the three year period ended December 31, 2001. Table 3 shows the
extent to which volume increases have dominated earnings from tax-equivalent net
interest income during this time frame, as compared to negative changes in
average rate. As a result, the Company was able to achieve tax-equivalent net
interest income of $72,042,000 in 2001, representing a 15.1% annual increase,
and $62,571,000 in 2000, representing a 10.7% annual increase, preceded by
$56,518,000 in 1999. Pressure on the net interest margin in recent years is an
industry-wide trend and a significant challenge for management. It has lead to
greater sophistication in margin management and heightened emphasis on growing
noninterest revenues.
TABLE 3 -- EFFECT OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME
2001 VS. 2000 2000 vs. 1999
------------------------------------------------------------------------------------------------------------------------------------
INCREASE DUE TO CHANGE Increase Due to Change
OR IN AVERAGE:* or in Average:*
(In thousands and tax-equivalent) (DECREASE) VOLUME RATE (Decrease) Volume Rate
------------------------------------------------------------------------------------------------------------------------------------
Interest income from earning assets:
Loans and leases $ 4,520 $ 9,442 $ (4,922) $16,858 $ 15,755 $ 1,103
Taxable securities 5,932 8,306 (2,374) 4,387 2,863 1,524
Nontaxable securities (696) 754 (1,450) 3,190 1,639 1,551
Other investments (502) 280 (782) 750 486 264
--------- -------
Total interest income 9,254 19,423 (10,169) 25,185 20,162 5,023
Interest expense on funding of earning assets:
Interest-bearing demand deposits (473) (13) (460) (196) 239 (435)
Regular savings deposits (544) (14) (530) (2) 8 (10)
Money market savings deposits (1,922) 2,305 (4,227) 7,106 4,169 2,937
Time deposits (1,219) (63) (1,156) 3,710 1,721 1,989
Total borrowings 3,941 8,045 (4,104) 8,514 4,543 3,971
--------- -------
Total interest expense (217) 8,812 (9,029) 19,132 10,509 8,623
--------- --------- --------- ------- -------- -------
Net interest income $ 9,471 $ 10,611 $ (1,140) $ 6,053 $ 9,653 $(3,600)
========= ========= ========= ======= ======== =======
* Variances are computed line-by-line and do not add to the totals shown.
Where volume and rate have a combined effect that cannot be separately
identified with either, the variance is allocated to volume and rate based
on the relative size of the variance that can be separately identified
with each.
9
INTEREST INCOME
The Company's tax-equivalent interest income increased by 7.5%, or $9,254,000,
in 2001, compared to 2000. This improvement was the result of a 16.6%, or
$257,582,000, increase in average earning assets, partially offset by the
effects of a 62 basis point decrease in average yield earned on those funds.
During 2001, average loans and leases, yielding 8.08% versus 8.61% a year
earlier, rose 13.0% to $997,657,000, with all three major categories exhibiting
growth. Average commercial loans and leases were up 15.9% (primarily reflecting
the rise in commercial credits and the acquisition of the lease portfolio in
December 2000), average residential real estate loans rose 14.6% (attributable
largely to construction lending), and consumer loans increased 5.0% (due for the
most part to home equity products and installment lending). In 2001, average
loans and leases comprised 55.0% of average earning assets, compared to ratios
of 56.8% in 2000 and 53.9% in 1999. Average total securities, yielding 6.55% in
2001 versus 7.14% in 2000, rose 21.4% to $782,483,000. They represented 43.2% of
average earning assets in 2001, a small increase from 41.4% in 2000. The Company
further expanded its leverage activities during 2001, through which growth in
securities is funded by Federal Home Loan Bank of Atlanta advances. Leverage
earned a similar margin in 2001, compared to 2000, while it benefited both the
return on average equity (105 basis points) and earnings per share ($0.10).
Tax-equivalent interest income increased by 25.5% or $25,185,000 in 2000,
compared to 1999, due to substantially higher average earning assets and the
positive effects of a modest increase in the average yield earned on those
funds.
INTEREST EXPENSE
Interest expense decreased 0.4% or $217,000 in 2001, compared to 2000, as a 63
basis point decline in the average rate paid on interest-bearing liabilities (to
3.94% from 4.57%) offset the effects of a 15.5% increase or $207,920,000 higher
average interest-bearing liabilities.
Among the major interest-bearing deposit categories, only average money market
savings deposits showed an increase of 20.4%, while the other categories were
essentially level from 2000 to 2001. Average rates paid on all categories
declined, especially on money market savings deposits, whose average rate was
down 124 basis points to 2.97% in 2001 from 4.21% in 2000. Average short-term
and long-term borrowings, the most expensive funding sources, increased
substantially, by 40.1% and 51.9%, respectively. Like interest-bearing deposits,
they showed a decline in average rate paid, which, in the case of short-term
borrowings, nearly matched the significant rate decline for money market savings
deposits. As previously mentioned, there was an increase in leverage on the
average balance sheet in 2001, which is reflected in the rise in borrowings.
Interest expense increased 45.4% or $19,132,000 in 2000, as compared to 1999,
due to the combined effects of 22.6% or $247,166,000 higher average
interest-bearing liabilities (including, especially, the acquisition of branches
in September 1999) and a 71 basis point increase in the average rate paid for
those funds.
INTEREST RATE PERFORMANCE
Net interest margin, the profit margin achieved on the Company's earning asset
base, declined slightly by 5 basis points in 2001, compared to 2000, while the
net interest spread was stable. In the lower interest rate environment which
characterized 2001, versus 2000, the Company was able to achieve a decline in
funding rates which matched the decline in earning asset yields, so that overall
interest rate performance was maintained. The net interest margin and net
interest spread declined, by 33 basis points and 34 basis points, respectively,
in 2000, compared to 1999, reflecting a greater interest rate sensitivity for
interest-bearing liabilities than for interest-earning assets in a year that
included increases in interest rates.
NONINTEREST INCOME
Total noninterest income was $21,836,000 in 2001, a 24.6% or $4,308,000 increase
from 2000. Non-operating items affecting this comparison were the $256,000 gain
in 2001 on the sale of the Company's credit card portfolio, gains of $1,470,000
on the sale of a building and $384,000 on the sale of mortgage servicing rights
in 2000, and $69,000 higher securities gains in 2001 than in 2000. Excluding
these items, the increase in operating noninterest income was 37.9% or
$5,837,000 in 2001 over 2000. Most of this change was due to higher gains on
sales of mortgage loans, growth in service charges on deposit accounts, and
increases in various types of other noninterest income, including those recorded
for transaction based service fees, bank owned life insurance investments, and
certain revenues of the Equipment Leasing Company acquired in December 2000.
These results reflect the Company's priority to grow and diversify its sources
of noninterest income. In total, noninterest income grew 42.1% or $5,197,000 in
2000, versus 1999. Excluding the non-operating items shown above for 2000, plus
$176,000 higher securities gains in 2000, compared to 1999, the increase in
operating noninterest income was 25.9% or $3,167,000.
10
Securities gains were $346,000 in 2001, an increase of $69,000 from $277,000 for
2000. Securities gains of $101,000 were recorded in 1999. During 2001, the sale
of available-for-sale debt securities generated net gains of $142,000, while
gains of $204,000 were realized on sales of available-for-sale equity
securities. During 2000, sales of available-for-sale debt securities generated
$55,000 in net losses, compared to $332,000 in gains on sales of
available-for-sale equity securities.
Service charges on deposit accounts increased 22.3% in 2001 and 29.8% in 2000. A
large part of the change in both years was attributable to increases in return
check charges and in commercial and small business account fees.
Gains on mortgage sales more than doubled in 2001, compared to 2000, reaching
$2,608,000 from an increase of $1,550,000, after reporting a 40.3% decline in
2000, compared to 1999. During 2001, a declining interest rate environment, and
the introduction of several new initiatives, such as wholesale lending, led to a
significant increase in loan production and funded loans. Due to the low rates,
many customers elected to refinance their existing loans, increasing gains on
mortgage sales. During 2000, originations of loans held for sale declined due to
higher interest rates (especially early in the year), along with client
preferences for adjustable rate mortgage products that are held in portfolio.
The Company achieved gains of $2,608,000 on sales of $222,303,000 in 2001,
compared to gains of $1,058,000 on sales of $64,166,000 in 2000 and gains of
$1,772,000 on sales of $145,074,000 in 1999.
Fees on sales of investment products have increased 153.2% over the three year
period, from $857,000 in 1999 to $2,170,000 in 2001. Much of the 32.3% rise in
2001 occurred on sales of tax-deferred annuity products, while much of the 91.4%
increase in 2000 reflected sales of mutual funds.
Trust income amounted to $1,995,000 in 2001, an increase of $342,000 or 20.7%
over 2000, reflecting increased assets under management and higher estate and
trust settlements. During 2001, trust assets under management rose by 14.5% to
$283,000,000 despite adverse investment markets, aided by sales and
better-than-market investment performance in managed accounts. Revenues of
$1,653,000 for 2000 represented an increase of $93,000 or 6.0% over 1999.
Other income increased $1,955,000 or 35.8% to $7,410,000 for 2001, compared to
$5,455,000 for 2000. This increase largely reflects higher income from
bank-owned life insurance investments (up $1,205,000), along with noninterest
revenues of $620,000 from the Equipment Leasing Company acquired at the end of
2000 and a $256,000 non-operating gain on the sale of the credit card portfolio.
The rise in other income was $2,019,000 or 58.8% in 2000, compared to 1999,
attributable primarily to higher fees from unfunded loan commitments and debit
card fees, along with a non-operating gain on the sale of mortgage servicing
rights.
NONINTEREST EXPENSES
Noninterest expenses increased $7,017,000 or 14.7% in 2001 over 2000, and
$8,073,000 or 20.4% in 2000 over 1999. On an operating basis, the percentage
increases were 16.8% in 2001 and 14.2% in 2000. Non-operating items which have
been excluded from these results were goodwill and intangible asset amortization
(totaling $3,178,000 in 2001 and $2,824,000 in 2000) and, in 2000, non-recurring
costs of early retirement benefits ($744,000). 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 with the goal
of maximizing profitability over time.
The major categories of noninterest expenses include salaries and employee
benefits, occupancy and equipment expenses, marketing expenses, outside data
services costs, goodwill and intangible asset amortization, and other
noninterest expenses generally associated with the day-to-day operations of the
Company.
Salaries and employee benefits, the largest component of noninterest expenses,
increased $4,695,000 or 18.9% in 2001, and $2,438,000 or 10.9% in 2000. Without
non-recurring expenses of $744,000 for early retirement benefits in 2000, the
rate of increase for 2001 was 22.5%. Salaries rose 13.5% in 2001, while benefits
increased by 30.6%. Efficient staffing is a goal of management. Staff additions
are made carefully with a view toward achieving gains in financial performance.
Staffing increased in 2001, as two new branches opened (one in the Annapolis
market, and the other to serve residents and employees of a retirement community
in the Gaithersburg market), two branches were consolidated into one (Bethesda
market), an insurance agency acquisition was consummated, and the Equipment
Leasing Company, acquired in December 2000, had its first full year of
operation. Reflecting these changes, and general growth of the Company, average
full-time equivalent employees reached 475 in 2001, representing an increase of
5.1% from 452 in 2000, which was 1.6% above 445 for 1999. The ratio of net
income per average full-time equivalent employee increased to $49,000 in 2001,
up from $42,000 in 2000 and $39,000 in 1999. The most significant increase in
benefits during 2001 was attributable to incentive compensation, related to the
Company's financial performance, and expenses for
11
a 401(k) match of employee contributions by the Company which began in 2001.
Salaries increased by 13.2% in 2000, versus 1999, reflecting, in part, merit
increases and costs of the first full year of operation for branches acquired in
September 1999. Benefit expenses, excluding the nonrecurring window option
costs, actually declined in 2000.
In 2001, occupancy expense rose 6.5% or $311,000, attributable in large part to
increased depreciation and amortization charges. The rate of increase was 46.3%
or $1,509,000 in 2000, primarily reflecting higher rental expenses, net of
rental income, related to increases in leased premises due to branches acquired
in September 1999. Equipment expenses rose 7.1% in 2001, preceded by an increase
of 20.1% in 2000, compared to each prior year, due largely to software and
equipment servicing costs and, in 2000, to higher depreciation charges.
Marketing expense increased by only $192,000 in 2001, representing a rate of
15.0%, following a decrease of $281,000 or 18.0% the prior year. The decrease in
2000 was achieved through careful channeling of efforts into more effective,
less costly types of advertising.
Outside data services costs decreased minimally in 2001, reflecting a
renegotiation of the provider contract. The increase of 22.1% or $429,000 in
2000 was due primarily to the branch acquisition completed in the fourth quarter
of 1999 and to costs of internet banking initiatives.
The amortization of goodwill and intangible assets increased by $354,000 or
12.5% in 2001, and by $1,840,000 or 187.0% in 2000. The rise in 2001 was caused
by goodwill amortization related to the acquisition of the Equipment Leasing
Company in December 2000, while the increase in 2000 reflected the first full
year of goodwill and intangible asset amortization associated with the branch
acquisition in September 1999. See Notes 1 and 8 to the Consolidated Financial
Statements for discussions of new accounting pronouncements which affect the
amortization of goodwill and intangible assets.
Other noninterest expenses of $9,516,000 in 2001 were $1,268,000 or 15.4% above
2000, resulting from consulting fees and miscellaneous cost increases. The
percentage rise in other expenses was 24.7% in 2000, attributable largely to
consulting fees and communications costs.
OPERATING EXPENSE PERFORMANCE
Management views the efficiency ratio as an important measure of overall
operating expense performance and cost management. The ratio expresses the level
of noninterest expenses as a percentage of total revenue (tax-equivalent net
interest income plus total noninterest income). Lower ratios indicate improved
productivity. The computation excludes significant non-operating items of
noninterest expenses and income. Such non-operating expenses include goodwill
and intangible asset amortization and, in 2000, non-recurring costs of an early
retirement opportunity plan. Non-operating income items encompassed gains on
sales of securities, the gain in 2001 from the sale of the credit card
portfolio, and, in 2000, gains on the sale of premises and mortgage servicing
rights.
During 2001, the Company's efficiency ratio was 55.1%, better than ratios of
56.5% achieved in 2000 and 56.1% in 1999. These ratios are generally superior to
those of other banking companies of similar size.
PROVISION FOR INCOME TAXES
Income tax expense amounted to $8,429,000 in 2001, compared with $5,887,000 in
2000 and $6,330,000 in 1999. The resulting effective tax rates were 26.7% for
2001, 23.9% for 2000, and 26.5% for 1999.
BALANCE SHEET ANALYSIS
The Company's total assets reached $2,081,834,000 at December 31, 2001, an
increase of 17.4% or $308,833,000 from $1,773,001,000 at December 31, 2000.
Earning assets increased 17.6% or $290,137,000 in 2001, to $1,938,694,000 at
December 31, 2001, from $1,648,557,000 at the prior year end.
LOANS AND LEASES
Residential real estate loans, comprised of residential construction and
residential mortgage categories, rose $29,208,000 or 9.4% during 2001, to
$339,797,000 at December 31, 2001. Residential construction loans, a specialty
of the Bank for many years, increased significantly in 2001 (up 91.8% or
$40,463,000, to $84,541,000 at December 31, 2001), largely reflecting higher
production from a wholesale lending initiative.
12
Residential mortgages, most of which are 1-4 family, decreased by $11,255,000 or
4.2%, to $255,256,000, as many customers responded to the lower rate environment
by electing to move from short-term adjustable rate loans (which are kept in
portfolio) into fixed rate loans (which are sold in the secondary market).
The Company devotes significant resources and attention to seeking and then
serving commercial clients. Commercial loans and leases declined by $1,847,000
or 0.4% during 2001, to $441,540,000 at December 31, 2001. Included in this
category are commercial real estate loans, commercial construction loans, leases
and other commercial loans.
In general, the Company's commercial real estate loans consist of owner occupied
properties where an established banking relationship exists or, to a lesser
extent, involve investment properties for warehouse, retail, and office space
with a history of occupancy and cash flow. Commercial mortgages increased
$7,657,000 or 3.3% during 2001, to $240,297,000 at year end. The amount of
growth was adversely affected during 2001 by significant rate refinancing in a
declining rate environment. Commercial construction credits declined $5,835,000
or 9.7% during the year, to $54,478,000 at December 31, 2001. The Company lends
for commercial construction in markets it knows and understands, works
selectively with local, top-quality builders and developers, and requires
substantial equity from its borrowers.
The Company's equipment leasing business is, for the most part, technology
based, consisting of a portfolio of leases for items such as computers,
telecommunications systems and equipment, medical equipment, and point-of-sale
systems for retail businesses. Equipment leasing is conducted through vendors
located primarily in east coast states from Maryland to Florida and in Illinois.
The typical lease is "small ticket" by industry standards, averaging less than
$20,000, with individual leases generally not exceeding $250,000. The Company's
equipment leasing business suffered almost immediately from the economic
downturn in 2001. As a result, the leasing portfolio declined $3,959,000 or
12.6% in 2001, to $27,345,000 at year end.
Over the years, the Company's commercial loan clients have come to represent a
diverse cross-section of small to mid-size local businesses, whose owners and
employees are often established Bank customers. Such banking relationships are a
natural business for the Company, with its long-standing community roots and
extensive experience in serving and lending to this market segment. In 2001, the
marketplace was characterized by lower rates and significant refinancing. These
conditions had a generally negative effect on the Company's portfolio of other
commercial loans, which grew minimally in 2001, by 0.2% or $290,000, to
$119,420,000 at year end.
