ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
For the Year Ended December 31, 2003
Commission File Number 0-19065
SANDY SPRING BANCORP, INC.
FORM 10-K
OF THE SECURITIES EXCHANGE ACT OF 1934
Maryland
52-1532952
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
17801 Georgia
Avenue, Olney, Maryland
20832
(Address of principal executive offices)
(Zip Code)
Registrants 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
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 registrants 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]
Indicate by a check mark if the registrant is an accelerated filer. YES [X] NO [ ]
The registrants Common Stock is traded on the NASDAQ National Market under the symbol SASR. The aggregate market value of approximately 13,944,000 shares of Common Stock of the registrant issued and outstanding held by nonaffiliates on June 30, 2003, the last day of the registrants most recently completed second fiscal quarter, was approximately $444 million based on the closing sales price of $31.83 per share of the registrants 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 9, 2004, approximately 14,503,000 shares of the registrants 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 21, 2004 (the Proxy Statement).
3
SANDY SPRING BANCORP, INC.
4
5
6
6
7
8
9
26
27
31
55
56
57
65
66
67
69
71
FORWARD-LOOKING STATEMENTS
Sandy Spring Bancorp makes forward-looking statements in the Managements Discussion and Analysis of Financial Condition and Results of Operations 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 probable loan and lease losses and market risk; and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by: managements estimates and projections of future interest rates and other economic conditions; future laws and regulations; and a variety of other matters which, by their nature, are subject to significant uncertainties. Because of these uncertainties, Sandy Spring Bancorps actual future results may differ materially from those indicated. In addition, the Companys past results of operations do not necessarily indicate its future results.
4
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 the 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.
5
Item of Form 10-K | Location | |||
Item 14. | Principal Accountant Fees and Services | The material labeled Audit and Non-Audit Fees in the Proxy | ||
Statement is incorporated in this Report by reference. | ||||
PART IV | ||||
Item 15. | Exhibits, Financial Statement Schedules, | Exhibits, Financial Statements, and Reports on Form 8-K | ||
and Reports on Form 8-K | on pages 69 and 70. | |||
SIGNATURES | Signatures on page 71. |
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 was founded in 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, Frederick, Howard, Montgomery, and Prince Georges counties in Maryland.
ABOUT THIS REPORT
This report comprises the entire 2003 Form 10-K, other than exhibits, as filed with the SEC. The 2003 annual report to shareholders, including this report, and the annual proxy materials for the 2004 annual meeting are being distributed together to the shareholders Please see page 70 for information regarding how to obtain copies of exhibits and additional copies of the Form 10-K.
This report is provided along with 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.
6
FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
2003
2002
2001
2000
1999
$
112,467
$
122,722
$
127,870
$
118,680
$
94,387
37,432
44,113
61,262
61,486
42,227
75,035
78,609
66,608
57,194
52,160
0
2,865
2,470
2,690
1,216
75,035
75,744
64,138
54,504
50,944
32,740
27,713
21,490
17,251
12,230
996
2,016
346
277
101
67,226
63,961
54,618
47,601
39,528
41,545
41,512
31,356
24,431
23,747
9,479
10,927
8,342
5,798
6,330
32,066
30,585
23,014
18,633
17,417
$
2.21
$
2.11
$
1.60
$
1.30
$
1.21
2.18
2.08
1.58
1.30
1.20
0.74
0.69
0.61
0.54
0.50
13.35
12.25
10.37
8.87
7.49
12.03
10.76
8.69
7.22
6.08
$
2,333,342
$
2,307,404
$
2,081,834
$
1,773,001
$
1,591,281
1,561,830
1,492,212
1,387,459
1,242,927
1,165,372
1,153,428
1,063,853
995,919
967,817
826,125
998,205
1,046,258
914,479
666,927
630,039
563,381
613,714
525,248
392,368
312,096
193,449
178,024
150,133
127,150
108,449
17.29
%
18.89
%
16.32
%
16.72
%
15.85
%
1.37
1.42
1.18
1.11
1.25
3.80
4.23
3.96
4.01
4.34
61.80
59.04
61.75
63.70
61.29
56.33
54.13
55.28
56.64
56.15
33.94
33.17
38.61
41.54
41.67
7.91
%
7.49
%
7.24
%
6.66
%
7.90
%
1.29
1.41
1.27
1.19
1.00
0.13
0.12
0.38
0.16
0.13
0.01
0.05
0.14
0.08
0.05
(1) | Total stockholders equity, net of goodwill and other intangible assets, divided by the number of shares of common stock outstanding at year end. | |
(2) | See the discussion of the efficiency ratio in the section of Managements Discussion and Analysis of Financial Condition and Results of Operations entitled Operating Expense Performance. |
7
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 $10,725,000 in 2003 and $10,012,000 in 2002. Regular dividends have been declared for one hundred and three consecutive years. Sandy Spring Bancorp, Inc. (the Company) has increased its dividends per share each year for the past twenty-three years. Since 1998, dividends per share have risen at a compound annual growth rate of 12%. The increase in dividends per share was 7% in 2003.
The ratio of dividends per share to diluted net income per share was 34% in 2003, compared to 33% for 2002. 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 employee stock purchase plan, which commenced on July
1, 2001, totaled 16,801 in 2003 and 14,841 in 2002, while issuances pursuant to
the stock option plan were 49,923 and 39,529 in the respective years. The
following table presents disclosure regarding equity compensation plans in
existence at December 31, 2003, consisting only of the 1992 stock option plan
(expired but having outstanding options that may still be exercised) and the
1999 stock option plan, both of which were approved by the shareholders
(described further in Note 12 to the consolidated financial statements).
Equity Compensation Plan Information
Number of securities
remaining available for
Number of securities to be
future issuance under
issued upon exercise of
Weighted average exercise
equity compensation plans
outstanding options,
price of outstanding options,
excluding securities reflected
warrants and rights
warrants and rights
in column (a)
Plan category
(a)
(b)
(c)
801,317
$
26.74
821,860
0
0
0
801,317
$
26.74
821,860
8
The Company has a stock repurchase program that permits the repurchase of up to 5% (approximately 718,000 shares) of its outstanding common stock. Repurchases are made in connection with shares expected to be issued under the Companys stock option and benefit plans, as well as for other corporate purposes. A total of 1,057,869 shares have been repurchased since 1997, when stock repurchases began, through December 31, 2003. There were 105,460 shares repurchased in 2003. No shares were repurchased in 2002.
The number of common shareholders of record was approximately 2,277 as of
February 9, 2004.
Quarterly Stock Information
2003
2002
Stock Price Range
Per Share
Stock Price Range
Per Share
Quarter
Low
High
Dividend
Low
High
Dividend
$
30.33
$
33.97
$
0.18
$
27.90
$
32.45
$
0.17
31.06
33.50
0.18
30.70
35.19
0.17
31.05
36.00
0.19
29.20
35.00
0.17
33.33
40.25
0.19
28.24
32.88
0.18
$
0.74
$
0.69
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Sandy Spring Bancorp, Inc. and subsidiaries (the Company) achieved record earnings for the year ended December 31, 2003. In addition, according to the latest Bank Holding Company Performance Report from the Federal Reserve, the Companys return on average equity for the nine months ended September 30, 2003, was in the 84th percentile of all U.S. bank holding companies with assets between $1-3 billion.
Net income for the year ended December 31, 2003, was $32.1 million ($2.18 per diluted share), as compared to $30.6 million ($2.08 per diluted share) for the prior year, an increase of 5%.
The Companys results in 2003, versus 2002, reflected higher noninterest income which continued to increase, reflecting a 13% increase over the prior year. This increase was primarily due to increases in mortgage banking income, trust department income, insurance agency commissions, income from bank owned life insurance and income from early termination of a sublease. These increases were partially offset by a decrease in securities gains. Net interest income decreased by $3.6 million, or 5%, due primarily to the margin compression resulting from a decline in the net interest margin to 3.80% for the year 2003 from 4.23% for the year 2002. Expressed as a percentage of net interest income and noninterest income, noninterest income increased to 31% from 21% five years ago. With respect to operating cost management, the Companys efficiency ratio - GAAP based increased to 61.80% in 2003 from 59.04% in 2002 and 61.75% in 2001, while the efficiency ratio - traditional also increased to 56.33% in 2003 from 54.13% in 2002 and 55.28% in 2001. For an explanation of the efficiency ratio - GAAP based, as compared to the efficiency ratio - traditional, see the section of this report entitled Operating Expense Performance. The return on average equity was 17.29% in 2003, as compared to 18.89% in 2002, and 16.32% in 2001.
Comparing December 31, 2003, balances to December 31, 2002, total assets remained at $2.3 billion. Total deposits increased 5% to $1.56 billion, while total loans and leases grew to $1.15 billion from $1.06 billion, an 8% increase. During the same period, stockholders equity increased to $193.45 million or 8% of total assets.
Asset quality, as measured by the following ratios, continued to be favorable. Non-performing assets represented 0.13% of total assets at year-end 2003, versus 0.12% at year-end 2002. The ratio of net charge-offs to average loans and leases was 0.01% in 2003, as compared to 0.05% for the prior year.
9
Critical Accounting Policies
The Companys consolidated financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability must be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.
The allowance for credit losses is an estimate of the losses that may be sustained in the loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (2) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the loans or leases contractual terms.
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 Company, 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.
The Companys allowance for credit losses has two basic components: the formula allowance reflecting historical losses by credit category as adjusted by several factors whose effects are not reflected in historical loss ratios, and specific allowances. Each of these components, and the systematic allowance methodology used to establish them, are described in detail in Note 1 of the Notes to the Consolidated Financial Statements. The amount of the allowance is reviewed monthly by the Senior Loan Committee, and reviewed and approved quarterly by the Audit Committee and Board of Directors.
The portion of the allowance that is based upon historical loss factors, as adjusted, establishes allowances for the major loan and lease categories based upon adjusted historical loss experience over the prior eight quarters, weighted so that losses realized in the most recent quarters have the greatest effect. The use of these loss factors is intended to reduce the differences between estimated losses inherent in the loan and lease portfolio and observed losses. The factors address changes in the risk characteristics of the Companys loan and lease portfolio that are related to (1) trends in delinquencies and other non-performing loans (2) changes in the risk portfolio related to large loans in the portfolio (3) changes in the categories of loans comprising the loan portfolio (4) concentrations of loans to specific industry segments (5) changes in economic conditions on both a local and national level (6) changes in the Companys credit administration and loan and lease portfolio management processes and (7) quality of the Companys credit risk identification processes. This component comprised 69% of the total allowance at December 31, 2003.