Consumer lending continues to be very important to the Company's full-service,
community banking business. This category of loans includes primarily home
equity loans and lines, installment loans, personal lines of credit, and student
loans. The consumer loan portfolio rose 0.3% or $741,000 in 2001, to
$214,582,000 at December 31, 2001. Consumer loan production in 2001 essentially
mirrored production in 2000, but this growth was largely offset by declines in
the portfolio during the year due to refinancing in a lower rate environment.
The only major consumer loan category showing an increase for the year was home
equity loans and lines, which rose by $5,968,000 or 5.6%, reaching $113,351,000
by year end.
TABLE 4 -- ANALYSIS OF LOANS AND LEASES
This table presents the trends in the composition of the loan and lease
portfolio over the previous five years.
December 31,
-------------------------------------------------------------------------------
(In thousands) 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
Residential real estate:
Residential mortgages $255,256 $266,511 $235,153 $152,764 $143,558
Residential construction 84,541 44,078 34,721 38,856 35,480
Commercial loans and leases:
Commercial real estate 240,297 232,640 237,924 210,079 182,560
Commercial construction 54,478 60,313 42,256 33,092 22,207
Leases 27,345 31,304 0 0 0
Other commercial 119,420 119,130 92,674 79,259 72,524
Consumer 214,582 213,841 183,397 110,362 102,564
-------- -------- -------- -------- ---------
Total loans and leases $995,919 $967,817 $826,125 $624,412 $ 558,893
======== ======== ======== ======== =========
13
TABLE 5 -- LOAN AND LEASE MATURITIES AND INTEREST RATE SENSITIVITY
Remaining Maturities at December 31, 2001,
of Selected Credits (in Years)
-------------------------------------------
(In thousands) 1 or Less Over 1-5 Over 5 Total
------------------------------------------------------------------------------------------------------------------------------------
Residential construction loans $ 83,857 $ 684 $ 0 $ 84,541
Commercial construction loans 54,478 0 0 54,478
Commercial loans not secured by real estate 71,781 40,630 7,009 119,420
--------- -------- ------ ---------
Total $ 210,116 $ 41,314 $7,009 $ 258,439
========= ======== ====== =========
Rate Terms:
Fixed $ 27,265 $ 40,630 $7,009 $ 74,904
Variable or adjustable 182,851 684 0 183,535
--------- -------- ------ ---------
Total $ 210,116 $ 41,314 $7,009 $ 258,439
========= ======== ====== =========
SECURITIES
The investment portfolio, consisting of available-for-sale, held-to-maturity and
other equity securities, increased 37.1% or $247,552,000, to $914,479,000 at
December 31, 2001, from $666,927,000 at December 31, 2000. This increase was due
to slower growth in outstanding loans, an increase in deposits, an increase in
leverage, and changes in interest rates. In 2001, the yield curve shifted as the
Federal Reserve decreased short-term interest rates with a 475 basis point
reduction in the federal funds rate. Long-term rates were essentially unchanged,
but had fallen earlier in the year, only to rise back to the earlier levels by
year end. The Company's overall policy is to maximize earnings and maintain
liquidity through an investment portfolio bearing low credit risk.
The asset mix within the investment portfolio shifted slightly with increases in
the purchase of mortgage backed securities, mainly collateralized mortgage
obligations. This was accomplished primarily to capture higher yields, with
varying degrees of call risk, not available in traditional U. S. Government
Agency securities. At December 31, 2001, mortgage backed securities made up
13.6% of total investments, compared to 3.4% at December 31, 2000, while the
percentage for U. S. Agencies fell to 58.2% from 66.0%. The Bank's portfolio had
$194,083,000 in municipal securities at year end 2001, or 21.2% of the total
portfolio, down slightly from 23.6% in 2000. These are high-grade obligations
held for their tax-exempt income.
The Company does not hedge through derivatives. The only derivatives are covered
call option contracts, held from time to time, incident to an established plan
to enhance the yield on certain of the bank's equity securities. These
derivatives do not expose the Bank to credit risk, or to significant market
risk.
The Company's leverage programs, primarily investing in available-for-sale
securities, and funded either by Federal Home Bank of Atlanta advances or
repurchase agreements with U. S. Government security dealers, are managed to
better utilize available capital to achieve higher returns on equity and
earnings per share. The percentage of the investment portfolio funded in this
manner increased to 30.9% at December 31, 2001, from 29.4% at December 31, 2000.
14
TABLE 6 -- ANALYSIS OF SECURITIES
The composition of securities at December 31 for each of the latest three years
was:
(Dollars in thousands) 2001 2000 1999
--------------------------------------------------------------------------------
Available-for-Sale:(1)
U.S. Agency $522,308 $418,460 $422,665
State and municipal 39,157 44,317 57,797
Mortgage-backed(2) 124,197 22,921 22,550
Corporate debt 11,878 3,148 0
Trust preferred 27,273 23,817 0
Marketable equity securities 7,816 5,198 5,703
-------- -------- --------
Total 732,629 517,861 508,715
Held-to-Maturity and Other Equity:
U.S. Agency 9,995 22,020 6,538
State and municipal 154,926 112,859 98,579
Other equity securities 16,929 14,187 16,207
-------- -------- --------
Total 181,850 149,066 121,324
-------- -------- --------
Total securities(3) $914,479 $666,927 $630,039
======== ======== ========
(1) At estimated fair value.
(2) Issued by a U. S. Government Agency or secured by U.S. Government Agency
collateral.
(3) The outstanding balance of no single issuer, except for U.S. Government
and U.S. Government Agency securities, exceeded ten percent of
stockholders' equity at December 31, 2001, 2000 or 1999.
Maturities and weighted average yields for debt securities available-for-sale
and held-to-maturity at December 31, 2001 are presented below. Amounts appear in
the table at amortized cost, without market value adjustments, by stated
maturity adjusted for estimated calls.
TABLE 7 -- MATURITY TABLE FOR DEBT SECURITIES
Years to Maturity
---------------------------------------------------------------------------
Within Over 1 Over 5 Over
1 through 5 through 10 10
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale:
U.S. Agency $441,156 5.25% $ 75,371 4.60% $ 1,389 6.28% $ 0 0% $517,916 5.15%
State and municipal* 8,834 6.42 13,183 6.09 13,730 6.08 3,003 6.38 38,750 7.17
Mortgage-backed 17,712 4.40 77,425 4.78 21,897 5.89 7,612 6.67 124,646 5.01
Corporate debt 1,007 8.61 6,242 5.64 4,625 7.10 0 0 11,874 6.46
Trust preferred 2,809 9.50 15,314 9.42 7,642 9.30 1,650 8.23 27,415 9.72
-------- -------- ------- ------- --------
Total $471,518 5.27% $187,535 5.21% $49,283 6.60% $12,265 6.81% $720,601 5.41%
======== ======== ======= ======= ========
Held-to-Maturity:
U.S. Agency $ 9,995 5.27% $ 0 0% $ 0 0% $ 0 0% $ 9,995 5.27%
State and municipal* 3,625 6.30 50,818 6.30 94,397 6.41 6,086 6.35 154,926 7.27
-------- -------- ------- ------- --------
Total $ 13,620 5.57% $ 50,818 6.30% $94,397 6.41% $ 6,086 6.35% $164,921 7.15%
======== ======== ======= ======= ========
* Yields on state and municipal securities have been calculated on a
tax-equivalent basis using the applicable federal income tax rate.
15
OTHER EARNING ASSETS
Residential mortgage loans held for sale increased $10,311,000 in 2001.
Originations and sales of these loans, and the resulting gains on sales,
increased substantially during 2001 under favorable interest rate conditions.
The aggregate of federal funds sold and interest-bearing deposits with banks
increased 56.1% or $4,172,000 in 2001.
DEPOSITS AND BORROWINGS
Total deposits were $1,387,459,000 at December 31, 2001, increasing $144,532,000
or 11.6% from $1,242,927,000 at December 31, 2000. Growth was achieved for
noninterest-bearing demand deposits, up $34,253,000 or 14.1%, with increases
recorded for both personal and business accounts. Interest-bearing deposits
increased $110,279,000 or 11.0%, attributable in large part to money market
savings and time deposits of $100,000 or more, which increased by 17.4% (up
$58,763,000) and 26.7% (up $25,447,000), respectively.
Total borrowings increased $132,880,000 or 33.9% during 2001, to $525,248,000 at
December 31, 2001, primarily reflective of $70,062,000 in higher levels of
short-term and long-term advances from the Federal Home Loan Bank of Atlanta,
along with a $50,000,000 secured borrowing in the form of a short-term reverse
repurchase agreement. The Company borrowed these funds primarily for the purpose
of investing them in securities under its leverage programs.
CAPITAL MANAGEMENT
Management monitors historical and projected earnings, dividends and asset
growth, as well as risks associated with the various types of on- and
off-balance sheet assets and liabilities, in order to determine appropriate
capital levels. During 2001, total stockholders' equity increased 18.1% or
$23,115,000 to $150,673,000 at December 31, 2001, from $127,558,000 at December
31, 2000. Internal capital generation was responsible for most of this increase
in total stockholders' equity. Internal capital generation (net income less
dividends) added $14,265,000 to equity during 2001, representing a rate, when
considered as a percentage of average total stockholders' equity, of 10.1% for
2001, up from 9.9% recorded in 2000. Year-end accumulated other comprehensive
income (comprised of net unrealized gains and losses on available-for-sale
securities) increased in 2001, compared to 2000, due in large part to lower
interest rates, contributing $6,083,000 of the overall increase in stockholders'
equity. Excluding accumulated other comprehensive income (loss), total
stockholders' equity rose $17,032,000 or 13.1%.
External capital formation, resulting from exercises of stock options as the
Company's stock price increased substantially in 2001, from stock issuances
under the dividend reinvestment and stock purchase plan, and, to a lesser
degree, from stock purchases under the new employee stock purchase plan, totaled
$2,767,000 during 2001. Effective October 1, 2001, the Company's dividend
reinvestment and stock purchase plan was replaced by a plan under which required
shares are purchased in the market rather than being issued as new shares. The
ratio of average equity to average assets was 7.27% for 2001, as compared to
6.68% for 2000 and 7.92% for 1999.
Bank holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. The
guidelines are commonly known as Risk-Based Capital Guidelines. On December 31,
2001, the Company exceeded all applicable capital requirements, with a total
risk-based capital ratio of 14.10%, a tier 1 risk-based capital ratio of 12.98%,
and a leverage ratio of 7.73%. Tier 1 capital of $157,511,000 and total
qualifying capital of $171,155,000 each included $35,000,000 in trust preferred
debt issuance as permitted under Federal Reserve Guidelines (see Note 11 --
Long-Term Borrowings of the Notes to the Consolidated Financial Statements). As
of December 31, 2001, the Bank met the criteria for classification as a
"well-capitalized" institution under the prompt corrective action rules of the
Federal Deposit Insurance Act. Designation as a well-capitalized institution
under these regulations is not a recommendation or endorsement of the Company or
the Bank by federal bank regulators. Additional information regarding regulatory
capital ratios is included in Note 22 -- Regulatory Matters of the Notes to the
Consolidated Financial Statements.
CREDIT RISK MANAGEMENT
The Company's loan and lease portfolio (the "credit portfolio") is subject to
varying degrees of credit risk. Credit risk is mitigated through portfolio
diversification, limiting exposure to any single customer, industry or
collateral type. The Company maintains an allowance for credit losses (the
"allowance") to absorb losses inherent in the 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 methodology for assessing the appropriateness of the allowance
includes: (1) the formula
16
allowance reflecting historical losses by credit category and credit-risk
factors for identified problem credit categories, (2) specific allowances for
identified problem credits, and (3) evaluation of other factors relating to the
portfolio. This systematic allowance methodology is described more fully in Note
1 to the Consolidated Financial Statements.
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 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.
Table 8 presents a five-year history for the allocation of the allowance,
reflecting use of the methodology outlined above, along with the credit mix
(year end credit types as a percent of total credits). This year's table
represents a presentation change from prior years, made in response to
regulatory clarifications contained in the Security and Exchange Commission's
Staff Accounting Bulletin No. 102, "Selected Loan Loss Allocation Methodology
and Documentation Issues" ("SAB 102"). This does not represent a change in
methodology. In all years presented, allowance amounts based upon certain
factors specified in Comptroller of the Currency guidelines were computed by
credit type. However, in prior years, these allocations were consolidated and
shown as part of the unallocated amount in the table. Under guidance from SAB
102, these amounts are now included in the appropriate credit categories.
TABLE 8 -- ALLOWANCE FOR CREDIT LOSSES
December 31,
------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
CREDIT Credit Credit Credit Credit
(Dollars in thousands) AMOUNT MIX Amount Mix Amount Mix Amount Mix Amount Mix
-----------------------------------------------------------------------------------------------------------------------------------
Amount applicable to:
Residential real estate $ 2,541 34% $ 2,436 32% $ 2,045 33% $ 764 31% $1,406 32%
Commercial loans
and leases 6,085 44 5,547 46 4,361 45 4,056 51 4,576 50
Consumer 2,309 22 2,363 22 2,025 22 1,226 18 1,158 18
Unallocated 1,718 1,184 (200) 1,304 (124)
------- ------- ------- ------- ------
Total allowance $12,653 $11,530 $ 8,231 $ 7,350 $7,016
======= ======= ======= ======= ======
During 2001, there were no changes in estimation methods or assumptions that
affected the allowance methodology. Significant variation can occur over time in
the methodology's assessment of the adequacy of the allowance as a result of the
credit performance of a small number of borrowers. The unallocated allowance at
year end 2001, when measured against the total allowance was 13.6% versus 10.3%
a year earlier. The leasing company acquisition in December 2000 has resulted in
increases in the formula and specific reserve elements for commercial loans and
leases over prior years. In addition, the historical loss factors used to
calculate the formula allowance increased in 2001 due to higher charge-offs.
The allowance is increased by credit-loss provisions, which are charged to
expense. Charge-offs of loan and lease amounts determined by management to be
uncollectible or impaired decrease the allowance, while recoveries of previous
charge-offs are added back to the allowance. The Company makes provisions for
credit losses in amounts necessary to maintain the allowance at an appropriate
level, as established by use of the allowance methodology. Resulting provisions
were $2,470,000 in 2001 and $2,690,000 in 2000, representing a decrease of
$220,000 over the period. Net charge-offs of $1,347,000, $691,000 and $335,000,
were recorded in 2001, 2000 and 1999, respectively. The ratio of net charge-offs
to average loans and leases was 0.14% in 2001, compared to 0.08% in 2000.
Excluding the equipment leasing subsidiary acquired at the end of 2000, which
experienced net charge-offs of $597,000 in 2001, this ratio was the same in 2001
as in 2000. At December 31, 2001, the allowance for credit losses was
$12,653,000, or 1.27% of total loans and leases, versus $11,530,000, or 1.19% of
total loans and leases, at December 31, 2000.
17
At December 31, 2001, total nonperforming loans and leases were $7,807,000, or
0.78% of total loans and leases, compared to $2,493,000, or 0.26% of total loans
and leases, at December 31, 2000. The allowance represented 162% of
nonperforming loans and leases at December 31, 2001, versus coverage of 462% a
year earlier. Significant variation in the coverage ratio may occur from year to
year 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 $50,000 at
December 31, 2001, compared to $380,000 at December 31, 2000. The balance of
impaired loans was $5,589,000 at December 31, 2001, with reserves against those
loans of $91,000, compared to $613,000 at December 31, 2000, with reserves of
$100,000. Most of the increase in nonperforming and impaired loans and leases
from year end 2000 to year end 2001 reflected a problem credit of a single
borrower in the amount of $5,130,000 which is well collateralized, with no loss
expected.
The Company's borrowers are concentrated in four counties in the State of
Maryland. Commercial and residential mortgages, including home equity loans and
lines, represented 61.1% of total loans at December 31, 2001, compared to 62.7%
at December 31, 2000. Historically, the Company has experienced low loss levels
with respect to such loans through various economic cycles and conditions. Risk
inherent in this loan concentration is mitigated by the nature of real estate
collateral, the Company's substantial experience in most of the markets served,
and its lending practices.
TABLE 9 -- SUMMARY OF CREDIT LOSS EXPERIENCE
Years Ended December 31,
-----------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1 $ 11,530 $ 8,231 $ 7,350 $ 7,016 $ 6,391
Provision for credit losses 2,470 2,690 1,216 552 986
Allowance acquired 0 1,300 0 0 0
Loan and lease charge-offs:
Residential real estate (23) (220) (67) (3) (139)
Commercial loans and leases (1,180) (246) (123) (136) (235)
Consumer (225) (303) (225) (196) (167)
-------- -------- -------- -------- --------
Total charge-offs (1,428) (769) (415) (335) (541)
Loan and lease recoveries:
Residential real estate 0 0 0 0 0
Commercial loans and leases 54 36 32 82 141
Consumer 27 42 48 35 39
-------- -------- -------- -------- --------
Total recoveries 81 78 80 117 180
-------- -------- -------- -------- --------
Net charge-offs (1,347) (691) (335) (218) (361)
-------- -------- -------- -------- --------
Balance, December 31 $ 12,653 $ 11,530 $ 8,231 $ 7,350 $ 7,016
======== ======== ======== ======== ========
Net charge-offs to average loans and leases 0.14% 0.08% 0.05% 0.04% 0.07%
Allowance to total loans and leases 1.27% 1.19% 1.00% 1.18% 1.26%
18
TABLE 10 -- ANALYSIS OF CREDIT RISK
Years Ended December 31,
---------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
--------------------------------------------------------------------------------
Non-accrual loans and leases(1) $5,904 $ 684 $ 275 $ 832 $ 890
Loans and leases 90 days past due 1,903 1,809 1,710 965 1,764
Restructured loans and leases 0 0 0 4 18
------ ------ ------- ------ ------
Total nonperforming loans
and leases(2) 7,807 2,493 1,985 1,801 2,672
Other real estate owned, net 50 380 163 0 296
------ ------ ------- ------ ------
Total nonperforming assets $7,857 $2,873 $ 2,148 $1,801 $2,968
====== ====== ======= ====== ======
Nonperforming loans and leases
to total loans and leases 0.78% 0.26% 0.24% 0.29% 0.48%
Allowance for credit losses to
nonperforming loans and leases 162% 462% 415% 408% 263%
Nonperforming assets to total assets 0.38% 0.16% 0.13% 0.13% 0.26%
(1) Gross interest income that would have been recorded in 2001 if non-accrual
loans and leases had been current and in accordance with their original
terms was $185,000, while interest actually recorded on such loans was
$7,000.