The specific allowance is used primarily to establish allowances for risk-rated credits on an individual or portfolio basis, and accounted for 25% of the total allowance at December 31, 2003. The Company has historically had favorable credit quality. The actual occurrence and severity of losses involving risk-rated credits can differ substantially from estimates, and some risk-rated credits may not be identified. A 10% decrease (increase) in risk-rated credits not specifically reserved would have resulted in a corresponding decrease (increase) of approximately $192,000 in the recommended reserve computed by the allowance methodology for December 31, 2003.
10
Table 1Consolidated Average Balances, Yields and Rates
(1)
2003
2002
2001
Average
Yield/
Average
Yield/
Average
Yield/
(Dollars in thousands and tax equivalent)
Balance
Interest
Rate
Balance
Interest
Rate
Balance
Interest
Rate
$
395,004
$
22,166
5.61
%
$
366,472
$
24,145
6.59
%
$
332,693
$
25,183
7.57
%
232,822
11,358
4.88
231,831
13,781
5.94
213,163
15,923
7.47
475,453
32,338
6.80
458,535
35,760
7.80
451,801
39,457
8.73
1,103,279
65,862
5.97
1,056,838
73,686
6.97
997,657
80,563
8.08
752,234
33,336
4.43
698,351
38,643
5.53
615,249
39,193
6.37
%
307,349
21,191
6.89
232,841
16,746
7.19
167,234
12,068
7.22
1,059,583
54,527
5.15
931,192
55,389
5.95
782,483
51,261
6.55
1,538
13
0.85
1,546
21
1.36
2,665
88
3.30
27,565
302
1.10
33,872
546
1.61
29,811
1,172
3.93
$
2,191,965
$
120,704
5.51
%
$
2,023,448
$
129,642
6.41
%
$
1,812,616
$
133,084
7.34
%
(15,020
)
(14,429
)
(11,874
)
34,929
34,993
40,784
37,207
34,347
31,947
95,662
82,248
73,385
$
2,344,743
$
2,160,607
$
1,946,858
$
200,855
$
465
0.23
%
$
173,935
$
550
0.32
%
$
151,873
$
1,191
0.78
%
173,078
512
0.30
143,357
1,163
0.81
104,496
1,568
1.50
401,716
2,436
0.61
386,571
4,582
1.19
366,759
10,894
2.97
433,244
10,262
2.37
427,943
13,538
3.16
426,464
21,944
5.15
1,208,893
13,675
1.13
1,131,806
19,833
1.75
1,049,592
35,597
3.39
465,382
17,531
3.77
453,769
16,351
3.60
384,400
17,543
4.56
128,302
6,226
4.85
117,252
7,929
6.76
113,415
8,122
7.16
1,802,577
37,432
2.08
1,702,827
44,113
2.59
1,547,407
61,262
3.96
$
83,272
3.43
%
$
85,529
3.82
%
$
71,822
3.38
%
332,443
280,839
245,408
24,305
15,038
13,039
185,418
161,903
141,004
$
2,344,743
$
2,160,607
$
1,946,858
5.51
%
6.41
%
7.34
%
1.71
2.18
3.38
3.80
%
4.23
%
3.96
%
(1) | Interest income includes the effects of taxable-equivalent adjustments (reduced by the nondeductible portion of interest expense) using the appropriate marginal federal income tax rate of 35.00% and, where applicable, the marginal state income tax rate of 7.00% (or a combined marginal federal and state rate of 39.55%), to increase tax-exempt interest income to a taxable-equivalent basis. The taxable-equivalent adjustment amounts utilized in the above table to compute yields totaled to $8,237,000 in 2003, $6,920,000 in 2002, and $5,214,000 in 2001. | |
(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 as consumer loans. |
11
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 paid on interest-bearing liabilities.
Net interest income for 2003 was $75,035,000, representing a decrease of $3,574,000 or 5% from 2002. An 18% increase was achieved in 2002, compared to 2001, resulting in net interest income of $78,609,000.
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 1
Consolidated Average Balances, Yields and Rates) shows a decrease in net
interest margin for 2003 of 43 basis points (representing a percentage change
of 10% when compared to 2002). Over the three-year period shown in Table 1,
average earning assets increased each year, but at a declining rate of
increase. Table 2 shows the extent to which interest income, interest expense
and net interest income were affected by rate changes and volume changes. The
decline in tax-equivalent net interest margin in 2003 resulted from decreases
in rates, offset in part by the effects of greater volume. The increase in net
interest income in 2002 resulted from volume increases and declining interest
rates, which created a higher net interest margin. Tax-equivalent net interest
income declined by 3% in 2003 (to $83,272,000 in 2003 from $85,529,000 in
2002), but increased 19% in 2002 (from $71,822,000 in 2001). Pressure on the
net interest margin in recent years has been 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.
During 2003, margin compression continued as calls of higher yielding
securities and refinancing of loans overcame the effect of the Companys
ability to manage deposit rates which had been lowered close to their practical
floor. Thus, the net interest margin continued to decline during the first
three quarters of 2003. However, in the fourth quarter of 2003 the margin
increased as the trend in interest rate declines began to reverse.
Table 2Effect of Volume and Rate Changes on Net Interest Income
2003 vs. 2002
2002 vs. 2001
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
$
(7,824
)
$
3,129
$
(10,953
)
$
(6,877
)
$
4,581
$
(11,458
)
(5,307
)
2,816
(8,123
)
(550
)
4,951
(5,501
)
4,445
5,162
(717
)
4,678
4,719
(41
)
(252
)
(89
)
(163
)
(693
)
105
(798
)
(8,938
)
11,018
(19,956
)
(3,442
)
14,356
(17,798
)
(85
)
77
(162
)
(641
)
153
(794
)
(651
)
203
(854
)
(405
)
463
(868
)
(2,146
)
173
(2,319
)
(6,312
)
559
(6,871
)
(3,276
)
166
(3,442
)
(8,406
)
76
(8,482
)
(523
)
941
(1,464
)
(1,385
)
3,472
(4,857
)
(6,681
)
1,560
(8,241
)
(17,149
)
4,723
(21,872
)
$
(2,257
)
$
9,458
$
(11,715
)
$
13,707
$
9,633
$
4,074
* | 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. |
12
Interest Income
The Companys interest income decreased by $10,255,000 or 8% in 2003, compared to 2002, preceded by a decrease of $5,148,000 or 4% the prior year. On a tax-equivalent basis, the respective changes were a 7% decline in 2003, and a 3% decrease in 2002. Table 2 shows that, in both 2003 and 2002, the negative effect of the significant decline in average earning asset yields overwhelmed the positive effect of the higher volume of average earning assets.
During 2003, average loans and leases, yielding 5.97% versus 6.97% a year earlier (representing a 14% decline), rose 4% to $1,103,279,000, with all three major categories exhibiting growth. Average residential real estate loans rose 8% (attributable to both mortgage and construction lending), consumer loans increased slightly, and average commercial loans and leases were up 4% (primarily reflecting a rise in commercial credits secured by real estate). In 2003, average loans and leases comprised 50% of average earning assets, compared to ratios of 52% in 2002 and 55% in 2001. Average total securities, yielding 5.15% in 2003 versus 5.95% last year, rose 14% to $1,059,583. The smaller category of nontaxable securities continued to increase by a much greater percentage than taxable securities. Average total securities grew to represent 48% of average earning assets in 2003, up from 46% in 2002 and 43% in 2001. The Company reduced its leverage activities during 2003, through which investment in securities is funded by Federal Home Loan Bank of Atlanta borrowing advances. The leveraging programs earned a margin of 40 basis points in 2003 compared to 100 basis points in 2002. These programs also contributed $.05 per share in 2003 compared to $.13 per share in 2002.
Interest Expense
Interest expense decreased significantly by 15% or $6,681,000 in 2003, compared to 2002, as a 51 basis point decline in the average rate paid on interest-bearing liabilities (decreasing 20% to 2.08% from 2.59%) offset the effects of 6% or $99,750,000 higher average interest-bearing liabilities. In 2002, compared to 2001, interest expense decreased significantly as the decrease in the average rate paid on interest-bearing liabilities more than offset the effects of higher volume.
During 2003, all major categories of interest-bearing deposits increased and reported declines in average rate. While average time deposits grew the least, by only 1%, they had the greatest effect on the overall decline in interest expense (see Table 2). This was due to a 79 basis point decrease in average rate, the largest decline of any category. Average money market savings, which increased by 4%, also had a large impact, attributable to a 58 basis point decrease in average rate. As market interest rates declined during the first three quarters of 2003, the Company was able to achieve growth in its deposit base, while interest rates on deposit funding continued to decline, although at a much slower pace than rates on earning assets. By contrast, in 2002 the growth in deposits was achieved with a significant decline in rates on such deposit funding. This was a major factor in the improvement in net interest margin for 2002 versus 2001. Average short-term and long-term borrowings, generally the most expensive funding sources, increased in 2003 by 3% and 9%, respectively. While the average rate paid on long-term borrowings declined to 4.85% in 2003 from 6.76% in 2002, the average rate paid on short-term borrowings increased to 3.77% in 2003 from 3.60% in 2002 as interest rates increased in the last quarter of the year.
Interest Rate Performance
Net interest margin, the profit margin achieved on the Companys earning asset base, decreased by 43 basis points in 2003, as compared to a decrease in net interest spread of 39 basis points. The difference between these two indicators of interest rate performance was attributable primarily to a decrease in the benefit of funding average earning assets from interest-free sources, which is reflected in the net interest margin. During periods of low interest rates, as in 2003, the relative benefit of interest-free, versus interest-bearing, funding sources on the net interest margin is diminished. However, while contributing less to margin improvement, interest-free funding of average earning assets, primarily through noninterest-bearing demand deposits and stockholders equity, increased as a percentage of average earning assets in 2003, compared to 2002, after only a slight increase in 2002, compared to 2001. During 2003, the Company experienced a greater relative decline in the yield on earning assets compared to the funding rate, resulting in a decrease in the net interest margin and spread.
By comparison, in 2002 versus 2001, in the face of a more pronounced decline in interest rates, the Company reported a decrease in funding rates that significantly exceeded the decline in earning asset yields, so that overall interest rate performance increased.
Noninterest Income
Total noninterest income was $33,736,000 in 2003, a 13% or $4,007,000 rise from 2002. An increase of 36% or $7,893,000 was recorded for 2002 versus 2001. The Company has made it an organizational priority to grow and diversify its sources of noninterest income and, as a result, has reported significant increases in revenue from these sources. The major reason for the rise in noninterest income for 2003,
13
as compared to 2002 (comprising 44% of the overall increase) was $1,783,000 of additional noninterest revenue generated by gains on sales of mortgage loans. Other significant contributors included income from bank owned life insurance (up $870,000), insurance agency commissions (up $460,000), trust operations (up $458,000), service charges on deposit accounts (up $193,000) and fees on sales of investment products (up $133,000). Also, the Company recognized income of $1,077,000 from the early termination of a sublease as the result of proceeds received from a negotiated settlement with a sub-tenant of the Companys leased facility. The Company is renovating the vacated space for its own use. In the comparison of total noninterest income for 2002 versus 2001, the increase primarily reflected higher mortgage banking revenues, increase in gains from sales of securities, growth in service charges on deposit accounts, increased insurance agency commissions and higher income from trust operations.
Gains on mortgage sales increased significantly by 45% or $1,783,000 in 2003, compared to 2002, after an increase of 51% in 2002, compared to 2001. Historically low mortgage interest rates prevailing during the two-year period led to increased fixed-rate loan production, both from new loans and refinancing business. Most of these loans were sold in the secondary market, resulting in increased gains on sales. The Company achieved gains of $5,723,000 on sales of $436,408,000 in 2003, compared to gains of $3,940,000 on sales of $313,512,000 in 2002 and gains of $2,608,000 on sales of $222,303,000 in 2001.
Income from bank owned life insurance increased by $870,000 during 2003, preceded by an increase of $243,000 during 2002. The Company invests in bank owned life insurance products in order to better manage the cost of employee benefit plans. Investments totaled $51.4 million at December 31, 2003 and were well diversified by carrier in accordance with defined policies and practices. The average tax-equivalent yield on these insurance contract assets was 8.84%.
Insurance agency commissions increased by $460,000 or 14% in 2003 compared to 2002. This increase was mainly the result of insurance agency commissions generated by the Chesapeake Insurance Group. The acquisition in December 2001, of the Chesapeake Insurance Group contributed significantly to the $3,038,000 increase in insurance agency commissions during 2002, its first year of operation with the Company.
Trust income amounted to $2,955,000 in 2003, an increase of $458,000 or 18% over 2002, reflecting increased assets under management. During 2003, trust assets under management rose by 17% to $365,000,000 despite adverse investment markets, aided by strong sales and better-than-market investment performance in managed accounts combined with higher estate and trust settlement administration fees. Revenues of $2,497,000 for 2002 represented an increase of $502,000 or 25% over 2001. This increase was the result of increased assets under management and higher estate and trust settlement administration fees.
Fees on sales of investment products increased by $133,000 or 6% in 2003, compared to 2002, reflecting an increase in fees from sales of mutual funds and variable rate annuities. Fees on sales of investment products decreased by $92,000 or 4% in 2002, compared to 2001, as a result of a decline in fees from sales of mutual funds.
Securities gains were $996,000 in 2003, a decrease of $1,020,000 from $2,016,000 for 2002. Securities gains of $346,000 were recorded in 2001. During 2003, the sale of available-for-sale debt securities generated net losses of $404,000, while gains of $1,400,000 were realized on sales of equity securities. During 2002, sales of available-for-sale debt securities generated $547,000 in net gains, compared to $1,469,000 in gains on sales of equity securities.
Noninterest Expenses
Noninterest expenses increased $3,265,000 or 5% in 2003, compared to 2002, and $9,343,000 or 17% in 2002, compared to 2001. The Company incurs additional costs in order to enter new markets, provide new services, and support growth. 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, intangible asset amortization, and other noninterest expenses generally associated with the day-today operations of the Company. Prior to 2002, goodwill amortization was also included in noninterest expenses.
Salaries and employee benefits, the largest component of noninterest expenses decreased $487,000 in 2003 primarily as the result of reduced incentive compensation expense. Salaries and employee benefits rose $8,976,000 or 30% in 2002, and $4,695,000 or 19% in 2001. The higher compensation and benefit costs for 2002 and 2001 resulted in large part from incentive compensation, merit raises, modest branch expansion, and acquisitions of the Equipment Leasing Company in December 2000 and the Chesapeake Insurance Group
14
in December 2001. Efficient staffing is a goal of management and staff additions are made carefully with a view toward achieving gains in financial performance. Average full-time equivalent employees reached 578 in 2003, representing an increase of 7% from 539 in 2002, which was 13% above 475 for 2001. The ratio of net income per average full-time equivalent employee decreased to $55,000 in 2003 from $57,000 in 2002.
In 2003, occupancy expense rose 26% or $1,462,000, primarily as the result of higher occupancy costs due to the opening of new offices and re-development efforts. The rate of increase was 10% or $519,000 in 2002, primarily reflecting higher rental expenses, net of rental income, and increased depreciation and amortization charges. Equipment expenses rose $610,000 or 16% in 2003, preceded by an increase of $377,000 or 11% in 2002, compared to each prior year, due largely to higher depreciation charges and software costs.
Marketing expense increased by $593,000 or 31% in 2003 following an increase of $433,000 or 29% in 2002. Most of the increases in 2003 and 2002 occurred as the result of higher advertising costs including targeted marketing programs.
Other noninterest expenses of $10,158,000 were $1,158,000 or 13% above the $9,000,000 recorded for 2002, due largely to an increase in consulting fees.
Goodwill amortization ceased with the year ended 2001 due to adoption of the non-amortization provisions of Statement of Financial Accounting Standards No. 142 (effective January 1, 2002). This new accounting standard resulted in a reduction in noninterest expense in this category from $666,000 in 2001 to no such expense in 2003 and 2002. No intangible assets were acquired in 2003 or 2002. In each year over the three-year period from 2001 to 2003, goodwill and intangible asset amortization comprised less than 6% of total noninterest expenses. The Companys intangible assets are being amortized over relatively short amortization periods averaging approximately six years at December 31, 2003. Intangible assets arising from branch acquisitions were not classified as goodwill and continue to be amortized since the acquisitions did not meet the definition for business combinations.
Operating Expense Performance
Management views the efficiency ratio as an important measure of expense performance and cost management. The ratio expresses the level of noninterest expenses as a percentage of total revenue (net interest income plus total noninterest income). This is a GAAP financial measure. Lower ratios indicate improved productivity.
Non-GAAP Financial Measure
The Company has for many years used a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations. Management believes that its traditional ratio better focuses attention on the operating performance of the Company over time than does a GAAP based ratio, and is highly useful in comparing period-to-period operating performance of the Companys core business operations. It is used by management as part of its assessment of its performance in managing noninterest expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the traditional efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.
In general, the efficiency ratio is noninterest expenses as a percentage of net interest income plus noninterest income. Noninterest expenses used in the calculation of the traditional, non-GAAP efficiency ratio exclude amortization of goodwill and intangibles and nonrecurring expenses. Income for the traditional ratio is increased for the favorable effect of tax-exempt income (see Table 1), and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses, and non-recurring gains. The measure is different from the GAAP based efficiency ratio, which also is presented in this report. The GAAP based measure is calculated using noninterest expense and income amounts as shown on the face of the Consolidated Statements of Income. The GAAP and traditional based efficiency ratios are reconciled in Table 3. As shown in Table 3, both efficiency ratios, GAAP based and traditional, increased in 2003. This increase was mainly the result of a 5% increase in noninterest expense coupled with a decrease in net interest income as the result of a decline in the net interest margin from 4.23% in 2002 to 3.80% in 2003.
15
Table 3GAAP Based and Traditional Efficiency Ratios
(Dollars in thousands)
2003
2002
2001
2000
1999
$
67,226
$
63,961
$
54,618
$
47,601
$
39,528
108,771
108,338
88,444
74,722
64,491
61.80
%
59.04
%
61.75
%
63.70
%
61.29
%
$
67,226
$
63,961
$
54,618
$
47,601
$
39,528
0
0
666
65
65
2,480
2,659
2,512
2,759
919
0
0
0
744
0
$
64,746
$
61,302
$
51,440
$
44,033
$
38,544
108,771
108,338
88,444
74,722
64,491
8,237
6,920
5,214
5,151
4,259
996
2,016
346
277
101
1,077
0
0
0
0
0
0
256
1,854
0
$
114,935
$
113,242
$
93,056
$
77,742
$
68,649
56.33
%
54.13
%
55.28
%
56.64
%
56.15
%
Provision for Income Taxes
Income tax expense amounted to $9,479,000 in 2003, compared with $10,927,000 in 2002 and $8,342,000 in 2001. The resulting effective tax rates were 23% for 2003, 26% for 2002, and 27% for 2001. The decrease in the effective tax rate for 2003 was mainly the result of an increase in income from tax exempt securities coupled with an increase in tax exempt income from bank owned life insurance.
Balance Sheet Analysis
The Companys total assets increased $25,938,000 to $2,333,342,000 at December 31, 2003. Earning assets increased $16,742,000 in 2003, to $2,175,236,000 at December 31, 2003.
Loans and Leases
Residential real estate loans, comprised of residential construction and permanent residential mortgage loans, increased $64,956,000 or 18% during 2003, to $419,629,000 at December 31, 2003. Residential construction loans, a specialty of the Company for many years, increased in 2003 (up 20% or $14,915,000, to $88,500,000 at December 31, 2003), largely reflecting continuing emphasis and geographic expansion in offering this product. Permanent residential mortgages, most of which are 1-4 family, increased by $50,041,000 or 18%, to $331,129,000, largely due to growth in the Banks three, five and seven-year adjustable rate mortgage products which increased $41,714,000 or 22%.