(2) Performing loans considered potential problem loans, as defined and
identified by management, amounted to $4,126,000 at December 31, 2001.
Although these are loans where known information about the borrowers'
possible credit problems causes management to have doubts as to the
borrowers' ability to comply with the present loan repayment terms, most
are well collateralized and are not believed to present significant risk
of loss. Loans classified for regulatory purposes not included in
nonperforming loans consist only of "other loans especially mentioned" and
do not, in management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact future operating
results, liquidity or capital resources or represent material credits
where known information about the borrowers' possible credit problems
causes management to have doubts as to the borrowers' ability to comply
with the loan repayment terms.
MARKET RISK MANAGEMENT
The Company's net income is largely dependent on the Bank's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders' equity.
The Company's interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 2001, is presented in
Table 11. As indicated in the note to the table, the data was based in part on
assumptions that are regularly reviewed for propriety. The accompanying analysis
indicates an asset sensitive one-year cumulative GAP position of 19% of total
assets, with approximately 56% of rate sensitive assets and approximately 42% of
rate sensitive liabilities subject to maturity or repricing within a one-year
period from December 31, 2001 (termed GAP analysis). The one-year cumulative gap
reversed from a liability sensitive position to asset sensitivity during 2001,
reflecting a significantly reduced duration in the investment portfolio. This
was due to the generally falling interest rate environment in 2001, which
shortened the average life of the investment portfolio. The investment portfolio
is composed of various securities that contain imbedded call options or
prepayments that are more likely to occur as interest rates move in a downward
direction. While senior management, through its Asset Liability Management
Committee (ALCO), has a preference for maintaining a moderate level of interest
rate risk as measured by the repricing GAP, the Company's interest rate risk
policies are guided by results of simulation analysis, which takes into account
more factors than does GAP analysis. Simulation results presented in the
following discussion show that the Company's exposure to changing interest rates
is well within policy limits for acceptable levels of risks. The ALCO analyzes
balance sheet, income statement, and margin trends monthly.
A detailed interest rate risk profile is prepared for ALCO quarterly and is
reviewed with the Board of Directors.
19
The following GAP analysis schedule sets out the time frames from December 31,
2001, in which the Company's assets and liabilities are subject to repricing.
TABLE 11 -- INTEREST RATE SENSITIVITY ANALYSIS
0-90 91-365 Over 1-3 Over 3-5 Over 5
(Dollars in thousands) Days Days Years Years Years
------------------------------------------------------------------------------------------------------------------------------------
Rate Sensitive Assets (RSA):
Loans and leases $364,949 $129,535 $182,521 $168,335 $150,579
Taxable securities 387,819 161,256 61,931 16,189 93,202
Nontaxable securities 2,966 10,366 40,076 25,403 115,271
Other investments 28,295 0 0 0 0
-------- -------- -------- -------- --------
Total 784,029 301,157 284,528 209,927 359,052
Rate Sensitive Liabilities (RSL):
Interest-bearing demand deposits 4,852 14,558 38,820 38,820 69,553
Regular savings deposits 3,779 11,337 30,233 30,233 32,753
Money market savings deposits 18,436 55,306 147,485 147,485 24,581
Time deposits 141,092 240,640 49,515 10,267 122
Short-term borrowing and other RSL 195,982 0 28,967 30,300 270,000
-------- -------- -------- -------- --------
Total 364,141 321,841 295,020 257,105 397,009
-------- -------- -------- -------- --------
Cumulative GAP* $419,888 $399,204 $388,712 $341,534 $303,577
======== ======== ======== ======== ========
As a percent of total assets 20.17% 19.18% 18.67% 16.41% 14.58%
Cumulative RSA to RSL 2.15 1.58 1.40 1.28 1.19
* This analysis is based upon a number of significant assumptions including
the following. Loans and leases are repaid/rescheduled by contractual
maturity and repricings. Securities, except mortgage-backed securities,
are repaid according to contractual maturity adjusted for call features.
Mortgage-backed security repricing is adjusted for estimated early
paydowns. Interest-bearing demand, regular savings, and money market
savings deposits are estimated to exhibit some rate sensitivity based on
management's analysis of deposit withdrawals. Time deposits are shown in
the table based on contractual maturity.
The Company's Board of Directors has established a comprehensive interest rate
risk management policy, which is administered by ALCO. The policy establishes
limits of risk, which are quantitative measures of the percentage change in net
interest income and the fair value of equity capital resulting from a
hypothetical change of plus or minus 200 basis points in U.S. Treasury interest
rates for maturities from one day to thirty years. By employing simulation
analysis through use of a computer model, the Company intends to effectively
manage the potential adverse impacts that changing interest rates can 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. During 2001, as
general market interest rates approached historically low levels, management
adjusted the simulation model to consider interest rate floors on the Company's
core deposit portfolio. This recognizes that at certain low levels of market
interest rates, the Company's core deposit products would not reprice below
specific rates. For evaluating interest rate risk at the end of 2001, the
simulation of a hypothetical, parallel change of plus and minus 200 basis points
in U.S. Treasury interest rates is not practical. Therefore, the Company chose
to apply a plus 200 basis point change and a minus 100 basis point change when
evaluating the December 31, 2001, interest rate risk position. Measured from
December 31, 2001, the simulation analysis indicates that net interest income
would decline by 2% over a twelve-month period given a decrease in interest
rates of 100 basis points, against 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 13%, as compared
to a policy limit of 25%.
20
As with any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by the Company. When
interest rates change, actual movements in different categories of
interest-earning assets and interest-bearing liabilities, loan prepayments, and
withdrawals of time and other deposits, may deviate significantly from
assumptions used in the model. Finally, the methodology does not measure or
reflect the impact that higher rates may have on adjustable-rate loan customers'
ability to service their debts, or the impact of rate changes on demand for
loan, lease and deposit products.
In addition to the potential adverse effect that changing interest rates may
have on the Company's net interest margin and operating results, potential
adverse effects on liquidity can occur as a result of changes in the estimated
cash flows from investment, loan, and deposit portfolios. The Company manages
this inherent risk by maintaining a large portfolio of available-for-sale
investments as well as secondary sources of liquidity from Federal Home Loan
Bank of Atlanta advances and other borrowing arrangements.
LIQUIDITY
Liquidity is measured by a financial institution's ability to raise funds
through loan and lease repayments, maturing investments, deposits, borrowed
funds, capital, or the sale of highly marketable assets such as residential
mortgage loans. The Company's liquidity position, considering both internal and
external sources available, exceeded anticipated short-term and long-term needs
at December 31, 2001. Core deposits, considered to be stable funding sources and
defined to include all deposits except time deposits of $100,000 or more,
equaled 65.3% of total earning assets at December 31, 2001. In addition, loan
and lease payments, maturities, calls and paydowns of securities, deposit growth
and earnings contribute a flow of funds available to meet liquidity
requirements. In assessing liquidity, management considers operating
requirements, the seasonality of deposit flows, investment, loan, lease and
deposit maturities and calls, expected funding of loans and leases, deposit
withdrawals, and the market values of available-for-sale investments, so that
sufficient funds are available on short notice to meet obligations as they arise
and to ensure that the Company is able to pursue new business opportunities.
Liquidity is measured using an approach designed to take into account, in
addition to factors already discussed above, the Company's growth, mortgage
banking activities and leverage programs. Also considered are the greater
sophistication of investment activities and changes in the liquidity of the
investment portfolio due to fluctuations in interest rates. Through this
approach, implemented by the funds management committee under formal policy
guidelines, the Company's liquidity position is measured weekly, looking forward
thirty, sixty and ninety days. The measurement is based upon the asset-liability
management model's projection of a funds sold or purchased position, along with
ratios and trends developed to measure dependence on purchased funds, leverage
limitations and core growth. Resulting projections as of December 31, 2001, show
short-term investments exceeding short-term borrowings by $2,400,000 over the
subsequent 90 days. This excess of liquidity over projected requirements for
funds indicates that the Company can continue to increase its loans and other
earning assets without incurring additional borrowing.
The Company also has external sources of funds, which can be drawn upon when
required. The main source of external liquidity is an available line of credit
for $608,225,000 with the Federal Home Loan Bank of Atlanta, of which
$301,316,000 was outstanding at December 31, 2001. 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 $254,976,000
at December 31, 2001, against which there were outstandings of $50,000,000.
Based upon its liquidity analysis, including external sources of liquidity
available, management believes the liquidity position is appropriate at December
31, 2001.
The Company's time deposits of $100,000 or more represented 8.7% of total
deposits at December 31, 2001, and are shown by maturity in the table below.
Months to Maturity
------------------------------------------------------------------------------------------------------------------------------------
3 or Over 3 Over 6 Over
(Dollars in thousands) less to 6 to 12 12 TOTAL
------------------------------------------------------------------------------------------------------------------------------------
Time deposits -- $100 thousand or more $41,387 $27,500 $37,145 $14,742 $120,774
21
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31,
-----------------------------------
2001 2000
----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 45,609 $ 39,394
Federal funds sold 10,774 6,935
Interest-bearing deposits with banks 840 507
Residential mortgage loans held for sale 16,682 6,371
Investments available-for-sale (at fair value) 732,629 517,861
Investments held-to-maturity -- fair value of $165,015 (2001)
and $135,121 (2000) 164,921 134,879
Other equity securities 16,929 14,187
Total loans and leases 995,919 967,817
Less: allowance for credit losses (12,653) (11,530)
----------- -----------
Net loans and leases 983,266 956,287
Premises and equipment, net 32,584 31,282
Accrued interest receivable 15,163 15,124
Goodwill and intangible assets 24,226 23,648
Other assets 38,211 26,526
----------- -----------
Total assets $ 2,081,834 $ 1,773,001
=========== ===========
LIABILITIES
Noninterest-bearing deposits $ 277,592 $ 243,339
Interest-bearing deposits 1,109,867 999,588
----------- -----------
Total deposits 1,387,459 1,242,927
Short-term borrowings 411,132 308,314
Guaranteed preferred beneficial interests in
the Company's subordinated debentures 35,000 35,000
Other long-term borrowings 79,116 49,054
Accrued interest payable and other liabilities 18,454 10,148
----------- -----------
Total liabilities 1,931,161 1,645,443
STOCKHOLDERS' EQUITY
Common stock-par value $1.00; shares authorized
50,000,000 (2001) and 15,000,000 (2000); shares issued
and outstanding 14,483,564 (2001) and 9,552,672 (2000) 14,484 9,553
Surplus 20,347 22,511
Retained earnings 111,906 97,641
Accumulated other comprehensive income (loss) 3,936 (2,147)
----------- -----------
Total stockholders' equity 150,673 127,558
----------- -----------
Total liabilities and stockholders' equity $ 2,081,834 $ 1,773,001
=========== ===========
See Notes to Consolidated Financial Statements.
22
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Years Ended December 31,
-----------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans and leases $ 79,783 $ 75,746 $58,822
Interest on loans held for sale 780 298 364
Interest on deposits with banks 88 112 218
Interest and dividends on securities:
Taxable 37,873 33,261 27,773
Exempt from federal income taxes 8,174 7,614 6,417
Interest on federal funds sold 1,172 1,649 793
-------- -------- -------
Total interest income 127,870 118,680 94,387
Interest expense:
Interest on deposits 35,597 39,755 29,137
Interest on short-term borrowings 17,324 15,647 11,249
Interest on long-term borrowings 8,122 5,858 1,742
-------- -------- -------
Total interest expense 61,043 61,260 42,128
-------- -------- -------
Net interest income 66,827 57,420 52,259
Provision for credit losses 2,470 2,690 1,216
-------- -------- -------
Net interest income after
provision for credit losses 64,357 54,730 51,043
Noninterest income:
Securities gains 346 277 101
Service charges on deposit accounts 7,307 5,975 4,605
Gains on sales of mortgage loans 2,608 1,058 1,772
Fees on sales of investment products 2,170 1,640 857
Trust department income 1,995 1,653 1,560
Gain on sale of premises 0 1,470 0
Other income 7,410 5,455 3,436
-------- -------- -------
Total noninterest income 21,836 17,528 12,331
Noninterest expenses:
Salaries and employee benefits 29,595 24,900 22,462
Occupancy expense of premises 5,080 4,769 3,260
Equipment expenses 3,433 3,204 2,667
Marketing 1,474 1,282 1,563
Outside data services 2,342 2,374 1,945
Amortization of goodwill and intangible assets 3,178 2,824 984
Other expenses 9,516 8,248 6,647
-------- -------- -------
Total noninterest expenses 54,618 47,601 39,528
-------- -------- -------
Income before income taxes 31,575 24,657 23,846
Income tax expense 8,429 5,887 6,330
-------- -------- -------
Net income $ 23,146 $ 18,770 $17,516
======== ======== =======
Basic net income per share* $ 1.61 $ 1.31 $ 1.21
Diluted net income per share* $ 1.59 $ 1.31 $ 1.21
* Per share data have been adjusted to give retroactive effect to a 3-for-2
stock split declared on November 28, 2001.
See Notes to Consolidated Financial Statements.
23
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
--------------------------------------
2001 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 23,146 $ 18,770 $ 17,516
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 6,225 5,699 3,243
Provision for credit losses 2,470 2,690 1,216
Deferred income taxes 1,565 1,344 (408)
Origination of loans held for sale (230,006) (67,657) (132,292)
Proceeds from sales of loans held for sale 222,303 64,166 145,074
Gains on sales of loans held for sale (2,608) (1,058) (1,772)
Securities gains (346) (277) (101)
Gain on sale of premises 0 (1,470) 0
Net increase in accrued interest receivable (39) (2,359) (883)
Net increase in other assets (11,819) (7,504) (4,176)
Net increase (decrease) in accrued expenses 4,205 3,702 (1,925)
Other-net (4,272) (4,945) 346
--------- --------- ---------
Net cash provided by operating activities 10,824 11,101 25,838
Cash Flows from Investing Activities:
Net (increase) decrease in interest-bearing deposits with banks (333) 3,194 (2,267)
Purchases of investments held-to-maturity (79,656) (29,774) (56,278)
Purchases of other equity securities (2,742) (10,063) (7,561)
Purchases of investments available-for-sale (984,951) (120,279) (360,521)
Proceeds from sales of investments available-for-sale 142,658 68,538 83,976
Proceeds from maturities, calls and principal payments of investments held-to-maturity 49,235 0 6,598
Proceeds from maturities, calls and principal payments of investments available-for-sale 638,389 59,068 284,684
Proceeds from sales of other equity securities 0 12,083 9,833
Proceeds from sales of other real estate owned 459 531 49
Net increase in loans and leases receivable (28,184) (113,311) (117,120)
Purchases of loans 0 0 (50,960)
Acquisitions, net of cash acquired (1,231) (32,460) 165,457
Proceeds from sale of premises 0 2,965 0
Expenditures for premises and equipment (4,712) (3,501) (4,942)
--------- --------- ---------
Net cash used by investing activities (271,068) (163,009) (49,052)
Cash Flows from Financing Activities:
Net increase (decrease) in deposits 143,532 77,555 (8,538)
Net increase (decrease) in short-term borrowings 102,618 69,138 (29,250)
Proceeds from long-term borrowings 30,262 46,134 68,645
Retirement of long-term borrowings 0 (35,000) (46)
Common stock purchased and retired 0 (4,158) (833)
Proceeds from issuance of common stock 2,767 2,098 2,458
Dividends paid (8,881) (7,749) (7,201)
--------- --------- ---------
Net cash provided by financing activities 270,298 148,018 25,235
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 10,054 (3,890) 2,021
Cash and cash equivalents at beginning of year 46,329 50,219 48,198
--------- --------- ---------
Cash and cash equivalents at end of year* $ 56,383 $ 46,329 $ 50,219
========= ========= =========
Supplemental Disclosures:
Interest payments $ 60,766 $ 61,172 $ 42,031
Income tax payments 9,236 6,631 6,176
Non-cash Investing Activities:
Transfers from loans to other real estate owned $ 82 $ 686 $ 225
Reclassification of borrowings from long-term to short-term 200 200 11,200
Details of acquisitions:
Fair value of assets acquired $ 2,605 $ 29,156 $ 36,188
Fair value of liabilities assumed (2,503) (2,689) (221,141)
Cash to be paid for acquisition (2,227) 0 0
Purchase price in excess of net assets acquired 3,725 5,993 20,254
--------- --------- ---------
Cash paid (received) 1,600 32,460 (164,699)
Cash acquired (369) 0 (758)
--------- --------- ---------
Net cash paid (received) for acquisition $ 1,231 $ 32,460 $(165,457)
--------- --------- ---------
* Cash and cash equivalents include those amounts under the captions "Cash
and due from banks" and "Federal funds sold" on the Consolidated Balance
Sheets.
See Notes to Consolidated Financial Statements.