Commercial loans and leases increased by $14,924,000 or 3% during 2003, to $490,938,000 at December 31, 2003. Included in this category are commercial real estate loans, commercial construction loans, equipment leases and other commercial loans.
Over the years, the Companys 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 2003, the marketplace
16
continued to be characterized by lower rates and significant refinancing. Due largely to these market conditions, other commercial loans decreased by $7,506,000 or 5% during 2003 to $136,822,000 at year end.
In general, the Companys 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 $30,780,000 or 12% during 2003, to $287,898,000 at year-end. Commercial construction credits declined $1,760,000 or 3% during the year, to $50,187,000 at December 31, 2003. 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 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 New Jersey to Florida and in Illinois. The typical lease is small ticket by industry standards, averaging less than $30,000, with individual leases generally not exceeding $250,000. The Companys equipment leasing business continued to suffer from clients reduction in capital spending throughout the most recent year. As a result, the leasing portfolio declined $6,590,000 or 29% in 2003, to $16,031,000 at year end.
Consumer lending continues to be very important to the Companys 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 4% or $9,695,000 in 2003, to
$242,861,000 at December 31, 2003. This increase was driven largely by an
increase of $22,870,000 or 24% in home equity lines during 2003 to $118,687,000
at year end. This growth was primarily a result of the Companys increased
sales culture emphasis and the continuing low rate environment.
Table 4Analysis of Loans and Leases
This table presents the trends in the composition of the loan and lease portfolio over the previous five years.
Table 5Loan and Lease Maturities and Interest Rate Sensitivity
December 31,
(In thousands)
2003
2002
2001
2000
1999
$
331,129
$
281,088
$
255,256
$
266,511
$
235,153
88,500
73,585
84,541
44,078
34,721
287,898
257,118
240,297
232,640
237,924
50,187
51,947
54,478
60,313
42,256
16,031
22,621
27,345
31,304
0
136,822
144,328
119,420
119,130
92,674
242,861
233,166
214,582
213,841
183,397
$
1,153,428
$
1,063,853
$
995,919
$
967,817
$
826,125
At December 31, 2003
Remaining Maturities of Selected Credits in Years
(In thousands)
1 or less
Over 1-5
Over 5
Total
$
88,210
$
290
$
0
$
88,500
50,187
0
0
50,187
82,635
41,480
12,707
136,822
$
221,032
$
41,770
$
12,707
$
275,509
17
At December 31, 2003
Remaining Maturities of Selected Credits in Years
(In thousands)
1 or less
Over 1-5
Over 5
Total
$
16,507
$
41,480
$
12,707
$
70,694
204,525
290
0
204,815
$
221,032
$
41,770
$
12,707
$
275,509
Securities
The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, decreased 5% or $48,053,000 to $998,205,000 at December 31, 2003, from $1,046,258,000 at December 31, 2002. This decrease was mainly the result of a decrease in U.S. Agency securities as the result of calls of these securities during 2003. The funds provided were utilized to fund the growth in the Companys loan portfolio during 2003. The Companys overall policy is to maximize earnings and maintain liquidity through an investment portfolio bearing low credit risk.
The Company has not traditionally used derivative instruments to hedge its market rate risk position. 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 Companys equity securities. These derivatives do not expose the Company to credit risk, or to significant market risk. The Company had no derivatives at December 31, 2003 or at December 31, 2002.
The Companys leverage programs, primarily investing in available-for-sale
securities, and funded either by Federal Home Loan 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 decreased to 27% at December 31, 2003, from 33% at December 31, 2002.
Table 6Analysis of Securities
The composition of securities at December 31 for each of the latest three years was:
18
Maturities and weighted average yields for debt securities available-for-sale
and held-to-maturity at December 31, 2003 are presented in Table 7. Amounts
appear in the table at amortized cost, without market value adjustments, by
stated maturity adjusted for estimated calls.
Table 7Maturity Table for Debt Securities
Other Earning Assets
Residential mortgage loans held for sale decreased $26,226,000 from 38,435,000
as of December 31, 2002 to $12,209,000 as of December 31, 2003 as the mortgage
refinance market slowed considerably late in 2003. Originations and sales of
these loans, and the resulting gains on sales, increased substantially during
2003 and 2002 under favorable interest rate conditions.
The aggregate of federal funds sold and interest-bearing deposits with banks
increased 15% or $1,446,000 to $11,394,000 in 2003.
Bank owned life insurance increased $8.5 million (20%) to $51.4 million as of
December 31, 2003.
Deposits and Borrowings
Total deposits were $1,561,830,000 at December 31, 2003, increasing $69,618,000
or 5% from $1,492,212,000 at December 31, 2002. Growth was achieved for
noninterest-bearing demand deposits, up $47,736,000 or 15%, with increases
recorded for both personal and business accounts. Interest-bearing deposits
increased $21,882,000 or 2%, attributable in large part to regular savings and
interest checking accounts, which increased by 22% (up $34,216,000) and 21% (up
$38,892,000), respectively. This increase was mainly the result of a strong
internal focus on building client relationships in the Companys marketplace.
Total borrowings decreased $50,333,000 or 8% during 2003, to $563,381,000 at
December 31, 2003, primarily as the result of a $31,608,000 decrease in retail
repurchase agreements, as the lower interest rate environment in 2003 made
these accounts less attractive to commercial customers.
19
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 2003, total stockholders equity increased 9% or
$15,425,000 to $193,449,000 at December 31, 2003, from $178,024,000 at December
31, 2002. Internal capital generation (net income less dividends) was responsible for
most of this increase in total stockholders equity. Internal capital
generation added $21,341,000 to equity during 2003, representing a rate, when
considered as a percentage of average total stockholders equity, of 12% for
2003, compared to 13% recorded in 2002.
Stockholders equity was negatively affected by a $3,718,000 or 36% decline in
accumulated other comprehensive income (comprised of net unrealized gains and
losses on available-for-sale securities) from $10,421,000 at December 31, 2002
to $6,703,000 at December 31, 2003. This change resulted primarily from
declines in the value of available-for-sale securities when rates increased
significantly in August (as the yield curve became steeper) and remained close
to those levels through December. While these net unrealized gains are
considered to be a part of stockholders equity under generally accepted
accounting principles, they are not included in capital for purposes of
computing regulatory capital ratios.
External capital formation, resulting from exercises of stock options and from
stock purchases under the employee stock purchase plan, totaled $1,127,000
during 2003. Share repurchases amounted to $3,325,000 over the same period, for
a net decrease in stockholders equity from these sources of $2,198,000. The
ratio of average equity to average assets was 7.91% for 2003, as compared to
7.49% for 2002 and 7.24% for 2001.
Bank holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. These
guidelines are commonly known as Risk-Based Capital Guidelines. On December 31,
2003, the Company exceeded all applicable capital requirements, with a total
risk-based capital ratio of 15.51%, a Tier 1 risk-based capital ratio of
14.34%, and a leverage ratio of 8.67%. Tier 1 capital of $202,658,000 and total
qualifying capital of $219,166,000 each included $35,000,000 in trust preferred
debt issuance as permitted under Federal Reserve Guidelines (see Note
10-Long-Term Borrowings of the Notes to the Consolidated Financial
Statements). Trust preferred securities are considered regulatory capital for
purposes of determining the Companys Tier 1 capital ratios. The Company
believes that the Board of Governors of the Federal Reserve System, which is
the holding Companys banking regulator, may rule on continued inclusion of
trust preferred securities in regulatory capital following the issuance of FIN
46R. At this time, it is not possible to estimate the effect, if any, on the
Companys Tier 1 regulatory capital as a result of any future action taken by
the Board of Governors of the Federal Reserve System. However, as of December
31, 2003, the Bank met the criteria for classification as a well-capitalized
institution under the prompt corrective action rules of the Federal Deposit
Insurance Act and still would have been considered well-capitalized if the
trust preferred securities had been excluded from regulatory capital.
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 21-Regulatory Matters of the Notes to the Consolidated
Financial Statements.
Credit Risk Management
The Companys loan and lease portfolio (the credit portfolio) is subject to
varying degrees of credit risk. Credit risk is mitigated through portfolio
diversification, limiting exposure to any single customer, industry or
collateral type. The Company maintains an allowance for credit losses (the
allowance) to absorb losses inherent in the loan and lease portfolio. The
allowance is based on careful, continuous review and evaluation of the loan and
lease portfolio, along with ongoing, quarterly assessments of the probable
losses inherent in that portfolio, and, to a lesser extent, in unused
commitments to provide financing. The methodology for assessing the
appropriateness of the allowance includes: (1) the formula allowance reflecting
historical losses, as adjusted, by credit category and (2) the specific
allowance for risk-rated credits on an individual or portfolio basis. This
systematic allowance methodology is further described in the section entitled
Critical Accounting Policies and in Note 1 - Significant Accounting
Policies of the Notes to the Consolidated Financial Statements. The amount of the allowance is reviewed monthly by the
Senior Loan Committee, and reviewed and approved quarterly by the Audit
Committee and Board of Directors.
The allowance is increased by provisions for credit losses, 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. There
were no such provisions in 2003, while provisions amounted to $2,865,000 in
20
2002. Net charge-offs of $156,000, $482,000 and $1,347,000, were recorded in
2003, 2002 and 2001, respectively. Considering the current levels of potential
problem loans and non-performing assets and the low dollar level of net
charge-offs reported in 2003 compared to recent history, management does not
expect such low dollar levels of net charge-offs to continue. The ratio of net
charge-offs to average loans and leases was 0.01% in 2003, compared to 0.05% in
2002. At December 31, 2003, the allowance for credit losses was $14,880,000, or
1.29% of total loans and leases, versus $15,036,000, or 1.41% of total loans
and leases, at December 31, 2002.
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 reviews may result in adjustments to the
provision based upon their judgments of information available at the time of
each examination.
Table 8 presents a five-year history for the allocation of the allowance,
reflecting consistent use of the methodology outlined above, along with the
credit mix (year-end credit balances by category as a percent of total loans
and leases). The loan and lease categories were expanded beginning in 2002 to
mirror the loan and lease breakout in Table 4 - Analysis of Loans and Leases.