24
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Accumulated Other Total
Common Retained Comprehensive Stockholders'
Stock Surplus Earnings Income (Loss) Equity
------------------------------------------------------------------------------------------------------------------------------------
Balances at January 1, 1999 $ 9,586 $ 22,913 $ 76,305 $ 2,133 $ 110,937
Comprehensive Income:
Net income 17,516 17,516
Other comprehensive loss, net of tax
(unrealized losses on securities of $14,220, net
of reclassification adjustment for losses of $63) (14,157) (14,157)
---------
Total comprehensive income 3,359
Cash dividends*-$0.50 per share (7,201) (7,201)
Common stock issued pursuant to:
Incentive stock option plan-1,165 shares 1 28 29
Dividend reinvestment and stock
purchase plan-90,318 shares 90 2,339 2,429
Stock repurchases-29,529 shares (29) (804) (833)
--------- --------- --------- --------- ---------
Balances at December 31, 1999 9,648 24,476 86,620 (12,024) 108,720
Comprehensive Income:
Net income 18,770 18,770
Other comprehensive income, net of tax
(unrealized gains on securities of $9,994, net
of reclassification adjustment for gains of $117) 9,877 9,877
---------
Total comprehensive income 28,647
Cash dividends*-$0.54 per share (7,749) (7,749)
Common stock issued pursuant to dividend
reinvestment and stock purchase plan-
97,927 shares 98 2,000 2,098
Stock repurchases-193,234 shares (193) (3,965) (4,158)
--------- --------- --------- --------- ---------
Balances at December 31, 2000 9,553 22,511 97,641 (2,147) 127,558
Increase in beginning shares as a result of 3-for-2
stock split in the form of a stock dividend 4,777 (4,777)
Comprehensive Income:
Net income 23,146 23,146
Other comprehensive income, net of tax
(unrealized gains on securities of $6,394, net
of reclassification adjustment for gains of $311) 6,083 6,083
---------
Total comprehensive income 29,229
Cash dividends*-$0.61 per share (8,881) (8,881)
Common stock issued pursuant to:
Incentive stock option plan-79,521 shares 80 1,045 1,125
Dividend reinvestment and stock
purchase plan-67,947 shares 68 1,447 1,515
Employee stock purchase plan-5,931 shares 6 121 127
--------- --------- --------- --------- ---------
Balances at December 31, 2001 $ 14,484 $ 20,347 $ 111,906 $ 3,936 $ 150,673
========= ========= ========= ========= =========
* Per share data have been adjusted to give retroactive effect to a 3-for-2
stock split declared on November 28, 2001.
See Notes to Consolidated Financial Statements.
25
Sandy Spring Bancorp, Inc. and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Company, which includes Sandy
Spring Bancorp, Inc. and its wholly-owned subsidiary, Sandy Spring Bank (the
"Bank"), together with its subsidiaries, Sandy Spring Insurance Corporation and
The Equipment Leasing Company, conform to accounting principles generally
accepted in the United States and to general practice within the financial
services industry.
On September 21, 2001, Sandy Spring National Bank of Maryland, a national
banking association, became Sandy Spring Bank, a Maryland chartered bank and
trust company. Sandy Spring Bank continues to be a wholly-owned subsidiary of
Sandy Spring Bancorp, Inc., and a member of the Federal Reserve system. The Bank
also retains all of the powers and authority previously held by the national
association, and may engage in essentially the same range of activities. Its
deposits remain FDIC insured.
Certain reclassifications have been made to amounts previously reported to
conform to the classifications made in 2001. The following is a summary of the
more significant accounting policies:
NATURE OF OPERATIONS
Through its subsidiary bank, the Company conducts a full-service commercial
banking, mortgage banking and trust business. Services to individuals and
businesses include accepting deposits, extending real estate, consumer and
commercial loans and lines of credit, equipment leasing, general insurance, and
personal trust services. The Company operates in the four Maryland counties of
Montgomery, Howard, Prince George's and Anne Arundel, and has a concentration in
loans secured by residential and commercial real estate.
POLICY FOR CONSOLIDATION
The consolidated financial statements include the accounts of Sandy Spring
Bancorp, Inc. and its subsidiaries. Consolidation has resulted in the
elimination of all significant intercompany balances and transactions. The
financial statements of Sandy Spring Bancorp (Parent Only) include its
investment in the Bank under the equity method of accounting.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RESIDENTIAL MORTGAGE LOANS HELD FOR SALE
The Company engages in sales of residential mortgage loans originated by the
Bank. Loans held for sale are carried at the lower of aggregate cost or fair
value. Fair value is derived from secondary market quotations for similar
instruments. Gains and losses on sales of these loans are recorded as a
component of noninterest income in the Consolidated Statements of Income.
When the Company retains the servicing rights to collect and remit principal and
interest payments, manage escrow account matters and handle borrower
relationships on mortgage loans sold, resulting service fee income is included
in noninterest income. The Company's current practice is to sell loans on a
servicing released basis, and, therefore, it has no intangible asset recorded
for the value of such servicing as of December 31, 2001.
INVESTMENTS AVAILABLE-FOR-SALE
Marketable equity securities and debt securities not classified as
held-to-maturity or trading are classified as available-for-sale. Securities
available-for-sale are acquired as part of the Company's asset/liability
management strategy and may be sold in response to changes in interest rates,
loan demand, changes in prepayment risk and other factors. Securities
available-for-sale are carried at fair value, with unrealized gains or losses
based on the difference between amortized cost and fair value reported as
accumulated other comprehensive income,
26
a separate component of stockholders' equity, net of deferred tax. Realized
gains and losses, using the specific identification method, are included as a
separate component of noninterest income. Related interest and dividends are
included in interest income.
INVESTMENTS HELD-TO-MATURITY AND OTHER EQUITY SECURITIES
Investments held-to-maturity are those securities which the Company has the
ability and positive intent to hold until maturity. Securities so classified at
time of purchase are recorded at cost. The carrying values of securities
held-to-maturity are adjusted for premium amortization and discount accretion.
Other equity securities represent Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock, which are considered restricted as to marketability.
LOANS AND LEASES
Loans are stated at their principal balance outstanding net of any deferred fees
and costs. Interest income on loans is accrued at the contractual rate based on
the principal outstanding. Lease financing assets include aggregate lease
rentals, net of related unearned income. Leasing income is recognized as a
constant percentage of outstanding lease financing balances over the lease
terms. The Company places loans and leases, except for consumer loans, on
non-accrual when any portion of the principal or interest is ninety days past
due and collateral is insufficient to discharge the debt in full. Interest
accrual may also be discontinued earlier if, in management's opinion, collection
is unlikely. Generally, consumer installment loans are not placed on
non-accrual, but are charged off when they are five months past due.
Loans are considered impaired when, based on current information, it is probable
that the Company will not collect all principal and interest payments according
to contractual terms. Generally, loans are considered impaired once principal or
interest payments become ninety days or more past due and they are placed on
non-accrual. Management also considers the financial condition of the borrower,
cash flows of the loan and the value of the related collateral. Impaired loans
do not include large groups of smaller balance homogeneous credits such as
residential real estate, consumer installment loans, and commercial leases,
which are evaluated collectively for impairment. Loans specifically reviewed for
impairment are not considered impaired during periods of "minimal delay" in
payment (ninety days or less) provided eventual collection of all amounts due is
expected. The impairment of a loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if repayment is expected to be provided by the
collateral. Generally, the Company's impairment on such loans is measured by
reference to the fair value of the collateral. Income on impaired loans is
recognized on a cash basis, and is first applied for financial statement
purposes against the principal balance outstanding.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses ("allowance") represents an amount which, in
management's judgment, will be adequate to absorb probable losses on outstanding
loans and leases, as well as other extensions of credit, that may become
uncollectible. The allowance represents an estimation made pursuant to either
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies", or SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan". The adequacy of the allowance is determined through careful and
continuous evaluation of the credit portfolio, and involves the balancing of a
number of factors, as outlined below, to establish a prudent level. Loans and
leases deemed uncollectible are charged against the allowance, while recoveries
are credited to it. Management adjusts the level of the allowance through the
provision for credit losses, which is recorded as a current period operating
expense. The Company's systematic methodology for assessing the appropriateness
of the allowance includes: (1) the formula allowance reflecting historical
losses by credit category and credit-risk factors for identified problem credit
categories, (2) specific allowances for identified problem credits, and (3)
evaluation of other factors relating to the portfolio.
The first element of the formula allowance is calculated by applying loss
factors to corresponding period-end balances in the major credit categories.
Loss factors are based on the Company's historical loss experience in each
portfolio 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.
Specific allowances are established when significant conditions or circumstances
regarding a commercial credit have been identified which indicate, in
management's view, the probability that a loss may have been incurred in an
amount different from that determined by application of the formula allowance.
Analysis resulting in specific allowances, including those on loans identified
for evaluation of impairment, is performed by the commercial loan officer for
the credit, considering conditions such as collateral sufficiency, cash flow,
and guarantor capacity (if applicable). For other problem graded credits,
allowances are established according to the application of credit-risk factors
on a formula basis. These factors are set by management to reflect its
assessment of the relative level of risk inherent in each grade.
27
The third element of the allowance is based upon management's evaluation of
various conditions that are not directly measured in the determination of the
formula and specific allowances. The conditions regularly evaluated, which are
included in Comptroller of the Currency guidelines, are: trends in delinquencies
and nonaccrual loans and leases, large 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 also may 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. 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.
Management believes that the allowance is adequate. However, its determination
requires significant judgment, and estimates of probable losses inherent in the
credit portfolio can vary significantly from the amounts actually observed.
While management uses available information to recognize probable losses, future
additions to the allowance may be necessary based on changes in the credits
comprising the portfolio and changes in the financial condition of borrowers,
such as may result from changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by the Bank, periodically review the credit
portfolio and the allowance. Such review may result in additional provisions
based on their judgments of information available at the time of each
examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization computed using the straight-line method. Premises and equipment are
depreciated over the useful lives of the assets, except for leasehold
improvements which are amortized over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter. The costs of
major renewals and betterments are capitalized, while the costs of ordinary
maintenance and repairs are expensed as incurred.
OTHER REAL ESTATE OWNED (OREO)
OREO comprises properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at the lower of cost or fair value at the
date acquired. Losses arising at the time of acquisition of such properties are
charged against the allowance for credit losses. Subsequent write-downs that may
be required are added to a valuation reserve. Gains and losses realized from the
sale of OREO, as well as valuation adjustments, are included in noninterest
income. Expenses of operation are included in noninterest expense.
INCOME TAXES
Income tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Under the liability method,
deferred income taxes are determined based on the differences between the
financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 102, "Selected Loan Loss Allowance Methodology and
Documentation Issues." SAB 102 summarizes certain SEC views on the development,
documentation, and application of a systematic methodology as required by
Financial Reporting Release No. 28 for determining allowances for loan and lease
losses in accordance with accounting principles generally accepted in the United
States. In particular, the guidance focuses on the documentation the staff
normally would expect registrants to prepare and maintain in support of their
allowances for credit losses.
SAB 102 provides parallel guidance to the federal banking agencies' guidance
issued through the Federal Financial Institutions Examination Council ("FFIEC")
as interagency guidance, "Policy Statement on Allowance for Loan and Lease
Losses Methodologies and Documentation for Banks and Savings Institutions".
Management believes the Company is in compliance with the provisions of SAB 102.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001, as well as all
purchase method business combinations completed after June 30, 2001. SFAS No.
141 also specifies criteria that intangible assets acquired in a purchase method
business combination must be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead be tested for impairment at least
28
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
The provisions of SFAS Nos. 141 and 142 were adopted by the Company as required
effective July 1, 2001, and January 1, 2002, respectively. The adoption of SFAS
No. 141 had no effect on the financial position or results of operations of the
Company as previously reported. Application of the nonamortization provisions of
SFAS No. 142 is expected to reduce noninterest expense by approximately
$666,000, resulting in an increase in net income of approximately $428,000 or
$0.03 per diluted share in 2002 as compared to 2001.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", which
supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets to Be Disposed Of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses in
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. The provisions of SFAS No. 144 are effective for years beginning after
December 15, 2001, and its adoption is not expected to affect the financial
position or results of operations of the Company.
NOTE 2 -- ACQUISITION
In December 2001, the Company purchased certain assets and liabilities of the
Chesapeake Insurance Group (CIG), a general insurance agency. In the
transaction, $2,605,000 of assets were acquired, primarily accounts receivable,
and $2,503,000 of liabilities were assumed, primarily operating payables. The
acquisition resulted in the recognition of $2,088,000 of goodwill, which will
not be amortized, and $1,637,000 of identified intangible assets, $972,000 of
which will be amortized into noninterest expenses over fifteen years, and
$665,000 over seven years.
NOTE 3 -- CASH AND DUE FROM BANKS
Regulation D of the Federal Reserve Act requires that banks maintain reserve
balances with the Federal Reserve Bank based principally on the type and amount
of their deposits. At its option, the Company maintains additional balances to
compensate for clearing and safekeeping services. The average daily balance
maintained in 2001 was $13,217,000 and in 2000 was $13,445,000.
NOTE 4 -- INVESTMENTS AVAILABLE-FOR-SALE
The amortized cost and estimated fair values of investments available-for-sale
at December 31 are as follows:
2001 2000
----------------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
(In thousands) COST GAINS LOSSES VALUE Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------------------
U.S. Agency $ 517,916 $ 5,495 $ (1,103) $ 522,308 $421,887 $1,096 $(4,523) $ 418,460
State and municipal 38,750 409 (2) 39,157 44,049 275 (7) 44,317
Mortgage-backed 124,646 277 (726) 124,197 22,761 174 (14) 22,921
Corporate debt 11,874 4 0 11,878 3,096 52 0 3,148
Trust preferred 27,415 789 (931) 27,273 24,255 0 (438) 23,817
---------- -------- --------- ----------- -------- ------ ------- ---------
Total debt securities 720,601 6,974 (2,762) 724,813 516,048 1,597 (4,982) 512,663
Marketable equity
securities 5,612 2,204 0 7,816 5,315 0 (117) 5,198
---------- -------- --------- ----------- -------- ------ ------- ---------
Total investments
available-for-sale $ 726,213 $ 9,178 $ (2,762) $ 732,629 $521,363 $ 1,597 $(5,099) $ 517,861
========== ======== ========= =========== ======== ======= ======= =========
29
The amortized cost and estimated fair values of debt securities
available-for-sale at December 31 by contractual maturity, except
mortgage-backed securities for which an average life is used, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
2001 2000
-------------------------------------------------------------------
ESTIMATED Estimated
AMORTIZED FAIR Amortized Fair
(In thousands) COST VALUE Cost Value
------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 471,518 $ 473,775 $ 8,810 $ 8,841
Due after one year through five years 187,535 189,031 200,714 200,067
Due after five years through ten years 49,283 49,629 220,598 218,030
Due after ten years 12,265 12,378 85,926 85,725
---------- ----------- --------- --------
Total debt securities available-for-sale $ 720,601 $ 724,813 $ 516,048 $512,663
========== =========== ========= ========
Sale of investments available-for-sale during 2001, 2000 and 1999 resulted in
the following:
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Proceeds $ 142,417 $ 68,538 $83,976
Gross gains 708 457 253
Gross losses 566 180 152
At December 31, 2001 and 2000, investments available-for-sale with a carrying
value of $408,530,000 and $278,566,000, respectively, were pledged as collateral
for certain government deposits and for other purposes as required or permitted
by law. The outstanding balance of no single issuer, except for U.S. Government
and U.S. Government Agency securities, exceeded ten percent of stockholders'
equity at December 31, 2001 and 2000.
The Company has had covered call options which are subject to disclosure as
derivative financial instruments in accordance with SFAS Nos. 119 and 133. These
options are incident to an established plan to enhance the yield on certain of
the Bank's equity securities in the available-for-sale portfolio. The option
contracts do not exhibit credit risk since the Bank is holder of the premiums
paid. Market risk is mitigated by the fact that the option price is stated in
the contract and that the underlying securities held have a significant
unrealized gain position.
At December 31, 2001, the Bank had outstanding covered call option contracts for
20,000 shares of Branch Banking and Trust (BB&T) common stock, with expiration
dates of March 15, 2002 (10,000 shares), and June 21, 2002 (10,000 shares).
Premiums received on these options amounted to $32,000. The contracts have an
average option price of $36.25 per share and the underlying securities have a
quoted market price of $36.11 per share. Excluding option premiums, these BB&T
holdings had an unrealized gain at December 31, 2001, of $255,000 ($12.74 per
share). Generally, the option contracts have a term of approximately three to
six months. During 2001, the Bank received total option premiums of $46,000.
The Company had no covered call options during 2000.
NOTE 5 -- INVESTMENTS HELD-TO-MATURITY AND OTHER EQUITY SECURITIES
The amortized cost and estimated fair values of investments held-to-maturity at
December 31 are as follows:
2001 2000
----------------------------------------------------------------------------------------------------
GROSS GROSS ESTIMATED Gross Gross Estimated
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized Unrealized Unrealized Fair
(In thousands) COST GAINS LOSSES VALUE Cost Gains Losses Value
--------------------------------------------------------------------------------------------------------------------------
U.S. Agency $ 9,995 $ 171 $ 0 $ 10,166 $ 22,020 $ 43 $ 0 $ 22,063
State and municipal 154,926 0 (77) 154,849 112,859 205 (6) 113,058
---------- ----- ------ ----------- -------- ----- --- --------
Total investments
held-to-maturity $ 164,921 $ 171 $ (77) $ 165,015 $134,879 $ 248 $(6) $135,121
========== ===== ====== =========== ======== ===== === ========
30
The amortized cost and estimated fair values of debt securities held-to-maturity
at December 31 by contractual maturity, except mortgage-backed securities for
which an average life is used, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
2001 2000
-------------------------------------------------------------
ESTIMATED Estimated
AMORTIZED FAIR Amortized Fair
(In thousands) COST VALUE Cost Value
------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 13,620 $ 13,806 $ 0 $ 0
Due after one year through five years 50,818 51,210 9,096 9,165
Due after five years through ten years 94,397 93,998 21,580 21,809
Due after ten years 6,086 6,001 104,203 104,147
-------- -------- -------- --------
Total Debt Securities Held-to-Maturity $164,921 $165,015 $134,879 $135,121
======== ======== ======== ========
At December 31, 2001 and 2000, investments held-to-maturity with a book value of
$58,274,000 and 53,151,000, respectively, were pledged as collateral for certain
government deposits and for other purposes as required or permitted by law. The
outstanding balance of no single issuer, except for U.S. Government and U.S.