Such expansion of categories in the detail shown for the two most recent years
is not practicable for prior years. The allowance is allocated in the following
table to various loan and lease categories based on the methodology used to
estimate loan losses, however, the allocation does not restrict the usage of
the allowance for any specific loan or lease category.
Table 8 Allowance for Credit Losses
During 2003, there were no changes in estimation methods or assumptions that
affected the allowance methodology. Significant variation can occur over time
in the methodologys 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 2003, when measured
against the total allowance, was 6% versus 3% a year earlier. The total
allowance at December 31, 2003, including the unallocated portion, was within
the desirable range under the Companys policy guidelines derived from the
allowance methodology.
21
The allowance decreased by $156,000 (or 1%) during 2003, which was the amount
of net charge-offs for the year. The required allowance for consumer loans
decreased significantly during the year and was offset by smaller increases in
the required allowance for commercial loans and leases and for residential real
estate loans. The consumer loan portfolio grew by 4% over the period. However,
the portion of the allowance attributed to this category decreased by 30% or
$883,000 due primarily to lower requirements related to a decreased historical
loan volume trend factor. Partially offsetting this decline was a 3% or
$251,000 rise in the required allowance for commercial loans and leases during
the year that equaled the percentage of growth in the portfolio. The required
reserve pertaining to residential real estate loans also rose in 2003, by 4% or
$139,000, while the portfolio as a whole grew by 18%. The rise in required
reserves that would normally accompany portfolio growth was offset in this
portfolio primarily by lower requirements related to a decreased historical
loan volume trend factor for residential construction loans.
At December 31, 2003, total non-performing loans and leases were $2,855,000, or
0.25% of total loans and leases, compared to $2,745,000, or 0.26% of total
loans and leases, at December 31, 2002. As shown in Table 10, the ratio of
non-performing loans and leases to total loans and leases has been very
consistent over the past five years except for 2001, which included a problem
credit of a single borrower in the amount of approximately $5,125,000. The
property securing this credit was sold in October 2002, and all principal,
interest, and fees due to the Company were paid in full. The allowance
represented 521% of non-performing loans and leases at December 31, 2003,
versus coverage of 548% a year earlier. Significant variation in the coverage
ratio may occur from year to year because the amount of non-performing 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 $77,000 at December 31, 2003, compared to $0 at
December 31, 2002.
The balance of impaired loans was $336,000 at December 31, 2003, with reserves
of $120,000 against those loans, compared to $170,000 at December 31, 2002,
with no reserves.
The Companys borrowers are concentrated in five counties of the State of
Maryland. Commercial and residential mortgages, including home equity loans and
lines, represented 67% of total loans and leases at December 31, 2003, compared
to 64% at December 31, 2002. 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 Companys substantial experience in most of the
markets served, and its lending practices.
Table 9 Summary of Credit Loss Experience
22
Table 10Analysis of Credit Risk
Market Risk Management
The Companys net income is largely dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income. Similarly, when interest-earning assets mature or reprice more quickly
than interest-bearing liabilities, falling interest rates could result in a
decrease in net interest income. Net interest income is also affected by
changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds, such as
noninterest-bearing deposits and stockholders equity.
The Companys interest rate sensitivity, as measured by the repricing of its
interest sensitive assets and liabilities at December 31, 2003 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 18%
of total assets, with approximately 45% of rate sensitive assets and
approximately 31% of rate sensitive liabilities subject to maturity or
repricing within a one-year period from December 31, 2003. The one-year
cumulative GAP continues in an asset sensitive position, but reflects a larger
positive GAP position than at the end of 2002. This was due to the maturity and
subsequent replacement of a significant percentage of the investment portfolio
throughout the year into shorter average life investments as well as the
maturity and subsequent replacement of Federal Home Loan Bank of Atlanta
borrowings into longer maturities than those that matured throughout the year.
In addition, the Company had some maturities of short-term borrowings in the
form of customer repurchase
agreements that were not renewed. The investment portfolio is comprised 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 Companys 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 Companys 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. The
following GAP analysis schedule sets out the time frames from December 31,
2003, in which the Companys assets and liabilities are subject to repricing.
23
Table 11 Interest Rate Sensitivity Analysis
The Companys 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 in U.S. Treasury interest rates for maturities from one day
to thirty years. The Company intends to effectively manage the potential
adverse impacts that changing interest rates may have on its short-term
earnings, long-term value, and liquidity by employing simulation analysis
through the use of computer modeling. The simulation model captures optionality
factors such as call features and interest rate caps and floors imbedded in
investment and loan portfolio contracts. At December 31, 2003, as at December
31, 2002, the simulation of a hypothetical change of minus 200 or more basis
points in U.S. Treasury interest rates was not practical, due to historically
low prevailing interest yields and rates (See Table 1). Therefore, the Company
again chose to apply a plus 200 basis point change and a minus 100 basis point
change when evaluating its interest rate risk position. Measured from December
31, 2003, the simulation analysis estimates that net interest income would
decline (as computed) by 9.17% over a twelve month period given a decrease in
interest rates of 100 basis points compared to a policy limit of 15%. In terms
of equity capital on a fair value basis, the simulation analysis estimates that
the fair value of equity capital would decline (as computed) by 20.41% given an
increase in interest rates of 200 basis points compared to a policy limit of
27.5%.
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 Companys 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 bank borrowing arrangements.
24
Liquidity
Liquidity is measured by a financial institutions ability to raise funds
through loan and lease repayments, maturing investments, deposit growth,
borrowed funds, capital, or the sale of highly marketable assets such as
investment securities and residential mortgage loans. The Companys liquidity
position, considering both internal and external sources available, exceeded
anticipated short-term and long-term needs at December 31, 2003. All deposits,
except time deposits of $100,000 or more, considered a stable funding source by
management, equaled 66% of total earning assets at December 31, 2003. 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
and 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 Companys 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. Under this
approach, implemented by the Funds Management Committee under formal policy
guidelines, the Companys liquidity position is measured weekly, looking
forward thirty, sixty and ninety days. The measurement is based upon the
projection of 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, 2003, show short-term
investments exceeding short-term borrowings by $69,038,000 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 $711,880,000 with the Federal Home Loan Bank of Atlanta, of which
$360,702,000 was outstanding at December 31, 2003. Other external sources of
liquidity available to the Company in the form of lines of credit granted by
the Federal Reserve, correspondent banks and other institutions totaled
$262,562,000 at December 31, 2003, against which there were outstanding
borrowings 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, 2003.
The Companys time deposits of $100,000 or more represented 8.6% of total
deposits at December 31, 2003, and are shown by maturity in the table below.
Bancorp has various contractual obligations that affect its cash flows and
liquidity. For information regarding material contractual obligations, please
see Market Risk Management, above and Note 6-Premises and Equipment, Note
10-Long-term Borrowings, Note 13-Pension, Profit Sharing and Other Employee
Benefit Plans, Note 17-Financial Instruments with Off-balance Sheet Risk,
and Note 19-Fair Value of Financial Instruments, of the Notes to the
Consolidated Financial Statements.
Off-Balance Sheet Arrangements
With the exception of Bancorps obligations in connection with its Trust
Preferred Securities, irrevocable letters of credit, and loan commitments, and
the effects of covered call options, Bancorp has no off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on Bancorps financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources, that is material to investors. The Trust Preferred
Securities were issued by Sandy Spring Capital Trust I (the Trust), a
subsidiary of Bancorp created for the purpose of issuing the Trust Preferred
Securities and purchasing Bancorps junior subordinated debentures, which are
its sole assets. 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. Bancorp owns all of the Trusts outstanding securities.
Bancorp and the Trust believe that, taken together, Bancorps 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 Trusts obligations under
25
the preferred. For additional information on off-balance sheet arrangements,
please see Note 17-Financial Instruments with Off-Balance Sheet Risk and
Note 10-Long-term Borrowings of the Notes to the Consolidated Financial
Statements, and Capital Management, and Securities above.
CHANGE IN INDEPENDENT AUDITORS
On April 7, 2003, Bancorp dismissed Stegman & Company (Stegman), which had
previously served as independent auditors for the Bancorp. The reports of
Stegman on the consolidated financial statements of Bancorp as of and for the
fiscal years ended December 31, 2002 and December 31, 2001 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles. The change in independent
auditors was recommended by Bancorps Audit Committee and approved by Bancorps
Board of Directors. In connection with its audit for the fiscal years ended
December 31, 2002 and 2001, and in the interim period from January 1, 2003
through April 7, 2003, there were no disagreements with Stegman on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope procedure, which disagreements, if not resolved to the
satisfaction of Stegman, would have caused Stegman to make reference to such
disagreements in its report on the consolidated financial statements for such
years.
26
Sandy Spring Bancorp, Inc. and Subsidiaries
See Notes to Consolidated Financial Statements.
27
Sandy Spring Bancorp, Inc. and Subsidiaries
See Notes to Consolidated Financials Statements
28
Sandy Spring Bancorp, Inc. and Subsidiaries
See Notes to Consolidated Financial Statements.
29
Sandy Spring Bancorp, Inc. and Subsidiaries
See Notes to Consolidated Financial Statements.
30
Sandy Spring Bancorp, Inc. and Subsidiaries
Note 1Significant Accounting Policies
The accounting and reporting policies of the Company, which include 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.
Certain reclassifications have been made to amounts previously reported to
conform to the classifications made in 2003. 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 five Maryland counties of
Anne Arundel, Frederick, Howard, Montgomery, and Prince Georges, and has a
concentration in residential and commercial mortgage loans.
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 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.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and federal funds sold (items with an original maturity of
three months or less).
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 Companys 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 at either December 31, 2003 or December 31,
2002.
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 to the earlier of the
maturity or expected call date and discount accretion to the maturity date.
Declines in the fair value of individual held-to-maturity securities below
their cost that are other than temporary result in write-downs of the
individual securities to their fair value. Factors affecting the determination
of whether an other-than-temporary impairment has occurred include a
downgrading of the security by the rating agency, a significant deterioration
in the financial condition of the issuer, or that management would not have the
ability to hold a security for a period of time sufficient to allow for any
anticipated recovery in fair value.