Government Agency securities, exceeded ten percent of stockholders' equity at
December 31, 2001 or 2000.
Other equity securities at December 31, are as follows:
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock $ 1,826 $ 1,826
Federal Home Loan Bank stock 15,103 12,361
------- -------
Total $16,929 $14,187
======= =======
NOTE 6 -- LOANS AND LEASES
Major categories at December 31 are presented below:
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Residential real estate $339,797 $310,589
Commercial loans and leases 441,540 443,387
Consumer 214,582 213,841
-------- -------
Total loans and leases 995,919 967,817
Less: allowance for credit losses (12,653) (11,530)
-------- -------
Net loans and leases $983,266 $956,287
======== =======
In the table, home equity lines and home equity loans are classified with
consumer; commercial real estate and construction loans are classified with
commercial loans and leases; and, residential construction credits are
classified with residential real estate.
31
Activity in the allowance for credit losses for the preceding three years ended
December 31 is shown below:
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $11,530 $ 8,231 $7,350
Provision for credit losses 2,470 2,690 1,216
Allowance acquired 0 1,300 0
Loan charge-offs (1,428) (769) (415)
Loan recoveries 81 78 80
------- ------- ------
Net charge-offs (1,347) (691) (335)
------- ------- ------
Balance at end of year $12,653 $11,530 $8,231
======= ======= ======
Information regarding impaired loans at December 31, and for the respective
years, is as follows:
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Impaired loans with a valuation allowance $ 91 $ 113
Impaired loans without a valuation allowance 5,498 500
------- -------
Total impaired loans $ 5,589 $ 613
======= =======
Allowance for credit losses related to impaired loans $ 91 $ 100
Allowance for credit losses related to other than impaired loans 12,562 11,430
------- -------
Total allowance for credit losses $12,653 $11,530
======= =======
Average impaired loans for the year $ 1,625 $ 303
Interest income on impaired loans recognized on a cash basis $ 13 $ 16
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of:
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Land $ 8,505 $ 8,665
Buildings and leasehold improvements 28,494 23,335
Equipment 16,732 17,462
-------- -------
Total premises and equipment 53,731 49,462
Less: accumulated depreciation and amortization (21,147) (18,180)
-------- -------
Net premises and equipment $ 32,584 $31,282
======== =======
Depreciation and amortization expense for premises and equipment amounted to
$2,967,000 for 2001, $2,816,000 for 2000 and $2,246,000 for 1999.
32
Total rental expense (net of rental income) of premises and equipment for the
three years ended December 31 was $2,465,000 (2001), $2,315,000 (2000) and
$1,244,000 (1999). Lease commitments entered into by the Company bear initial
terms varying from 3 to 15 years, or they are 20-year ground leases, and are
associated with premises. Future minimum lease payments as of December 31, 2001
for all noncancelable operating leases are:
Operating
(Dollars in thousands) Leases
-------------------------------------------------------------------------------------------------------
2002 $ 2,954
2003 2,872
2004 2,783
2005 2,461
2006 2,277
Thereafter 15,021
-------
Total minimum lease payments $28,368
=======
The above table does not include annual revenues on a sublease in the amount of
approximately $901,000 for 2002 with annual increases of 1.25% through 2009.
NOTE 8 -- GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets represent the excess of the cost of assets
acquired in business combinations accounted for under the purchase method of
accounting over the fair value of the net assets acquired at the dates of
acquisition. Prior to the adoption of SFAS Nos. 141 and 142, the excess purchase
price was being amortized using the straight-line method over varying periods
not exceeding ten years. Effective January 1, 2002, goodwill will no longer be
amortized but rather tested for impairment under the provisions of SFAS No. 142.
The acquired intangible assets apart from goodwill will continue to be amortized
over their remaining estimated lives.
The significant components of goodwill and intangible assets are as follows:
2001 2000
----------------------------------------------------------------------------------------------------
WEIGHTED Weighted
GROSS NET AVERAGE Gross Net Average
CARRYING ACCUMULATED CARRYING REMAINING Carrying Accumulated Carrying Remaining
(In thousands) AMOUNT AMORTIZATION AMOUNT LIFE Amount Amortization Amount Life
--------------------------------------------------------------------------------------------------------------------------------
Goodwill $ 8,751 $1,109 $ 7,642 0 $ 6,631 $ 443 $ 6,188 9.8
Unidentifiable intangible
assets resulting from
branch acquisitions 17,854 4,143 13,711 9.7 17,854 2,356 15,498 10.7
Core deposit intangible
assets 3,895 2,646 1,249 1.8 3,895 1,933 1,962 2.8
Other identifiable assets 1,637 13 1,624 11.8 0 0 0 0
------- ------ ------- ------- ------ -------
Total $32,137 $7,911 $24,226 9.7 $28,380 $4,732 $23,648 9.8
======= ====== ======= ======= ====== =======
Future annual estimated annual amortization expense, excluding goodwill (in
thousands):
2002 $ 2,659
2003 2,480
2004 1,945
2005 1,945
2006 1,945
33
NOTE 9 -- DEPOSITS
Deposits outstanding at December 31 consist of:
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing Deposits $ 277,592 $ 243,339
Interest-bearing Deposits:
Demand 166,603 156,266
Money market savings 396,295 337,532
Regular savings 109,409 98,592
Time deposits less than $100,000 316,786 311,871
Time deposits-$100,000 or more 120,774 95,327
------------- ----------
Total Interest-bearing 1,109,867 999,588
------------- ----------
Total deposits $ 1,387,459 $1,242,927
============= ==========
Interest expense on time deposits of $100,000 or more amounted to $5,650,000,
$5,491,000 and $4,289,000 for 2001, 2000 and 1999, respectively.
NOTE 10 -- SHORT-TERM BORROWINGS
Information relating to short-term borrowings is as follows for the years ended
December 31:
2001 2000
-------------------------------------------------------------------
(Dollars in thousands) AMOUNT RATE Amount Rate
-----------------------------------------------------------------------------------------------------------------------
At year end:
Federal Home Loan Bank advances $ 222,200 5.25% $182,200 5.90%
Repurchase agreements 138,932 1.20 119,614 5.75
Reverse repurchase agreements
and other short-term borrowings 50,000 3.20 6,500 6.62
----------- --------
Total $ 411,132 3.64% $308,314 5.85%
=========== ========
Average for the Year:
Federal Home Loan Bank advances $ 219,612 5.34% $160,046 5.81%
Repurchase agreements 133,832 3.25 111,736 5.52
Reverse repurchase agreements
and other short-term borrowings 30,956 4.01 2,662 6.50
Maximum Month-end Balance:
Federal Home Loan Bank advances $ 222,200 $182,200
Repurchase agreements 157,520 122,978
Reverse repurchase agreements
and other short-term borrowings 50,000 19,000
The Company pledges U.S. Government Agency Securities, based upon their market
values, as collateral for 102% of the principal and accrued interest of its
repurchase agreements.
The Company has a line of credit arrangement with the Federal Home Loan Bank of
Atlanta (the "FHLB") under which it may borrow up to $608,225,000 at interest
rates based upon current market conditions, of which $301,316,000 was
outstanding at December 31, 2001. The Company also had lines of credit available
from the Federal Reserve, correspondent banks, and other institutions of
$254,976,000 at December 31, 2001, against which there were outstandings of
$50,000,000.
34
NOTE 11 -- LONG-TERM BORROWINGS
On November 29, 1999, the Company issued $35,000,000 of trust preferred
securities at a rate of 9.375%. These long-term borrowings bear a maturity date
of November 30, 2029, which may be shortened, subject to conditions, to a date
no earlier than November 30, 2004. The trust preferred securities were issued by
Sandy Spring Capital Trust I (the "Trust"), a subsidiary of the Company created
for the purpose of issuing the trust preferred securities and purchasing the
Company's junior subordinated debentures, which are its sole assets. The Company
owns all of the Trust's outstanding common securities. The Company and the Trust
believe that, taken together, the Company's obligations under the junior
subordinated debentures, the Indenture, the Trust Agreement, and the Guarantee
entered into in connection with the offering of the trust preferred securities
and the debentures, in the aggregate constitute a full, irrevocable and
unconditional guarantee of the Trust's obligations under the preferred
securities. The trust preferred securities qualify as tier 1 capital, subject to
regulatory guidelines that limit the amount included to an aggregate of 25% of
tier 1 capital.
The Company had other long-term borrowings at December 31 as follows:
(Dollars in thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
FHLB 6.12% Advance due 2003 $ 2,020 $ 2,020
FHLB 6.37% Advance due 2003 26,396 26,134
FHLB 6.45% Advance due 2006 350 450
FHLB 6.68% Advance due 2006 350 450
FHLB 5.26% Advance due 2006 30,000 0
FHLB 5.35% Advance due 2009 10,000 10,000
FHLB 6.25% Advance due 2010 10,000 10,000
---------- -------
Total other long term borrowings $ 79,116 $49,054
========== =======
The 6.45% and 6.68% 2006 advances are principal reducing with payments of
$50,000 semi-annually. Interest on these instruments is generally paid monthly.
FHLB advances are fully collateralized by pledges of loans and U.S. Agency
securities. The Company has pledged, under a blanket lien, all qualifying
residential mortgage loans as collateral under the borrowing agreement with the
FHLB.
NOTE 12 -- STOCKHOLDERS' EQUITY
On April 18, 2001, the shareholders approved a change in the Company's Articles
of Incorporation to authorize 50,000,000 shares of capital stock (par value
$1.00 per share). Issued shares have been classified as common stock. The
Articles of Incorporation provide that remaining unissued shares may later be
designated as either common or preferred stock.
On April 18, 2001, the shareholders approved the 2001 Employee Stock Purchase
Plan (the "Purchase Plan") to commence on July 1, 2001, with consecutive monthly
offering periods thereafter, and reserved 450,000 authorized but unissued shares
of common stock (adjusted for the 3-for-2 stock split declared on November 28,
2001) for purchase upon the exercise of options granted under the plan. Shares
are placed under option to employees, to be purchased at 85% of the fair market
value on the exercise date through monthly payroll deductions of not less than
1% or more than 10% of cash compensation paid in the month. The Purchase Plan is
administered by a committee of at least three directors appointed by the Board
of Directors.
On March 28, 2001, the Board of Directors renewed the stock repurchase plan by
authorizing the repurchase of up to 5%, or approximately 718,000 shares
(adjusted for the 3-for-2 stock split declared on November 28, 2001), of the
Company's outstanding common stock, par value $1.00 per share, in connection
with shares expected to be issued pursuant to the Company's dividend
reinvestment and stock purchase plan, stock option plan, and employee benefit
plans, and for other corporate purposes. The share repurchases would be made on
the open market and in privately negotiated transactions, from time to time
until March 31, 2003, or earlier termination of the program by the Board.
Bancorp's previous repurchase program expired on March 31, 2001.
35
Effective October 1, 2001, the Company replaced its existing dividend
reinvestment and stock purchase plan with the Investors Choice Plan (the
"Plan"), which is sponsored and administered by the American Stock Transfer &
Trust Company ("AST") as independent agent. The Plan enables current
shareholders as well as first-time buyers to purchase and sell common stock of
Sandy Spring Bancorp, Inc. directly through AST. Participants may reinvest cash
dividends and make periodic supplemental cash payments to purchase additional
shares. Share purchases pursuant to the Plan are made in the open market. The
Plan also allows participants to deposit their stock certificates with AST for
safekeeping or sale.
Bank and holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At December
31, 2001, the Bank could have paid additional dividends of $33,551,000 to its
parent company without regulatory approval. In conjunction with the Company's
trust preferred securities, the Bank issued a subordinated note to Bancorp for
$33,565,000 which was outstanding at December 31, 2001 and 2000. There were no
other loans outstanding between the Bank and the Company at either year end.
On November 28, 2001, the Board of Directors approved a 3-for-2 stock split in
the form of a 50% stock dividend payable to stockholders of record at the close
of business on December 10, 2001.
NOTE 13 -- STOCK OPTION PLAN
The Company's 1999 Stock Option Plan ("Option Plan") provides for the granting
of incentive and non-qualifying stock options to the Company's directors and to
selected key employees on a periodic basis at the discretion of the Board. Share
amounts and prices which follow have been adjusted to give retroactive effect to
the 3-for-2 stock split declared on November 28, 2001. The Option Plan
authorizes the issuance of up to 600,000 shares of common stock, has a term of
ten years, and is administered by a committee of at least three directors
appointed by the Board of Directors. In general, the options have an exercise
price which may not be less than 100% of the fair market value of the common
stock on the date of grant, must be exercised within ten years and vest over a
period of two years. Outstanding options granted under the expired 1992 option
plan will continue until exercise or expiration.
The following is a summary of changes in shares under option for the years ended
December 31:
2001 2000 1999
--------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
NUMBER AVERAGE Number Average Number Average
OF EXERCISE of Exercise of Exercise
SHARES PRICE Shares Price Shares Price
---------------------------------------------------------------------------------------------------------------------------
Balance, beginning of year 509,262 $ 14.53 319,275 $ 14.74 212,700 $ 13.51
Granted 143,394 32.25 212,487 14.55 110,025 17.21
Cancelled (16,067) 16.77 (22,500) 17.74 (1,703) 17.60
Exercised (79,521) 13.86 0 0 (1,747) 19.18
------- ------- -------
Balance, end of year 557,068 $ 19.12 509,262 $ 14.53 319,275 $ 14.74
======= ======= =======
Weighted average fair value of options
granted during the year $ 12.16 $ 4.54 $ 7.37
36
The following table summarizes information about options outstanding at December
31, 2001:
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------
Weighted Average
Remaining Weighted Weighted
Range of Contractual Life Average Average
Exercise Price Number (in years) Exercise Price Number Exercise Price
---------------------------------------------------------------------------------------------------------------------------
$6.33-$8.17 48,000 2.1 $ 7.51 48,000 $ 7.51
$11.09-$12.33 33,750 4.4 11.74 33,750 11.74
$14.54-$14.54 180,799 9.0 14.54 115,267 14.54
$15.13-$20.33 151,791 7.2 17.53 151,291 17.54
$32.25-$32.25 142,728 9.9 32.25 47,838 32.25
------- -------
557,068 7.9 $19.12 396,146 $16.73
======= =======
The fair value of each option grant is estimated on the date of grant using the
extended binomial option-pricing model with the following weighted-average
assumptions used for grants during the three years ended December 31:
2001 2000 1999
------------------------------------------------------------------------------------------------------------------
Dividend yield 2.10% 3.71% 3.20%
Expected volatility 30.87% 35.90% 36.26%
Risk-free interest rate 4.70% 5.05% 6.61%
Expected lives (in years) 9 10 10
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its stock
option plans. No compensation expense related to the Company's stock option
plans was recorded during the three years ended December 31, 2001. If the
Company had elected to recognize compensation cost based on the fair value at
the grant dates for awards under the plan consistent with the method prescribed
by SFAS No. 123, net income and earnings per share would have been changed to
the pro forma amounts as follows for the years ended December 31:
(In thousands, except per share data) 2001 2000 1999
-------------------------------------------------------------------------------------------------------------------
Net income:
As reported $ 23,146 $ 18,770 $ 17,516
Pro forma* 22,105 18,020 17,088
Basic net income per share:
As reported $ 1.61 $ 1.31 $ 1.21
Pro forma* 1.54 1.25 1.19
Diluted net income per share:
As reported $ 1.59 $ 1.31 $ 1.21
Pro forma* 1.52 1.25 1.18
*The pro forma amounts are not representative of the effects on reported net
income for future years.
NOTE 14 -- PENSION, PROFIT SHARING, AND OTHER EMPLOYEE BENEFIT PLANS
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits after January 1, 2001, are based
on the benefit earned as of December 31, 2000, plus benefits earned in future
years of service based on the employee's compensation during each such year. The
Company's funding policy is to contribute the maximum amount deductible for
federal income tax purposes. The Plan invests primarily in a diversified
portfolio of managed fixed income and equity funds. Contributions provide not
only for benefits attributed to service to date, but also for the benefit
expected to be earned in the coming year.
37
The Plan's funded status as of December 31 is as follows:
(Dollars in thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Reconciliation of Benefit Obligation:
Obligation at January 1 $ 6,479 $8,361
Service cost 671 754
Interest cost 512 532
Actuarial loss (gain) 709 (186)
Amendments to plan 0 (1,151)
Benefit payments (182) (1,831)
-------- ------
Obligation at December 31 8,189 6,479
-------- ------
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets at January 1 8,029 9,418
Actual return on plan assets (424) (150)
Employer contributions 0 622
Benefit payments (182) (1,861)
-------- ------
Fair value of plan assets at December 31 7,423 8,029
-------- ------
Funded Status:
Funded status at December 31 (766) 1,550
Unrecognized prior service cost (1,407) (1,118)
Unrecognized net loss 3,270 1,498
-------- ------
Prepaid pension cost included in other assets $ 1,097 $1,930
======== ======
Weighted Average Assumptions as of December 31:
2001 2000 1999
-----------------------------------------------------------------------------------------------------------------------
Discount rate 7.25% 7.50% 7.50%
Expected return on plan assets 8.50 8.50 8.50
Rate of compensation increase 4.50 4.50 4.50
Net pension expense for the previous three years includes the following
components:
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Service cost for benefits earned $ 671 $ 754 $ 807
Interest cost on projected benefit obligation 512 532 542
Expected return on plan assets (677) (859) (704)
Amortization of prior service cost (63) (27) 1
Amortization of transition asset 0 (1) (3)
Recognized net actuarial loss 44 0 120
-------- ----- -----
Pension expense for the year $ 487 $ 399 $ 763
======== ===== =====
38
The Company has a qualified Cash and Deferred Profit Sharing Plan that includes
a 401(k) provision with a Company match. The profit sharing component is
non-contributory and covers all employees after three months of service. The
401(k) plan provision is voluntary and also covers all employees after three
months of service. Employees contributing to the 401(k) provision receive a
matching contribution on the first 4% of compensation based on years of service.