Other equity securities represent Federal Reserve Bank and Federal Home Loan
Bank of Atlanta stock, which are considered restricted as to marketability.
31
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 Companys 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 net of
deferred tax, as accumulated other comprehensive income, a separate component
of stockholders equity. The carrying values of securities available-for-sale
are adjusted for premium amortization to the earlier of the maturity or
expected call date and discount accretion to the maturity date. 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. Declines in the fair value of individual
available-for-sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. Factors
affecting the determination of whether an other-than-temporary impairment has
occurred include a downgrading of the security by a rating agency, a
significant deterioration in the financial condition of the issuer, or that
management would not have the intent and ability to hold a security for a
period of time sufficient to allow for any anticipated recovery in fair value.
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. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment of the
related loan yield using the interest method. Lease financing assets, all of
which are direct financing leases, include aggregate lease rentals, net of
related unearned income. Leasing income is recognized on a basis that achieves
a constant periodic rate of return on the outstanding lease financing balances
over the lease terms. The Company generally 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 managements
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.
All interest accrued but not collected for loans that are placed on non-accrual
or charged-off is reversed against interest income. Interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
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 and interest payments are 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 (usually 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 loans effective
interest rate, or the fair value of the collateral if repayment is expected to
be provided by the collateral. Generally, the Company measures impairment on
such loans by reference to the fair value of the collateral. Income on impaired
loans is recognized on a cash basis, and payments are first applied against the
principal balance outstanding.
Allowance for Credit Losses
The allowance for credit losses (allowance) represents an amount which, in
managements 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 consideration of a
number of factors, as outlined below, to establish a prudent level.
Determination of the allowance is inherently subjective and requires
significant estimates, including estimated losses on pools of homogeneous loans
and leases based on historical loss experience and consideration of current
economic trends, which may be susceptible to significant change. Loans and
leases deemed uncollectible are charged against the allowance, while recoveries
are credited to the allowance. Management adjusts the level of the allowance
through the provision for credit losses, which is recorded as a current period
operating expense. The Companys systematic methodology for assessing the
appropriateness of the allowance includes: (1) the formula allowance reflecting
historical losses, as adjusted, by credit category and (2) the specific
allowance for risk-rated credits on an individual or portfolio basis.
32
The formula allowance that is based upon historical loss factors, as adjusted,
establishes allowances for the major loan and lease categories based upon
adjusted historical loss experience over the prior eight quarters, weighted so
that losses realized in the most recent quarters have the greatest effect. The
factors used to adjust the historical loss experience address various risk
characteristics of the Companys loan and lease portfolio including (1) trends
in delinquencies and other non-performing loans, (2) changes in the risk
profile related to large loans in the portfolio, (3) changes in the categories
of loans comprising the loan portfolio, (4) concentrations of loans to specific
industry segments, (5) changes in economic conditions on both a local and
national level, (6) changes in the Companys credit administration and loan and
lease portfolio management processes and (7) quality of the Companys credit
risk identification processes.
The specific allowance is used to allocate an allowance for internally risk
rated commercial loans where significant conditions or circumstances indicate
that a loss may be imminent. Analysis resulting in specific allowances,
including those on loans identified for evaluation of impairment, includes
consideration of the borrowers overall financial condition, resources and
payment record, support available from financial guarantors and the sufficiency
of collateral. These factors are combined to estimate the probability and
severity of inherent losses. Then a specific allowance is established based on
the Companys calculation of the potential loss embedded in the individual
loan. Allowances are also established by application of credit risk factors to
other internally risk rated loans, individual consumer and residential loans
and commercial leases having reached non-accrual or 90-day past due status, and
unfunded commitments. Each risk rating category is assigned a credit risk
factor based on managements estimate of the associated risk, complexity, and
size of the individual loans within the category. Additional allowances may
also be established in special circumstances involving a particular group of
credits or portfolio within a risk category when management becomes aware that
losses incurred may exceed those determined by application of the risk factor
alone.
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, which generally range from
3 to 10 years for furniture, fixtures and equipment, 3 to 5 years for computer
software and hardware, and 10 to 40 years for buildings and building
improvements. Leasehold improvements 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 included in noninterest
expense.
Other Real Estate Owned (OREO)
OREO, which is included in other assets, is comprised of 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.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquisition over the fair
value of the net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with a related
contract, asset, or liability. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under the provisions of SFAS No. 142, goodwill is no
longer amortized over an estimated life, but rather is tested at least annually
for impairment. Intangible assets that have finite lives continue to be
amortized over their estimated useful lives and also continue to be subject to
impairment testing. All of the Companys other intangible assets have finite
lives and are being amortized on a straight-line basis over varying periods not
exceeding 15 years. Prior to adoption of SFAS No. 142, the Companys goodwill
was amortized
on a straight-line basis over varying periods not exceeding 10 years. Note 7
includes a summary of the Companys goodwill and other intangible assets as
well as further detail about the impact of the adoption of SFAS No. 142.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
33
Stock Compensation Plans
At December 31, 2003, the Company had two stock-based employee compensation
plans in existence, the 1992 stock option plan (expired but having outstanding
options that may still be exercised) and the 1999 stock option plan as
described more fully in Note 12. The Company accounts for those plans under the
intrinsic value recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Therefore, no stock-based employee compensation cost
is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation for the three years ended December 31.
Advertising Costs
Advertising costs are included in noninterest expenses.
Earnings Per Common Share
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.
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 November 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45), which covers guarantees such as standby letters of credit, performance
guarantees, and direct or indirect guarantees of the indebtedness of others,
but not guarantees of funding. FIN 45 requires a guarantor to recognize, at the
inception of a guarantee, a liability in an amount equal to the fair value of
the obligation undertaken in issuing the guarantee, and requires disclosure
about the maximum potential payments that might be required, as well as the
collateral or other recourse obtainable. The recognition and measurement
provisions of FIN 45 were effective on a prospective basis after December 31,
2002, and its adoption by the Company on January 1, 2003 has not had a
significant effect on the Companys consolidated financial statements.
34
In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46), which explains identification of variable
interest entities and the assessment of whether to consolidate these entities.
FIN 46 requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the involved parties. The potential de-consolidation of
subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities appears to be an unintended consequence
of FIN 46. On December 17, 2003, the FASB revised FIN 46 (FIN 46R) and deferred
the effective date of FIN 46 to no later then the end of the first reporting
period that ends after March 15, 2004. Accordingly, the Company has chosen to
postpone de-consolidation of the trust preferred securities until March 31,
2004. The overall effect on the Companys financial position and operating
results of this de-consolidation will not be material. The Company has no
significant variable interests in any entities which would require disclosure
or consolidation.
In April 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The Statement
is effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. There was no material
impact on the Companys financial condition or results of operations upon
adoption of this Statement.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both a liability and equity. It
requires that an issuer classify certain financial instruments as a liability,
although the financial instrument may previously have been classified as
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. There was no material
impact on the Companys financial condition or results of operations upon
adoption of this Statement.
In December 2003, the FASB revised SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits. This revision requires additional
disclosures to those required in SFAS No. 132 about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans. This Statement is effective for
financial statements with fiscal years ending after December 15, 2003. The
Company adopted this Statement as of December 31, 2003 and all required
disclosures have been made in accordance with this Statement.
Note 2Cash 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 balance
maintained in 2003 was $2,272,000 and in 2002 was $2,188,000.
Note 3Investments Available-for-Sale
The amortized cost and estimated fair values of investments available-for-sale
at December 31 are as follows:
35
Gross unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss
position at December 31, 2003 are as follows:
The available-for-sale investment portfolio has a fair value of approximately
$639 million of which approximately $191 million of the securities have some
unrealized losses as compared to amortized cost. Of these securities, $172
million, or 90%, are U.S. Agency bonds, $11 million, or 6% are mortgage-backed
securities and the remaining 4% are state and municipal bonds. Approximately
99% of the bonds are rated AAA. The securities representing the unrealized
losses in the available-for-sale portfolio all have modest duration risk (2.37
years), low credit risk, and minimal loss (approximately 1%) when compared to
book value. The unrealized losses that exist are the result of market changes
in interest rates since the original purchase. These factors coupled with the
fact the Company has both the intent and ability to hold these investments for
a period of time sufficient to allow for any anticipated recovery in fair value
substantiates that the unrealized losses in the available-for-sale portfolio
are temporary.
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.
Sale of investments available-for-sale during 2003, 2002 and 2001 resulted in
the following:
At December 31, 2003 and 2002, investments available-for-sale with a carrying
value of $407,430,000 and $479,573,000, 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, 2003 and 2002.
36
Note 4Investments 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:
Gross unrealized losses and fair value by length of time that the individual
held-to-maturity securities have been in a continuous unrealized loss position
at December 31, 2003 are as follows:
The held-to-maturity investment portfolio has a fair value of approximately
$345 million of which approximately $91 million of the securities have some
unrealized losses as compared to amortized cost. Of these securities, $36
million, or 40%, are U.S. Agency bonds and $55 million, or 60%, are state and
municipal bonds. Approximately 90% of the bonds are rated AAA and 9% are rated
AA1. The securities representing the unrealized losses in the held-to-maturity
portfolio all have modest duration risk (4.5 years), low credit risk, and
minimal losses (approximately 1%) when compared to book value. The unrealized
losses that exist are the result of market changes in interest rates since the
original purchase. These factors coupled with the Companys intent and ability
to hold these investments for a period of time sufficient to allow for any
anticipated recovery in fair value substantiates that the unrealized losses in
the held-to-maturity portfolio are temporary.
The amortized cost and estimated fair values of debt securities
held-to-maturity at December 31 by contractual maturity 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.
37
At December 31, 2003 and 2002, investments held-to-maturity with a book value
of $114,413,000 and $101,484,000, 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, 2003 or 2002.
Other equity securities at December 31 are as follows:
Note 5Loans and Leases
Major categories at December 31 are presented below:
In the table, home equity loans are classified as consumer; commercial real
estate and commercial construction loans are classified as commercial loans and
leases; and, residential construction credits are classified as residential
real estate.