The Company match includes a vesting schedule with employees becoming 100%
vested after four years of service. The Plan permits employees to purchase
shares of Sandy Spring Bancorp common stock with their profit sharing
allocations, 401(k) contributions, Company match, and other contributions under
the Plan. Profit sharing contributions and Company match by the Company, which
are included in operating expenses, totaled $1,828,000 in 2001, $707,000 in
2000, and $347,000 in 1999.
The Company also has a performance based compensation benefit which provides
incentives to employees based on the Company's financial performance as measured
against key performance indicator goals set by management. Payments are made
annually and total expense under the plan amounted to $1,704,000 in 2001,
$797,000 in 2000, and $1,528,000 in 1999.
The Company has Supplemental Executive Retirement Agreements (SERAs) with its
executive officers providing for retirement income benefits as well as
pre-retirement death benefits for selected executives. Retirement benefits
payable under the SERAs, if any, are integrated with other pension plan and
Social Security retirement benefits expected to be received by the executive.
The Company is accruing the present value of these benefits over the remaining
number of years to the executives' retirement dates. Benefit accruals included
in operating expenses for 2001, 2000 and 1999 were $232,000, $127,000, and
$98,000, respectively.
The Company has an Executive Health Plan that provides for payment of defined
medical and dental expenses not otherwise covered by insurance for selected
executives and their families. Benefits, which are paid during both employment
and retirement, are subject to a $5,000 limitation for each executive per year.
Expenses under the plan, covering insurance premium and out-of-pocket expense
reimbursement benefits, totaled $66,000 in 2001, $65,000 in 2000, and $81,000 in
1999.
NOTE 15 -- INCOME TAXES
Income tax expense for the years ended December 31 consists of:
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Current Income Taxes:
Federal $ 8,229 $ 7,192 $5,842
State 1,765 39 80
-------- ------- ------
Total current 9,994 7,231 5,922
Deferred Income Taxes (Benefit):
Federal (1,289) (1,344) 400
State (276) 0 8
-------- ------- ------
Total deferred (1,565) (1,344) 408
-------- ------- ------
Total income tax expense $ 8,429 $ 5,887 $6,330
======== ======= ======
39
Temporary differences between the amounts reported in the financial statements
and the tax bases of assets and liabilities result in deferred taxes. Deferred
tax assets and liabilities, shown as the sum of the appropriate tax effect for
each significant type of temporary difference, are presented below for the years
ended December 31:
(Dollars in thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Allowance for credit losses $ 4,179 $3,411
Intangible assets 1,262 0
Net operating loss carryforward 248 281
Unrealized losses on investments available-for-sale 0 1,346
Other 614 1,053
--------- ------
Gross deferred tax assets 6,303 6,091
Deferred Tax Liabilities:
Depreciation (951) (1,014)
Unrealized gains on investments available-for-sale (2,482) 0
Pension plan costs (594) (814)
Deferred loan fees and costs (722) (440)
Other (411) (417)
--------- ------
Gross deferred tax liabilities (5,160) (2,685)
--------- ------
Net deferred tax asset $ 1,143 $3,406
========= ======
No valuation allowance exists with respect to deferred tax items. The Company
has a net operating loss carryforward (NOL) of $614,000 which expires in 2008.
The NOL is a result of an acquisition in 1993 and is subject to annual
limitations under IRS Code Section 382.
A three year reconcilement of the difference between the statutory federal
income tax rate and the effective tax rate for the Company is as follows:
2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
Increase (decrease) resulting from:
Tax-exempt interest income (10.1) (10.7) (8.5)
State income taxes, net of federal income tax benefits 2.0 0.1 0.2
Other (0.2) (0.5) (0.2)
---- ---- ----
Effective tax rate 26.7% 23.9% 26.5%
==== ==== ====
NOTE 16 -- NET INCOME PER COMMON SHARE
In the following table, basic earnings per share is derived 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 by the weighted-average number of shares outstanding, adjusted for
the dilutive effect of outstanding stock options. All per share data and share
amounts below have been adjusted to give retroactive effect to a 3-for-2 stock
split declared on November 28, 2001.
40
The calculation of net income per common share for the years ended December 31
was as follows:
(In thousands, except per share data) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Basic:
Net income available to common stockholders $ 23,146 $ 18,770 $17,516
Average common shares outstanding 14,389 14,361 14,403
Basic net income per share $ 1.61 $ 1.31 $ 1.21
--------- -------- -------
Diluted:
Net income available to common stockholders $ 23,146 $ 18,770 $17,516
Average common shares outstanding 14,389 14,361 14,403
Stock option adjustment 169 42 62
--------- -------- -------
Average common shares outstanding -- diluted 14,558 14,403 14,465
Diluted net income per share $ 1.59 $ 1.31 $ 1.21
========= ======== =======
NOTE 17 -- RELATED PARTY TRANSACTIONS
Certain directors and executive officers have loan transactions with the
Company. Such loans were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with outsiders. The following
schedule summarizes changes in amounts of loans outstanding, both direct and
indirect, to these persons during the years indicated.
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 10,557 $ 9,726
Additions 8,046 3,757
Repayments (1,877) (2,926)
--------- -------
Balance at December 31 $ 16,726 $10,557
========= =======
NOTE 18 -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Company has various outstanding credit
commitments which are properly not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Company's clients.
The associated credit risk is controlled by subjecting such activity to the same
credit and quality controls as exist for the Company's lending and investing
activities. The commitments involve diverse business and consumer customers and
are generally well collateralized. Management does not anticipate that losses,
if any, which may occur as a result of these commitments would materially affect
the stockholders' equity of the Company. Since a portion of the commitments have
some likelihood of not being exercised, the amounts do not necessarily represent
future cash requirements.
Loan and credit line commitments, excluding unused portions of home equity lines
of credit, totaled $205,869,000 at December 31, 2001, and $157,276,000 at
December 31, 2000. These commitments are contingent upon continuing customer
compliance with the terms of the agreement.
Unused portions of equity lines at year-end amounted to $120,261,000 in 2001 and
$97,455,000 in 2000. The Company's home equity line accounts are secured by the
borrower's residence.
Irrevocable letters of credit, totaling $24,530,000 at December 31, 2001, and
$23,202,000 at December 31, 2000, are obligations to make payments under certain
conditions to meet contingencies related to customers' contractual agreements.
They are primarily used to guarantee a customer's contractual and/or financial
performance, and are seldom exercised.
41
NOTE 19 -- LITIGATION
In the normal course of business, the Company may become involved in litigation
arising from banking, financial, and other activities it conducts. Management,
after consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
NOTE 20 -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses fair value information about financial instruments for
which it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial instruments have been
defined broadly to encompass 96.9% of the Company's assets and 99.2% of its
liabilities. Fair value is the amount at which a financial instrument could be
exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price, if
one exists.
Quoted market prices, where available, are shown as estimates of fair market
values. Because no quoted market prices are available for a significant part of
the Company's financial instruments, the fair values of such instruments have
been derived based on the amount and timing of future cash flows and estimated
discount rates.
Present value techniques used in estimating the fair value of many of the
Company's financial instruments are significantly affected by the assumptions
used. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities, and should not be considered an
indication of the fair value of the Company.
The estimated fair values of the Company's financial instruments at December 31
are as follows:
2001 2000
----------------------------------------------------------------------
ESTIMATED Estimated
BOOK FAIR Book Fair
(In thousands) VALUE VALUE Value Value
------------------------------------------------------------------------------------------------------------------------
Financial Assets
Cash and temporary investments(1) $ 73,904 $ 74,119 $ 53,207 $ 53,303
Investments available-for-sale 732,629 732,629 517,861 517,861
Investments held-to-maturity and
other equity securities 181,850 181,944 149,066 149,308
Loans, net of allowance 983,266 986,263 956,287 975,921
Accrued interest receivable and other assets(2) 46,451 46,451 34,994 34,994
Financial Liabilities
Deposits $ 1,387,459 $ 1,391,443 $1,242,927 $1,244,805
Short-term borrowings 411,132 412,075 308,314 308,842
Long-term borrowings 114,116 120,301 84,054 107,253
Accrued interest payable and other
liabilities(2) 2,727 2,727 2,449 2,449
ESTIMATED ESTIMATED Estimated Estimated
(In thousands) AMOUNT FAIR VALUE Amount Fair Value
--------------------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Assets
Commitments to extend credit(3) $ 326,130 $ (181) $ 254,731 $(318)
Irrevocable letters of credit 24,530 (123) 23,202 (116)
(1) Temporary investments include interest-bearing deposits with banks,
federal funds sold and residential mortgage loans held for sale.
(2) Only financial instruments as defined in Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments", are included in other assets and other liabilities.
(3) Includes loan and credit line commitments and unused portions of equity
lines.
42
The following methods and assumptions were used to estimate the fair value of
each category of financial instruments for which it is practicable to estimate
that value:
CASH AND DUE FROM BANKS AND FEDERAL FUNDS SOLD. The carrying amount approximated
the fair value.
INTEREST-BEARING DEPOSITS WITH BANKS. The fair value was estimated by computing
the discounted value of contractual cash flows using a current interest rate for
similar instruments.
RESIDENTIAL MORTGAGE LOANS HELD FOR SALE. The fair value of residential mortgage
loans held for sale was derived from secondary market quotations for similar
instruments.
SECURITIES. The fair value for U.S. Agency, state and municipal, and corporate
debt securities was based upon quoted market bids; for mortgage-backed
securities upon bid prices for similar pools of fixed and variable rate assets,
considering current market spreads and prepayment speeds; and, for equity
securities upon quoted market prices.
LOANS. The fair value was estimated by computing the discounted value of
estimated cash flows, adjusted for potential credit losses, for pools of loans
having similar characteristics. The discount rate was based upon the current
loan origination rate for a similar loan. Nonperforming loans have an assumed
interest rate of 0%.
ACCRUED INTEREST RECEIVABLE. The carrying amount approximated the fair value of
accrued interest, considering the short-term nature of the receivable and its
expected collection.
OTHER ASSETS. The carrying amount approximated the fair value of certain accrued
commissions in other assets, considering the short-term nature of the receivable
and its expected collection.
DEPOSIT LIABILITIES. The fair value of demand, money market savings and regular
savings deposits, which have no stated maturity, were considered equal to their
book value, representing the amount payable on demand. These estimated fair
values do not include the intangible value of core deposit relationships, which
comprise a significant portion of the Bank's deposit base. Management believes
that the Bank's core deposit relationships provide a relatively stable, low-cost
funding source that has a substantial intangible value separate from the value
of the deposit balances.
The fair value of time deposits was based upon the discounted value of
contractual cash flows at current rates for deposits of similar remaining
maturity.
SHORT-TERM BORROWINGS. The carrying amount approximated the fair value of
repurchase agreements due to their variable interest rates. The fair value of
Federal Home Loan Bank advances was estimated by computing the discounted value
of contractual cash flows payable at current interest rates for obligations with
similar remaining terms.
LONG-TERM BORROWINGS. The fair value of these mortgage and Federal Home Loan
Bank advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
OTHER LIABILITIES. The carrying amount approximated the fair value of accrued
interest payable, accrued dividends and premiums payable, considering their
short-term nature and expected payment.
OFF-BALANCE SHEET INSTRUMENTS. The fair value of unused lines and letters of
credit was estimated based upon the amount of unamortized fees collected or paid
incident to granting or receiving the commitment.
43
NOTE 21 -- PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for Sandy Spring Bancorp (Parent Only)
pertaining to the periods covered by the Company's consolidated financial
statements are presented below:
BALANCE SHEETS
December 31,
---------------------------------
(In thousands) 2001 2000
------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 3,956 $ 1,569
Investments available-for-sale (at fair value) 8,520 5,764
Investment in subsidiary 137,033 122,601
Loan from subsidiary 33,565 33,565
Other assets 1,429 1,543
----------- --------
Total assets $ 184,503 $165,042
=========== ========
Liabilities
Long-term borrowings $ 35,000 $ 35,000
Other liabilities 1,656 736
----------- --------
Total liabilities 36,656 35,736
Stockholders' Equity
Common stock 14,484 9,553
Surplus 20,347 22,511
Retained earnings 111,906 97,641
Accumulated other comprehensive income (loss) 1,110 (399)
----------- --------
Total stockholders' equity 147,847 129,306
----------- --------
Total liabilities and stockholders' equity $ 184,503 $165,042
=========== ========
STATEMENTS OF INCOME
Years Ended December 31,
------------------------------------------
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Income:
Cash dividends from subsidiary $ 8,881 $ 9,254 $ 8,177
Securities gains 0 209 65
Other income, principally interest 3,634 3,418 293
--------- -------- -------
Total income 12,515 12,881 8,535
Expenses:
Interest 3,281 3,281 293
Other expenses 610 506 446
--------- -------- -------
Total expenses 3,891 3,787 739
Income before income taxes and equity in undistributed
income of subsidiary 8,624 9,094 7,796
Income tax benefit (90) (101) (176)
--------- -------- -------
Income before equity in undistributed income of subsidiary 8,714 9,195 7,972
Equity in undistributed income of subsidiary 14,432 9,575 9,544
--------- -------- -------
Net income $ 23,146 $ 18,770 $17,516
========= ======== =======
44
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
(In thousands) 2001 2000 1999
------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 23,146 $ 18,770 $17,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income-subsidiary (14,432) (9,575) (9,544)
Securities gains 0 (209) (65)
Net change in other liabilities (30) 65 (88)
Other-net 114 (31) 3
--------- -------- -------
Net cash provided by operating activities 8,798 9,020 7,822
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (333) (1,100) (870)
Proceeds from sales of investments available-for-sale 36 460 164
Loan from subsidiary 0 0 (33,565)
Disposal of premises and equipment 0 0 98
--------- -------- -------
Net cash used by investing activities (297) (640) (34,173)
Cash Flows from Financing Activities:
Proceeds from long-term borrowings 0 0 33,645
Retirement of long-term debt 0 0 (46)
Common stock purchased and retired 0 (4,158) (832)
Proceeds from issuance of common stock 2,767 2,098 2,457
Dividends paid (8,881) (7,749) (7,201)
--------- -------- -------
Net cash (used) provided by financing activities (6,114) (9,809) 28,023
--------- -------- -------
Net increase (decrease) in cash and cash equivalents 2,387 (1,429) 1,672
Cash and cash equivalents at beginning of year 1,569 2,998 1,326
--------- -------- -------
Cash and cash equivalents at end of year $ 3,956 $ 1,569 $ 2,998
========= ======== =======
NOTE 22 -- REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain amounts and ratios (set forth in
the table below) of total and tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of tier 1 capital (as defined) to average
assets (as defined). As of December 31, 2001 and 2000, the capital levels of the
Company and the Bank substantially exceed all capital adequacy requirements to
which they are subject.
As of December 31, 2001, the Bank was well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, tier 1 risk-based, and tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Company's or
the Bank's category.
45
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-----------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2001:
Total Capital (to risk-weighted assets):
Company $ 171,155 14.10% $ 97,095 8.00%
Sandy Spring Bank 158,117 13.11 96,453 8.00 $ 120,566 10.00%
Tier 1 Capital (to risk-weighted
assets):
Company 157,511 12.98 48,548 4.00
Sandy Spring Bank 111,724 9.27 48,226 4.00 72,339 6.00
Tier 1 Capital (to average assets):
Company 157,511 7.73 36,411 3.00
Sandy Spring Bank 111,724 5.50 36,170 3.00 60,283 5.00
AS OF DECEMBER 31, 2000:
Total Capital (to risk-weighted assets):
Company $ 152,587 13.73% $ 88,926 8.00%
Sandy Spring Bank 143,202 12.97 88,302 8.00 $ 110,377 10.00%
Tier 1 Capital (to risk-weighted
assets):
Company 141,057 12.69 44,463 4.00
Sandy Spring Bank 97,870 8.87 44,151 4.00 66,226 6.00
Tier 1 Capital (to average assets):
Company 141,057 8.21 51,528 3.00
Sandy Spring Bank 97,870 5.72 51,298 3.00 85,496 5.00
NOTE 23 -- QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected consolidated quarterly financial data for the two years
ended December 31, 2001 is reported in the following table. Per share data have
been adjusted to give retroactive effect to a 3-for-2 stock split declared on
November 28, 2001.