Activity in the allowance for credit losses for the preceding three years ended
December 31 is shown below:
38
Information regarding impaired loans at December 31, and for the respective
years, is as follows:
Note 6Premises and Equipment
Premises and equipment at December 31 consist of:
Depreciation and amortization expense for premises and equipment amounted to
$4,133,000 for 2003, $3,286,000 for 2002 and $2,967,000 for 2001.
Total rental expense (net of rental income) of premises and equipment for the
three years ended December 31 was $3,301,000 (2003), $2,787,000 (2002) and
$2,465,000 (2001). 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, 2003
for all non-cancelable operating leases are:
39
Note 7Goodwill and Other Intangible Assets
Effective January 1, 2002, goodwill is no longer being amortized but rather is
tested for impairment under the provisions of SFAS No. 142. The acquired
intangible assets apart from goodwill are being amortized over their remaining
estimated lives.
The significant components of goodwill and acquired intangible assets are as
follows:
Future estimated annual amortization expense is presented below:
Under the provisions of SFAS No. 142, goodwill was subjected to an initial
assessment for impairment as of January 1, 2002. The Company also performed an
annual test for impairment as of October 1, 2003 and 2002. As a result of both
the initial and annual assessment reviews, the Company determined that there
was no impairment of goodwill at either date. The Company will continue to
review goodwill on an annual basis for impairment and as events occur or
circumstances change.
The Company adopted SFAS No. 142 effective January 1, 2002. The following
presents the pro forma effects of applying SFAS No. 142 for the three years
ended December 31:
40
Note 8Deposits
Deposits outstanding at December 31 consist of:
Interest expense on time deposits of $100,000 or more amounted to $3,456,800,
$3,728,800 and $5,650,000 for 2003, 2002, and 2001, respectively.
The following is a maturity schedule for time deposits maturing within years
ending December 31:
41
Note 9Short-term Borrowings
Information relating to short-term borrowings is as follows for the years ended
December 31:
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 $711,880,000 at interest
rates based upon current market conditions, of which $360,702,000 was
outstanding at December 31, 2003. The Company also had lines of credit
available from the Federal Reserve, correspondent banks, and other institutions
of $262,562,000 at December 31, 2003, against which there were outstandings of
$50,000,000.
Note 10Long-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 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:
42
The 6.45% and 6.68% advances due in 2006 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 amounting to $301,398,000 at December 31,
2003 as collateral under the borrowing agreement with the FHLB.
Note 11Stockholders Equity
The Companys Articles of Incorporation 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.
The Company has an employee stock purchase plan (the Purchase Plan) which
commenced on July 1, 2001, with consecutive monthly offering periods
thereafter. The shareholders have reserved 450,000 authorized but unissued
shares of common stock 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.
In 2003, the Companys Board of Directors renewed a Stock Repurchase Plan by
authorizing the repurchase of up to 5%, or approximately 727,000 shares of the
Companys outstanding common stock, par value $1.00 per share, in connection
with shares expected to be issued under the Companys stock option and employee
benefit plans, and for other corporate purposes. The share repurchases are
expected to be made primarily on the open market from time to time until March
31, 2005, or earlier termination of the repurchase program by the Board.
Repurchases will be made at the discretion of management based upon market,
business, legal, accounting and other factors. Bancorp purchased the equivalent
of 49,560 shares of its common stock under a prior share repurchase program,
which expired on March 31, 2003 and has purchased 55,900 shares under the
current share repurchase program through December 31, 2003.
The Company has an Investors Choice Plan (the Plan), which is sponsored and
administered by the American Stock Transfer and Trust Company (AST) as
independent agent, which enables current shareholders as well as first-time
buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly
through AST at low commissions. 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, 2003, the Bank could have paid additional dividends of
$55,177,000 to its parent company without regulatory approval. In conjunction
with the Companys trust preferred securities, the Bank issued a subordinated
note to Bancorp for $33,565,000 which was outstanding at December 31, 2003 and
2002. There were no other loans outstanding between the Bank and the Company at
either year end.
Note 12Stock Option Plan
The Companys 1999 Stock Option Plan (Option Plan) provides for the granting
of non-qualifying stock options to the Companys directors and incentive and
non-qualifying stock options to selected key employees on a periodic basis at
the discretion of the Board. The Option Plan authorizes the issuance of up to
1,600,000 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. The exercise
price of stock options must be paid for in full in cash or shares of common
stock, or a combination of both. The Stock Option Committee has the discretion
when making a grant of stock options to impose restrictions on the shares to be
purchased in exercise of such options. Outstanding options granted under the
expired 1992 Stock Option Plan will continue until exercise or expiration.
43
The following is a summary of changes in shares under option for the years
ended December 31:
The following table summarizes information about options outstanding at
December 31, 2003:
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:
Note 13Pension, Profit Sharing, and Other Employee Benefit Plans
Defined Benefit Pension Plan
The Company has a qualified, noncontributory, defined benefit pension plan
covering substantially all employees. Benefits after January 1, 2003, are based
on the benefit earned as of December 31, 2002, plus benefits earned in future
years of service based on the employees compensation during each such year.
The Companys 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.
44
The Plans funded status as of December 31 is as follows:
Amounts recognized in the balance sheet consist of a prepaid benefit cost of
$3,050,000 and $2,714,000 for the years ended December 31, 2003 and December
31, 2002, respectively.
Net periodic benefit cost for the previous three years includes the following
components:
Additional Information
Weighted Average Assumptions used to determine benefit obligations at December
31:
45
Weighted Average Assumptions used to determine net periodic benefit cost for
years ended December 31:
The expected rate of return on assets of 8% reflects the Plans predominant
investment of assets in equity type securities and an analysis of the average
rate of return of the S & P 500 index and the Lehman Brothers Govt/Corp. index
over the past 10 years weighted by 66.7% and 33.3%, respectively.
Plan Assets
The Companys pension plan weighted-average allocations at December 31, 2003,
and 2002, by asset category are as follows:
The Company has a written investment policy approved by the Board of Directors
that governs the investment of the defined benefit pension fund trust
portfolio. The investment policy is designed to provide limits on risk that is
undertaken by the investment managers both in terms of market volatility of the
portfolio and the quality of the individual assets that are held in the
portfolio. The investment policy statement focuses on the following areas of
concern: preservation of capital, diversification, risk tolerance, investment
duration, rate of return, liquidity and investment management costs. Market
volatility risk is controlled by limiting the asset allocation of the most
volatile asset class, equities, to no more than 70% of the portfolio; and
ensuring that there is sufficient liquidity to meet distribution requirements
from the portfolio without disrupting long-term assets. Diversification of the
equity portion of the portfolio is controlled by limiting the value of any
initial acquisition so that it does not exceed 5% of the market value of the
portfolio when purchased. The policy requires the sale of any portion of an
equity position when its value exceeds 10% of the portfolio. Fixed income
market volatility risk is managed by limiting the term of fixed income
investments to five years. Fixed income investments must carry an A or better
rating by a recognized credit rating agency. Corporate debt of a single issuer
may not exceed 10% of the market value of the portfolio. The investment in
derivative instruments such as naked call options, futures, commodities, and
short selling is prohibited. Investment in equity index funds and the writing
of covered call options (a conservative strategy to increase portfolio
income) are permitted. Foreign currency denominated debt instruments are not
permitted. Investment performance is measured against industry accepted
benchmarks. The risk tolerance and asset allocation limitations imposed by the
policy are consistent with attaining the rate of return assumptions used in the
actuarial funding calculations. A Retirement Plan Investment Committee meets
quarterly to review the activities of the investment managers to ensure
adherence with the investment policy statement.
Contributions
The Company, with input from its actuaries, estimates that the 2004
contribution will be approximately $1.8 million which will maintain the pension
plans fully funded status.
Cash and Deferred Profit Sharing Plan
The Company has a qualified Cash and Deferred Profit Sharing Plan that includes
a 401(k) provision with a Company match. The profit sharing component is
non-contributory and covers all employees after ninety days of service. The
401(k) plan provision is voluntary and also covers all employees after ninety
days of service. Employees contributing to the 401(k) provision receive a
matching contribution up to the first 4% of compensation based on years of
service and subject to employee contribution limitations. The Company match
includes a vesting schedule with employees becoming 100% vested after four
years of service. The Plan permits employees to purchase shares of
46
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 are included in noninterest expenses,
totaled $916,000 in 2003, $2,843,000 in 2002, and $1,828,000 in 2001.
The Company also has a performance based compensation benefit which is
integrated with the Cash and Deferred Profit Sharing Plan and which provides
incentives to employees based on the Companys financial results as measured
against key performance indicator goals set by management. Payments are made
annually and amounts included in noninterest expense under the plan amounted to
$370,000 in 2003, $2,028,000 in 2002, and $1,704,000 in 2001.
The Company has Supplemental Executive Retirement Agreements (SERAs) with its
executive officers providing for retirement income benefits as well as
pre-retirement death benefits. Retirement benefits payable under 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 costs included in noninterest expenses
for 2003, 2002 and 2001 were $553,000, $384,000, and $232,000, respectively.
The Company has an Executive Health Insurance 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 $6,500 limitation for each
executive per year. Expenses under the plan, covering insurance premium and
out-of-pocket expense reimbursement benefits, totaled $224,000 in 2003,
$115,000 in 2002, and $66,000 in 2001.
Note 14Income Taxes
Income tax expense for the years ended December 31 consists of:
47
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:
No valuation allowance exists with respect to deferred tax items. The Company
has a net operating loss (NOL) carryforward of $409,000, which expires in 2008.
The NOL carryforward is a result of an acquisition in 1993 and is subject to
annual limitations under IRS Code Section 382.
Note 15 Net Income per Common Share
The calculation of net income per common share for the years ended December 31
is as follows:
As of December 31, 2003 options for 189,489 shares of common stock were not
included in computing diluted net income per share because their effects were
antidilutive.
48
Note 16 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.
Note 17 Financial Instruments with Off-balance Sheet Risk
In the normal course of business, the Company has various outstanding credit
commitments that are properly not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Companys clients.
The associated credit risk is controlled by subjecting such activity to the
same credit and quality controls as exist for the Companys lending and
investing activities. The commitments involve diverse business and consumer
customers and are generally well collateralized. Collateral held varies, but
may include residential real estate, commercial real estate, property and
equipment, inventory and accounts receivable. 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 $229,140,000 at December 31, 2003, and $203,371,000 at
December 31, 2002. These commitments are contingent upon continuing customer
compliance with the terms of the agreement.