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------------------------------------------------------------------------------------------------------------------------
2001
Interest income $ 32,119 $ 32,272 $ 32,725 $ 30,754
Net interest income 15,541 16,265 17,423 17,598
Provision for credit losses 492 492 742 744
Income before Income taxes 7,099 8,031 8,135 8,310
Net income 5,305 5,867 5,952 6,022
Basic net income per share $ 0.37 $ 0.41 $ 0.41 $ 0.42
Diluted net income per share 0.37 0.41 0.40 0.41
2000
Interest income $ 27,592 $ 29,281 $ 30,400 $ 31,407
Net interest income 14,043 14,688 14,111 14,578
Provision for credit losses 300 990 800 600
Income before income taxes 7,235 5,500 5,078 6,844
Net income 5,020 4,200 4,126 5,424
Basic net income per share $ 0.35 $ 0.29 $ 0.29 $ 0.38
Diluted net income per share 0.35 0.29 0.29 0.38
46
Sandy Spring Bancorp, Inc. and Subsidiaries
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
Management acknowledges its responsibility for financial reporting (both audited
and unaudited) which provides a fair representation of the Company's operations
and is reliable and relevant to a meaningful appraisal of the Company.
Management has prepared the financial statements in accordance with accounting
principles generally accepted in the United States of America, making
appropriate use of estimates and judgement, and considering materiality. Except
for tax equivalency adjustments made to enhance comparative analysis, all
financial information is consistent with the audited financial statements.
In addition, management is responsible for establishing and maintaining
effective internal control over financial reporting, presented in conformity
with accounting principles generally accepted in the United States of America
and the applicable requirements of the Federal Reserve System. The internal
control system contains monitoring mechanisms, and actions are taken to correct
deficiencies identified. There are inherent limitations in the effectiveness of
any internal control system, including the possibility of human error and the
circumvention or overriding of controls. Accordingly, even effective internal
control systems can provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions, the
effectiveness of internal control systems may vary over time.
Management assessed Sandy Spring Bancorp, Inc.'s internal control over financial
reporting, presented in conformity with accounting principles generally accepted
in the United States of America and applicable Federal Reserve requirements as
of December 31, 2001. This assessment was based on criteria for effective
internal control over financial reporting described in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management believes that Sandy
Spring Bancorp, Inc. maintained effective internal control over financial
reporting, presented in conformity with accounting principles generally accepted
in the United States of America and applicable Federal Reserve requirements as
of December 31, 2001.
Management is also responsible for compliance with the federal and state laws
and regulations concerning dividend restrictions and federal laws and
regulations concerning loans to insiders, designated by the Federal Deposit
Insurance Corporation or the Federal Reserve as safety and soundness laws and
regulations.
Management has assessed compliance by Sandy Spring Bancorp, Inc. subsidiary
Sandy Spring Bank with the designated laws and regulations relating to safety
and soundness. Based on this assessment, management believes that the subsidiary
insured depository institution complied, in all significant respects, with the
designated laws and regulations related to safety and soundness for the year
ended December 31, 2001.
Oversight of the financial reporting process is provided by the Audit Committee
of the Board of Directors, which consists of outside directors. This Committee
meets on a regular basis, in private, with the internal auditor, who reports
directly to the Board of Directors, to approve the audit schedule and scope,
discuss the adequacy of the internal control system and the quality of financial
reporting, review audit reports and address problems. The Committee also reviews
the Company's annual report to shareholders and the annual report to the
Securities and Exchange Commission on Form 10-K. The Audit Committee meets at
least annually with the external auditors, and has direct and private access to
them at any time.
The independent public accounting firm of Stegman & Company has examined the
Company's financial records. The resulting opinion statement which follows is
based upon knowledge of the Company's accounting systems, as well as on tests
and other audit procedures performed in accordance with auditing standards
generally accepted in the United States of America.
/s/ Hunter R. Hollar /s/ James H. Langmead
------------------------------------- ----------------------------------------------------
Hunter R. Hollar James H. Langmead
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
47
REPORT OF INDEPENDENT AUDITORS [STEGMAN & COMPANY LOGO]
Board of Directors and Shareholders
Sandy Spring Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Sandy Spring
Bancorp, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the management of Sandy Spring
Bancorp, Inc. and Subsidiaries. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sandy Spring
Bancorp, Inc. and Subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Stegman & Company
--------------------------------
Baltimore, Maryland
January 25, 2002
OTHER MATERIAL REQUIRED BY FORM 10-K
BUSINESS
GENERAL
Sandy Spring Bancorp, Inc. ("the Company") is the one-bank holding company for
Sandy Spring Bank (the "Bank"). The Company is registered as a bank holding
company pursuant to the Bank Holding Company Act of 1956, as amended (the
"Holding Company Act"). As such, the Company is subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). The Company began operating in 1988. The Bank traces its origin to
1868, and is the oldest banking business based in Montgomery County, Maryland.
The Bank is independent, community oriented, and conducts a full-service
commercial banking business through 30 community offices located in Montgomery,
Howard, Prince George's and Anne Arundel counties in Maryland. The Bank is a
state chartered bank subject to supervision and regulation by the Federal
Reserve and the State of Maryland. The Bank's deposit accounts are insured by
the Bank Insurance Fund ("BIF") administered by the Federal Deposit Insurance
Corporation (the "FDIC") to the maximum permitted by law. The Bank is a member
of the Federal Reserve System and is an Equal Housing Lender. The Company, the
Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity
Employers.
The Bank experiences substantial competition both in attracting and retaining
deposits and in making loans. Direct competition for deposits comes from other
commercial banks, savings associations, and credit unions located in the Bank's
primary market area of Montgomery, Howard, Prince George's and Anne Arundel
Counties in Maryland. Additional significant competition for deposits comes from
mutual funds and corporate and government debt securities. Sandy Spring
Insurance Corporation (SSIC), a wholly owned subsidiary of the Bank, offers
annuities as an alternative to traditional deposit accounts. Since December
2001, SSIC also operates the Chesapeake Insurance Group, a general insurance
agency located in Annapolis, Maryland, which faces competition primarily from
other insurance agencies and insurance
48
companies. The primary factors in competing for loans are interest rates, loan
origination fees, and the range of services offered by lenders. Competitors for
loan originations include other commercial banks, mortgage bankers, mortgage
brokers, savings associations, and insurance companies. Equipment leasing
through the equipment leasing subsidiary basically involves the same competitive
factors as lending, with competition from other equipment leasing companies.
Management believes the Bank is able to compete effectively in its primary
market area.
The Company's and the Bank's principal executive office is at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is (301) 774-6400.
REGULATION, SUPERVISION, AND GOVERNMENTAL POLICY
Following is a brief summary of certain statutes and regulations that
significantly affect the Company and the Bank. A number of other statutes and
regulations affect the Company and the Bank but are not summarized below.
Bank Holding Company Regulation. The Company is registered as a bank holding
company under the Holding Company Act and, as such, is subject to supervision
and regulation by the Federal Reserve. As a bank holding company, the Company is
required to furnish to the Federal Reserve annual and quarterly reports of its
operations and additional information and reports. The Company is also subject
to regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of any class of voting securities of any bank or bank
holding company if, after the acquisition, the bank holding company would
directly or indirectly own or control more than 5% of the class; (ii) acquiring
all or substantially all of the assets of another bank or bank holding company;
or (iii) merging or consolidating with another bank holding company.
Under the Holding Company Act, any company must obtain approval of the Federal
Reserve prior to acquiring control of the Company or the Bank. For purposes of
the Holding Company Act, "control" is defined as ownership of 25% or more of any
class of voting securities of the Company or the Bank, the ability to control
the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank.
The Change in Bank Control Act and the related regulations of the Federal
Reserve require any person or persons acting in concert (except for companies
required to make application under the Holding Company Act), to file a written
notice with the Federal Reserve before the person or persons acquire control of
the Company or the Bank. The Change in Bank Control Act defines "control" as the
direct or indirect power to vote 25% or more of any class of voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The Holding Company Act also limits the investments and activities of bank
holding companies. In general, a bank holding company is prohibited from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of a company that is not a bank or a bank holding company or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, providing services for its subsidiaries, non-bank
activities that are closely related to banking, and other financially related
activities. The activities of the Company are subject to these legal and
regulatory limitations under the Holding Company Act and Federal Reserve
regulations.
The Gramm Leach Bliley Act of 1999 (the "GLB Act") changed historical
restrictions on the non-bank activities of bank holding companies, and allows
affiliations between types of companies that were previously prohibited. (See
"Competition," below.) In general, bank holding companies that qualify as
financial holding companies under the GLB Act may engage in an expanded list of
non-bank activities. The GLB Act also created a new regulatory framework by
expanding the extent to which non-bank and financially related activities of
bank holding companies, including companies that become financial holding
companies under the GLB Act, are subject to regulation and oversight by
regulators other than the Federal Reserve.
The Federal Reserve has the power to order a holding company or its subsidiaries
to terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of
bank holding companies, which require bank holding companies to maintain
specified minimum ratios of capital to total assets and capital to risk-weighted
assets. See "Regulatory Capital Requirements."
49
The Federal Reserve has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The Federal
Reserve has issued a policy statement on the payment of cash dividends by bank
holding companies, which expresses the Federal Reserve's view that a bank
holding company should pay cash dividends only to the extent that the company's
net income for the past year is sufficient to cover both the cash dividends and
a rate of earnings retention that is consistent with the company's capital
needs, asset quality, and overall financial condition.
Bank Regulation. On September 21, 2001, the Bank's application to the Maryland
State Commissioner of Financial Regulation to become a state chartered bank and
trust company was approved and the Bank began operations as such. The Bank is a
member of the Federal Reserve System and is subject to supervision by Federal
Reserve and the State of Maryland. Deposits of the Bank are insured by the FDIC
to the legal maximum of $100,000 for each insured depositor. Deposits, reserves,
investments, loans, consumer law compliance, issuance of securities, payment of
dividends, establishment of branches, mergers and acquisitions, corporate
activities, changes in control, electronic funds transfers, responsiveness to
community needs, management practices, compensation policies, and other aspects
of operations are subject to regulation by the appropriate federal and state
supervisory authorities. In addition, the Bank is subject to numerous federal,
state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit (including to
insiders), credit practices, disclosure of credit terms and discrimination in
credit transactions.
The Federal Reserve regularly examines the operations and condition of the Bank,
including, but not limited to, its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of the Bank's depositors and the BIF. In addition, the Bank is required to
furnish quarterly and annual reports to the Federal Reserve. The Federal
Reserve's enforcement authority includes the power to remove officers and
directors and the authority to issue cease-and-desist orders to prevent a bank
from engaging in unsafe or unsound practices or violating laws or regulations
governing its business.
The Federal Reserve has adopted regulations regarding capital adequacy which
require member banks to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "Regulatory Capital
Requirements." Federal Reserve and State regulations limit the amount of
dividends that the Bank may pay to the Company. See "Note 12 -- Stockholders'
Equity" of the Notes to the Consolidated Financial Statements.
The Bank is subject to restrictions under federal law which limit the transfer
of funds by the Bank to Bancorp and its non-banking subsidiaries, whether in the
form of loans, extensions of credit, investments, asset purchases, or otherwise.
Such transfers by the Bank to Bancorp or any of Bancorp's non-banking
subsidiaries are limited in amount to 10% of the Bank's capital and surplus and,
with respect to Bancorp and all such non-banking subsidiaries, to an aggregate
of 20% of the Bank's capital and surplus. Furthermore, such loans and extensions
of credit are required to be secured in specified amounts.
The Bank is subject to restrictions imposed by federal law on extensions of
credit to, and certain other transactions with, the Company and other
affiliates, and on investments in their stock or other securities. These
restrictions prevent the Company and the Bank's other affiliates from borrowing
from the Bank unless the loans are secured by specified collateral, and require
those transactions to have terms comparable to terms of arms-length transactions
with third persons. In addition, secured loans and other transactions and
investments by the Bank are generally limited in amount as to the Company and as
to any other affiliate to 10% of the Bank's capital and surplus and as to the
Company and all other affiliates together to an aggregate of 20% of the Bank's
capital and surplus. Certain exemptions to these limitations apply to extensions
of credit and other transactions between the Bank and its subsidiaries. These
regulations and restrictions may limit the Company's ability to obtain funds
from the Bank for its cash needs, including funds for acquisitions and for
payment of dividends, interest, and operating expenses.
Under Federal Reserve regulations, banks must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit secured by liens or interests in real estate or are made for the purpose
of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards; prudent underwriting
standards, including loan-to-value limits, that are clear and measurable; loan
administration procedures; and documentation, approval, and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") adopted by the federal bank regulators. The Interagency Guidelines,
among other things, call for internal loan-to-value limits for real estate loans
that are not in excess of the limits specified in the Guidelines. The
Interagency Guidelines state, however, that it may be appropriate in individual
cases to originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
50
The FDIC has established a risk-based deposit insurance premium assessment
system for insured depository institutions. Under the system, the assessment
rate for an insured depository institution depends on the assessment risk
classification assigned to the institution by the FDIC, based upon the
institution's capital level and supervisory evaluations. Institutions are
assigned to one of three capital groups -- well-capitalized, adequately
capitalized, or undercapitalized -- based on the data reported to regulators.
Well-capitalized institutions are institutions satisfying the following capital
ratio standards: (i) total risk-based capital ratio of 10.0% or greater; (ii)
Tier 1 risk-based capital ratio of 6.0% or greater; and (iii) Tier 1 leverage
ratio of 5.0% or greater. Adequately capitalized institutions are institutions
that do not meet the standards for well-capitalized institutions but that
satisfy the following capital ratio standards: (i) total risk-based capital
ratio of 8.0% or greater; (ii) Tier 1 risk-based capital ratio of 4.0% or
greater; and (iii) Tier 1 leverage ratio of 4.0% or greater. Institutions that
do not qualify as either well-capitalized or adequately capitalized are deemed
to be undercapitalized. Within each capital group, institutions are assigned to
one of three subgroups on the basis of supervisory evaluations by the
institution's primary supervisory authority and such other information as the
FDIC determines to be relevant to the institution's financial condition and the
risk it poses to the deposit insurance fund. Subgroup A consists of financially
sound institutions with only a few minor weaknesses. Subgroup B consists of
institutions with demonstrated weaknesses that, if not corrected, could result
in significant deterioration of the institution and increased risk of loss to
the deposit insurance fund. Subgroup C consists of institutions that pose a
substantial probability of loss to the deposit insurance fund unless effective
corrective action is taken. The Bank has been informed that it is in the least
costly assessment category for the first assessment period of 2002. Deposit
insurance rates may be increased during 2002 or later years.
Regulatory Capital Requirements. The Federal Reserve has established guidelines
for maintenance of appropriate levels of capital by bank holding companies and
member banks. The regulations impose two sets of capital adequacy requirements:
minimum leverage rules, which require bank holding companies and banks to
maintain a specified minimum ratio of capital to total assets, and risk-based
capital rules, which require the maintenance of specified minimum ratios of
capital to "risk-weighted" assets.
The regulations of the Federal Reserve require bank holding companies and member
banks to maintain a minimum leverage ratio of "Tier 1 capital" (as defined in
the risk-based capital guidelines discussed in the following paragraphs) to
total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies and banks, with composite examination ratings
of 1 under the rating system used by the federal bank regulators, would be
permitted to operate at or near this minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. A bank or
bank holding company experiencing or anticipating significant growth is expected
to maintain capital well above the minimum levels. In addition, the Federal
Reserve has indicated that it also may consider the level of an organization's
ratio of tangible Tier 1 capital (after deducting all intangibles) to total
assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve requires bank holding
companies and member banks to maintain minimum regulatory capital levels based
upon a weighting of their assets and off-balance sheet obligations according to
risk. The risk-based capital rules have two basic components: a core capital
(Tier 1) requirement and a supplementary capital (Tier 2) requirement. Core
capital consists primarily of common stockholders' equity, certain perpetual
preferred stock (noncumulative perpetual preferred stock with respect to banks),
and minority interests in the equity accounts of consolidated subsidiaries; less
all intangible assets, except for certain mortgage servicing rights and
purchased credit card relationships. Supplementary capital elements include,
subject to certain limitations, the allowance for losses on loans and leases;
perpetual preferred stock that does not qualify as Tier 1 capital; long-term
preferred stock with an original maturity of at least 20 years from issuance;
hybrid capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to 45%
of pre-tax net unrealized gains on available for sale equity securities.
In November 1999, Sandy Spring Capital Trust I, a statutory business trust and
consolidated subsidiary of the Company, sold 1.4 million trust preferred
securities having a liquidation price of $25 each for a total price of $35
million. These trust preferred securities meet the Federal Reserves regulatory
criteria for Tier 1 capital, subject to Federal Reserve guidelines that limit
the amount of trust preferred (and any cumulative perpetual preferred stock)
that may be included in Tier 1 capital to an aggregate of 25% of Tier 1 capital.
Any excess may be included as supplementary capital. Funds from the issuance of
the trust preferred securities were used for general corporate purposes,
including investment in subordinated debt of the Bank.
The risk-based capital regulations assign balance sheet assets and credit
equivalent amounts of off-balance sheet obligations to one of four broad risk
categories based principally on the degree of credit risk associated with the
obligor. The assets and off-balance sheet items in the four risk categories are
weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets.
51
The risk-based capital regulations require all commercial banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for credit losses that may be included in capital to 1.25% of total
risk-weighted assets.
The federal bank regulatory agencies have established a joint policy regarding
the evaluation of commercial banks' capital adequacy for interest rate risk.
Under the policy, the Federal Reserve's assessment of a bank's capital adequacy
includes an assessment of the bank's exposure to adverse changes in interest
rates. The Federal Reserve has determined to rely on its examination process for
such evaluations rather than on standardized measurement systems or formulas.
The Federal Reserve may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are adequate.
Federal banking regulations also require banks with significant trading assets
or liabilities to maintain supplemental risk-based capital based upon their
levels of market risk. The Bank did not have significant levels of trading
assets or liabilities during 2001, and was not required to maintain such
supplemental capital.
The Federal Reserve has established regulations that classify banks by capital
levels and provide for the Federal Reserve to take various "prompt corrective
actions" to resolve the problems of any bank that fails to satisfy the capital
standards. Under these regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has a total risk-based capital ratio of 10% or more, a Tier 1
risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An
adequately capitalized bank is one that does not qualify as well-capitalized but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank that does not meet these standards is categorized as
undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A bank that falls within any
of the three undercapitalized categories established by the prompt corrective
action regulation is subject to severe regulatory sanctions. As of December 31,
2001, the Bank was well-capitalized as defined in the Federal Reserve's
regulations.
For information regarding the Company's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis -- Capital Management" on page 18 of this Report and "Note 22 --
Regulatory Matters" of the Notes to the Consolidated Financial Statements on
page 47 of this Report.
SUPERVISION AND REGULATION OF MORTGAGE BANKING OPERATIONS
The Company's mortgage banking business is subject to the rules and regulations
of the U.S. Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration ("FHA"), the Veterans' Administration ("VA"), and Fannie
Mae ("FNMA") with respect to originating, processing, selling and servicing
mortgage loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines, which include provisions
for inspections and appraisals, require credit reports on prospective borrowers,
and fix maximum loan amounts. Lenders such as the Company are required annually
to submit to FNMA, FHA and VA audited financial statements, and each regulatory
entity has its own financial requirements. The Company's affairs are also
subject to examination by the Federal Reserve, FNMA, FHA and VA at all times to
assure compliance with the applicable regulations, policies and procedures.
Mortgage origination activities are subject to, among others, the Equal Credit
Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit
Reporting Act, the National Flood Insurance Act and the Real Estate Settlement
Procedures Act and related regulations that prohibit discrimination and require
the disclosure of certain basic information to mortgagors concerning credit
terms and settlement costs. The Company's mortgage banking operations also are
affected by various state and local laws and regulations and the requirements of
various private mortgage investors.
COMPETITION
The Bank's principal competitors for deposits are other financial institutions,
including other banks, credit unions, and savings institutions. Competition
among these institutions is based primarily on interest rates and other terms
offered, service charges imposed on deposit accounts, the quality of services
rendered, and the convenience of banking facilities. Additional competition for
depositors' funds comes from U.S. Government securities, private issuers of debt
obligations and suppliers of other investment alternatives for depositors, such
as securities firms.
52
Competition from credit unions has intensified in recent years as historical
federal limits on membership have been relaxed. Because federal law subsidizes
credit unions by giving them a general exemption from federal income taxes,
credit unions have a significant cost advantage over banks and savings
associations, which are fully subject to federal income taxes. Credit unions may
use this advantage to offer rates that are highly competitive with those offered
by banks and thrifts.
The banking business in Maryland generally, and the Bank's primary service areas
specifically, are highly competitive with respect to both loans and deposits. As
noted above, the Bank competes with many larger banking organizations that have
offices over a wide geographic area. These larger institutions have certain
inherent advantages, such as the ability to finance wide-ranging advertising
campaigns and promotions and to allocate their investment assets to regions
offering the highest yield and demand. They also offer services, such as
international banking, that are not offered directly by the Bank (but are
available indirectly through correspondent institutions), and, by virtue of
their larger total capitalization, such banks have substantially higher legal
lending limits, which are based on bank capital, than does the Bank. The Bank
can arrange loans in excess of its lending limit, or in excess of the level of
risk it desires to take, by arranging participations with other banks. Other
entities, both governmental and in private industry, raise capital through the
issuance and sale of debt and equity securities and indirectly compete with the
Bank in the acquisition of deposits.
In addition to competing with other commercial banks, credit unions and savings
associations, commercial banks such as the Bank compete with nonbank
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and hold
deposits. Commercial banks also compete for available funds with mutual funds.
These mutual funds have provided substantial competition to banks for deposits,
and it is anticipated they will continue to do so in the future.
The Holding Company Act permits the Federal Reserve to approve an application of
an adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than that holding company's home state. The Federal Reserve may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Holding Company Act also prohibits the Federal Reserve from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Holding Company
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies.
Federal banking laws also authorize the federal banking agencies to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
expressly prohibits merger transactions involving out-of-state banks. The State
of Maryland allows out-of-state financial institutions to merge with Maryland
banks and to establish branches in Maryland, subject to certain limitations.
The GLB Act permits the creation of a new type of regulated entity, the
financial holding company, that can offer a broad range of financial products.
These new financial holding companies may engage in banking as well as types of
securities, insurance, and other financial activities that had been prohibited
for bank holding companies under prior law. The GLB Act also permits banks with
or without holding companies to establish and operate financial subsidiaries
that may engage in most financial activities in which financial holding
companies may engage. Competition may increase as bank holding companies and
other large financial services companies take advantage of the new activities
and provide a wider array of products. By removing historical restrictions on
affiliations between banks and certain types of companies, the GLB Act expands
the number of potential acquirors of existing banks and bank holding companies,
and makes it possible for bank holding companies to acquire new types of
existing businesses.
EMPLOYEES
As of January 31, 2002, the Company and the Bank employed 560 persons, including
executive officers, loan and other banking and trust officers, branch personnel,
and others. None of the Company's or the Bank's employees is represented by a
union or covered under a collective bargaining agreement. Management of the
Company and the Bank consider their employee relations to be excellent.
53
EXECUTIVE OFFICERS
The following listing sets forth the name, age (as of March 22, 2002) and
principal position regarding the executive officers of the Company and the Bank
who are not directors:
Frank L. Bentz, III 43 Executive Vice President and Chief Information Officer
of the Bank
R. Louis Caceres 39 Executive Vice President of the Bank
Ronald E. Kuykendall 49 Executive Vice President, General Counsel and Corporate
Secretary of Bancorp and the Bank
James H. Langmead 52 Executive Vice President and Chief Financial Officer of
Bancorp and the Bank
Lawrence T. Lewis, III 53 Executive Vice President of Bancorp and the Bank and Chief
Investment Officer of the Bank
Frank H. Small 55 Executive Vice President of Bancorp and the Bank and Chief
Operating Officer of the Bank
Sara E. Watkins 45 Executive Vice President of the Bank
The principal occupation(s) and business experience of each executive officer
who is not a director for at least the last five years are set forth below.
Frank L. Bentz, III became Executive Vice President and Chief Information
Officer of the Bank effective January 1, 2002. Prior to that, Mr. Bentz was
Senior Vice President of the Bank.
R. Louis Caceres became Executive Vice President effective January 1, 2002.
Prior to that, Mr. Caceres was Senior Vice President of the Bank. Before joining
the Bank in 1999, Mr. Caceres was Vice President and then Senior Vice President
of First Union Corporation.
Ronald E. Kuykendall became Executive Vice President, General Counsel and
Corporate Secretary of Bancorp and the Bank effective January 1, 2002. Prior to
that, Mr. Kuykendall was Vice President and Secretary of Bancorp and Senior Vice
President and General Counsel of the Bank. Before joining the Bank in 2000, Mr.
Kuykendall was Associate General Counsel of Crestar Financial Corporation from
1998 to 1999, and Senior Corporate Counsel of First Union Corporation in 1997.
James H. Langmead, CPA, became Executive Vice President and Chief Financial
Officer of Bancorp and the Bank in 2001. Prior to that, Mr. Langmead was Vice
President and Treasurer of Bancorp and Executive Vice President and Chief
Financial Officer of the Bank.
Lawrence T. Lewis, III became Executive Vice President of Bancorp and the Bank
in 2001, and Chief Investment Officer of the Bank effective January 1, 2002.
Prior to that, Mr. Lewis was Executive Vice President of the Bank.
Frank H. Small became Executive Vice President of Bancorp and the Bank in 2001,
and Chief Operating Officer of the Bank effective January 1, 2002. Prior to
that, Mr. Small was Executive Vice President of the Bank.
Sara E. Watkins became Executive Vice President of Bancorp and the Bank
effective January 1, 2002. Prior to that, Ms. Watkins was Senior Vice President
of the Bank.
54
PROPERTIES
The locations of Sandy Spring Bancorp, Inc. and its subsidiaries are shown
below.
COMMUNITY BANKING
OFFICES
Airpark*
7653 Lindbergh Drive
Gaithersburg, Maryland 20879
Annapolis West*
2051 West Street
Annapolis, Maryland 21401
Ashton*
1 Ashton Road
Ashton, Maryland 20861
Asbury*
409 Russell Avenue
Gaithersburg, Maryland 20877
Aspenwood
14400 Homecrest Road
Silver Spring, Maryland 20906
Bedford Court
3701 International Drive
Silver Spring, Maryland 20906
Bethesda*
7126 Wisconsin Avenue
Bethesda, Maryland 20814
Burtonsville*
3535 Spencerville Road
Burtonsville, Maryland 20866
Chevy Chase*
5418 Wisconsin Avenue
Chevy Chase, Maryland 20815
Clarksville*
12276 Clarksville Pike
Clarksville, Maryland 21029
Colesville*
13300 New Hampshire Avenue
Silver Spring, Maryland 20904
Congressional*
1647 Rockville Pike
Rockville, Maryland 20852
Damascus*
26250 Ridge Road
Damascus, Maryland 20872
East Gude Drive*
1601 East Gude Drive
Rockville, Maryland 20850
Eastport*
1013 Bay Ridge Avenue
Annapolis, Maryland 21403
Edgewater*
116 Mitchells Chance Road
Edgewater, Maryland 21037
Gaithersburg Square*
596 A North Frederick Avenue
Gaithersburg, Maryland 20877
Jennifer Road*
166 Jennifer Road
Annapolis, Maryland 21401
Laurel Lakes*
14404 Baltimore Avenue
Laurel, Maryland 20707
Layhill*
14241 Layhill Road
Silver Spring, Maryland 20906
Leisureworld Plaza*
3801 International Drive, Suite 100
Silver Spring, Maryland 20906
Lisbon*
704 Lisbon Centre Drive
Woodbine, Maryland 21797
Milestone Center*
20930 Frederick Avenue
Germantown, Maryland 20876
Montgomery General Hospital*
18101 Prince Philip Drive
Olney, Maryland 20832
Montgomery Village*
9921 Stedwick Road
Montgomery Village, Maryland 20886
Olney*
17801 Georgia Avenue
Olney, Maryland 20832
Potomac*
9822 Falls Road
Potomac, Maryland 20854
Rockville
611 Rockville Pike
Rockville, Maryland 20852
Sandy Spring
908 Olney-Sandy Spring Road
Sandy Spring, Maryland 20860
Wildwood*
10329 Old Georgetown Road
Bethesda, Maryland 20814
*ATM available
55
OTHER PROPERTIES
Sandy Spring Bank Financial Center The Equipment Leasing Company Sandy Spring Mortgage
148 Jennifer Road 53 Loveton Circle, Suite 100 12501 Prosperity Drive, Suite 100
Annapolis, Maryland 21401 Sparks, Maryland 21152 Silver Spring, Maryland 20904
410-266-3000 410-472-0011 301-680-0200
Howard County Business Banking Administrative and Training Center Sandy Spring Insurance Corporation
8875 Centre Park Drive 17735 Georgia Avenue T/A Chesapeake Insurance Group
Columbia, Maryland 21045 Olney, Maryland 20832 2661 Riva Road, Suite 1050
410-740-8005 301-774-6400 Annapolis, Maryland 21401
410-841-5320
EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
The following financial statements are filed as a part of this report:
Consolidated Balance Sheets at December 31, 2001, and 2000
Consolidated Statements of Income for the years ended December 31, 2001,
2000, and 1999
Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000, and 1999
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2001, 2000, and 1999
Notes to the Consolidated Financial Statements Report of Independent
Auditors
All financial statement schedules have been omitted, as the required information
is either inapplicable or included in the consolidated financial statements or
related notes.
The following exhibits are filed as a part of this report:
Exhibit No. Description Incorporated by Reference to:
--------------------------------------------------------------------------------------------------------------------------------
3(a) Articles of Incorporation of Sandy Spring Bancorp, Inc., Exhibit 3.1 to Form 10-Q for the Quarter
as Amended ended June 30, 1996, SEC File No. 0-19065.
3(b) Bylaws of Sandy Spring Bancorp, Inc. Exhibit 3.2 to Form 8-K dated May 13, 1992,
SEC File No. 0-19065.
10(a)* Amended and Restated Sandy Spring Bancorp, Inc., Exhibit 10(a) to Form 10-Q for the Quarter ended
Cash and Deferred Profit Sharing Plan and Trust September 30, 1997, SEC File No. 0-19065.
10(b)* Sandy Spring Bancorp, Inc. 1982 Incentive Exhibit 10(c) to Form 10-Q for the Quarter ended
Stock Option Plan June 30, 1990, SEC File No. 0-19065.
10(c)* Sandy Spring Bancorp, Inc. 1992 Stock Option Plan Exhibit 10(i) to Form 10-K for the year ended
December 31, 1991, SEC File No. 0-19065.
10(d)* Sandy Spring Bancorp, Inc. Amended and Restated Exhibit 4 to Registration Statement on Form S-8,
Stock Option Plan for Employees of Annapolis Registration Statement No. 333-11049.
Bancshares, Inc.
10(e)* Sandy Spring Bancorp, Inc. 1999 Stock Option Plan Exhibit 4 to Registration Statement on Form S-8,
Registration Statement No. 333-81249.
10(f)* Sandy Spring National Bank of Maryland Executive Exhibit 10(g) to Form 10-K for the year ended
Health Insurance Plan December 31, 1991, SEC File No. 0-19065.
56
10(g)* Sandy Spring National Bank of Maryland Executive
Health Expense Reimbursement Plan, as amended
10(h)* Form of Director Fee Deferral Agreement, August 26, 1997 Exhibit 10(b) to Form 10-Q for the Quarter ended
September 30, 1997, SEC File No. 0-19065.
10(i)* Supplemental Executive Retirement Agreement by and Exhibit 10(c) to Form 10-Q for the Quarter ended
between Sandy Spring National Bank of Maryland September 30, 1997, SEC File No. 0-19065.
and Hunter R. Hollar
10(j)* Form of Supplemental Executive Retirement Agreement Exhibit 10(d) to Form 10-Q for the Quarter ended
by and between Sandy Spring National Bank of Maryland September 30, 1997, SEC File No. 0-19065.
and each of James H. Langmead, Lawrence T. Lewis, III,
Stanley L. Merson, Frank H. Small, and Sara E. Watkins
10(k)* Employment Agreement by and among Sandy Spring Exhibit 10(e) to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, September 30, 1997, SEC File No. 0-19065.
and Hunter H. Hollar
10(l)* Employment Agreement by and among Sandy Spring Exhibit 10(f) to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, September 30, 1997, SEC File No. 0-19065.
and James H. Langmead
10(m)* Employment Agreement by and among Sandy Spring Exhibit 10(g) to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, September 30, 1997, SEC File No. 0-19065.
and Lawrence T. Lewis, III
10(n)* Employment Agreement by and among Sandy Spring Exhibit 10(h) to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, September 30, 1997, SEC File No. 0-19065.
and Stanley L. Merson
10(o)* Employment Agreement by and among Sandy Spring Exhibit 10(i) to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, September 30, 1997, SEC File No. 0-19065.
and Frank H. Small
10(p)* Employment Agreement by and among Sandy Spring Exhibit 10(o) to Form 10-K for the year ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, December 31, 1998, SEC File No. 0-19065.
and Sara E. Watkins
10(q)* Change in Control Agreement by and among Sandy Spring Exhibit 10 to Form 10-Q for the Quarter ended
Bancorp, Inc., Sandy Spring National Bank of Maryland, March 31, 2000, SEC File No. 0-19065.
and Ronald E. Kuykendall
10(r)* Form of Sandy Spring National Bank of Maryland Officer
Group Term Replacement Plan
21 Subsidiaries
23 Consent of Independent Auditors
*Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
14(c) of this Report.
No Current Reports on Form 8-K were filed during the three-month period ended
December 31, 2001.
57
SHAREHOLDERS MAY OBTAIN, FREE OF CHARGE, A COPY OF THE EXHIBITS TO THIS REPORT
ON FORM 10-K BY WRITING RONALD E. KUYKENDALL, CORPORATE SECRETARY, AT SANDY
SPRING BANCORP, INC., 17801 GEORGIA AVENUE, OLNEY, MARYLAND 20832. SHAREHOLDERS
ALSO MAY ACCESS A COPY OF THE FORM 10-K INCLUDING EXHIBITS ON THE SEC WEB SITE
AT http://www.sec.gov.
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this 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
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated as of February 27, 2002.
Principal Executive Officer and Director: Principal Financial and Accounting Officer:
/s/ Hunter R. Hollar /s/ James H. Langmead
------------------------------------- ----------------------------------------------------
Hunter R. Hollar James H. Langmead
President and Chief Executive Officer Executive Vice President and Chief Financial Officer
SIGNATURE TITLE
/s/ John Chirtea Director
---------------------------
John Chirtea
/s/ Susan D. Goff Director
---------------------------
Susan D. Goff
/s/ Solomon Graham Director
---------------------------
Solomon Graham
/s/ Gilbert L. Hardesty Director
---------------------------
Gilbert L. Hardesty
/s/ Joyce R. Hawkins Director
---------------------------
Joyce R. Hawkins
/s/ Thomas O. Keech Director
---------------------------
Thomas O. Keech
/s/ Charles F. Mess Director
---------------------------
Charles F. Mess
/s/ Robert L. Mitchell Director
---------------------------
Robert L. Mitchell
/s/ Robert L. Orndorff, Jr. Director
---------------------------
Robert L. Orndorff, Jr.
/s/ David E. Rippeon Director
---------------------------
David E. Rippeon
/s/ Craig A. Ruppert Director
---------------------------
Craig A. Ruppert
/s/ Lewis R. Schumann Director
---------------------------
Lewis R. Schumann
/s/ W. Drew Stabler Chairman of the Board,
---------------------------
W. Drew Stabler Director
58