Irrevocable letters of credit, totaling $22,241,000 at December 31, 2003, and
$22,004,000 at December 31, 2002, are obligations to make payments under
certain conditions to meet contingencies related to customers contractual
agreements. They are primarily used to guarantee a customers contractual
and/or financial performance, and are seldom exercised. Collateral held varies
and is required in instances which the Company deems necessary. At December 31,
2003, a significant portion of the letters of credit were collateralized.
Note 18 Litigation
In the normal course of business, the Company may become involved in litigation
arising from the 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 Companys financial condition, operating results or liquidity.
Note 19 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 97.1% of the Companys assets and 99.3% 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 Companys 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.
49
Present value techniques used in estimating the fair value of many of the
Companys 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 Companys financial instruments at December 31
are as follows:
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 Temporary Investments:
Investments.
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.
50
51
Note 20 Parent Company Financial Information
The condensed financial statements for Sandy Spring Bancorp, Inc. (Parent Only)
pertaining to the periods covered by the Companys consolidated financial
statements are presented below:
Balance Sheets
Statements of Income
52
Statements of Cash Flows
Note 21 Regulatory Matters
The Company (on a consolidated basis) 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 Companys and the Banks 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 Banks assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Banks capital amounts and classifications are also subject to qualitative
judgments 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 minimum 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, 2003 and 2002, the
capital levels of the Company and the Bank substantially exceeded all capital
adequacy requirements to which they are subject.
As of December 31, 2003, the most recent notification from the Banks primary
regulator categorized the Bank as 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 below. There are no conditions or
events since that notification that management believes have changed the Banks
category.
53
The Companys and the Banks actual capital amounts and ratios are also
presented in the table:
Note 22 Quarterly Financial Results (Unaudited)
A summary of selected consolidated quarterly financial data for the two years ended December 31, 2003 is reported in the following table.
54
To the Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheet of Sandy Spring
Bancorp, Inc. and Subsidiaries as of December 31, 2003, and the related
consolidated statements of income, changes in stockholders equity and cash
flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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, 2003, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
Audit Committee of the
We have audited the accompanying consolidated balance sheet of Sandy Spring
Bancorp, Inc. and Subsidiaries as of December 31, 2002, and the related
consolidated statements of income, changes in stockholders equity, and cash
flows for each of the two years in the period ended December 31, 2002. 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, 2002, and the results of
their operations and cash flows for each of the two years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Baltimore, Maryland
55
Sandy Spring Bancorp, Inc. and Subsidiaries
Management acknowledges its responsibility for financial reporting (both
audited and unaudited) which provides a fair representation of the Companys
operations and is reliable and relevant to a meaningful appraisal of the
Company.
Management has prepared the financial statements in accordance with generally
accepted accounting principles, making appropriate use of estimates and
judgment, and considering materiality. Except for tax equivalency adjustments
made to enhance comparative analysis, and use of the non-GAAP efficiency ratio,
as described in this report, 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 generally accepted accounting principles 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 generally accepted accounting
principles and applicable Federal Reserve requirements as of December 31, 2003.
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 generally accepted accounting principles and applicable Federal
Reserve requirements as of December 31, 2003.
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, 2003.
Oversight of the financial reporting process is provided by the Audit Committee
of the Board of Directors, which consists solely of outside directors. This
Committee meets on a regular basis, in private, with the internal auditor, who
reports directly to the Audit Committee, to approve the audit schedule and
scope, discuss the adequacy of the internal control systems and the quality of
financial reporting, review audit reports and address problems. The Committee
also reviews the Companys annual report on Form 10-K to shareholders and filed
with the Securities and Exchange Commission, and its quarterly reports on Form
10-Q. The Audit Committee controls the hiring and compensation of the external
auditors, and meets at least quarterly with the external auditors, and has
direct and private access to them at any time.
The independent public accounting firms of McGladrey and Pullen, LLP, in 2003
and Stegman & Company in 2002 and 2001 have examined the Companys financial
records. The preceding opinion statements are based upon knowledge of the
Companys accounting systems, as well as on tests and other audit procedures
performed in accordance with generally accepted auditing standards.
56
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 was founded
in 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 Anne Arundel, Frederick, Howard, Montgomery and Prince Georges 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 Banks 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 Banks
primary market area of Anne Arundel, Frederick, Howard, Montgomery and Prince
Georges 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 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 Companys and the Banks principal executive office is located at 17801
Georgia Avenue, Olney, Maryland 20832, and its telephone number is
301-774-6400
. The Companys Website is located at
www.sandyspringbank.com
.
Loan and Lease Products
Residential Real Estate Loans. The residential real estate category contains
loans principally to consumers secured by residential real estate. The
Companys residential real estate lending policy requires each loan to have
viable repayment sources. Residential real estate loans are evaluated for the
adequacy of these repayment sources at the time of approval, based upon
measures including credit scores, debt-to-income ratios, and collateral values.
Credit risk for residential real estate loans arises from borrowers lacking the
ability or willingness to repay the loan, and by a shortfall in the value of
the residential real estate in relation to the outstanding loan balance in the
event of a default and subsequent liquidation of the real estate collateral.
The residential real estate portfolio includes both conforming and
nonconforming mortgage loans. Conforming mortgage loans represent loans
originated in accordance with underwriting standards set forth by the
government-sponsored entities (GSEs), including the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (Freddie Mac),
and the Government National Mortgage Association (GNMA), which serve as the
primary purchasers of loans sold in the secondary mortgage market by mortgage
lenders. These loans are generally collateralized by one-to-four-family
residential real estate, have loan-to-collateral value ratios of 80% or less or
have mortgage insurance to insure down to 80%, and are made to borrowers in
good credit standing. Substantially all fixed-rate conforming
loans originated are sold in the secondary mortgage market. For any loans
retained by the Company, title insurance insuring the priority of its mortgage
lien, as well as fire and extended coverage casualty insurance protecting the
properties securing the loans are required. Borrowers may be required to
advance funds, with each monthly payment of principal and interest, to a loan
escrow account from which the Company makes disbursements for items such as
real estate taxes, hazard insurance premiums and mortgage insurance premiums.
Appraisers approved by the Company appraise the properties securing
substantially all of the Companys residential mortgage loans.
Nonconforming mortgage loans represent loans that generally are not saleable in
the secondary market to the GSEs for inclusion in conventional mortgage-backed
securities due to the credit characteristics of the borrower, the underlying
documentation, the loan-to-value ratio, or the size of the loan, among other
factors. The Company originates nonconforming loans for its own portfolio and
for sale to third-party investors, usually large mortgage companies, under
commitments by them to purchase subject to compliance with pre-established
57
investor criteria. These nonconforming loans generated for sale include some
residential mortgage credits that may be categorized as sub-prime under federal
banking regulations. Such sub-prime credits typically remain on the Companys
consolidated books after funding for thirty days or less, and are included in
residential mortgages held for sale on the face of the balance sheet. The
Company also holds occasional, isolated credits that inadvertently failed to
meet GSE or other third-party investor criteria, or that were originated and
managed in the ordinary course of business (rather than in any sub-prime
lending program) and may have characteristics that could cause them to be
categorized as sub-prime. The Companys current practice is to sell all such
sub-prime loans to third party investors. The Company believes that the
sub-prime credits it originates or holds and the risks they entail are not
significant to its financial condition, results of operations, liquidity, or
capital resources.
The Company engages in sales of residential mortgage loans originated by the
Bank. The Companys current practice is to sell loans on a servicing released
basis. In 2001, the Company sold substantially all of its servicing rights,
which related to loans originated and sold with servicing retained in years
prior to 1995.
The Company makes residential real estate development and construction loans
generally to provide interim financing on property during the development and
construction period. Borrowers include builders, developers and persons who
will ultimately occupy the single-family dwelling. Residential real estate
development and construction loan funds are disbursed periodically as
pre-specified stages of completion are attained based upon site inspections.
Interest rates on these loans are usually adjustable. Loans to individuals for
the construction of primary personal residences are typically secured by the
property under construction, frequently include additional collateral (such as
a second mortgage on the borrowers present home), and commonly have maturities
of six to twelve months. The Company attempts to obtain the permanent mortgage
loan under terms, conditions and documentation standards that permit the sale
of the mortgage loan in the secondary mortgage loan market. The Companys
practice is to immediately sell substantially all fixed-rate residential
mortgage loans in the secondary market with servicing released.
Commercial Loans and Leases. The Company devotes significant resources and
attention to seeking and then serving commercial clients. Included in this
category are commercial real estate loans, commercial construction loans,
leases and other commercial loans. Over the years, the Companys 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.
Commercial loans are evaluated for the adequacy of repayment sources at the
time of approval and are regularly reviewed for any possible deterioration in
the ability of the borrower to repay the loan. Collateral generally is required
to provide the Company with an additional source of repayment in the event of
default by a commercial borrower. The structure of the collateral package,
including the type and amount of the collateral, varies from loan to loan
depending on the financial strength of the borrower, the amount and terms of
the loan, and the collateral available to be pledged by the borrower, but
generally may include real estate, accounts receivable, inventory, equipment or
other assets. Loans also may be supported by personal guarantees from the
principals of the commercial loan borrowers. The financial condition and cash
flow of commercial borrowers are closely monitored by the submission of
corporate financial statements, personal financial statements and income tax
returns. The frequency of submissions of required information depends upon the
size and complexity of the credit and the collateral that secures the loan.
Credit risk for commercial loans arises from borrowers lacking the ability or
willingness to repay the loan, and in the case of secured loans, by a shortfall
in the collateral value in relation to the outstanding loan balance in the
event of a default and subsequent liquidation of collateral. The Company has no
commercial loans to borrowers in similar industries that exceed 10% of total
loans.
Included in commercial loans are credits directly originated by the Company and
syndicated transactions or loan participations that are originated by other
lenders. The Corporations commercial
lending policy requires each loan, regardless of whether it is directly
originated or is purchased, to have viable repayment sources. The risks
associated with syndicated loans or purchased participations are similar to
those of directly originated commercial loans, although additional risk may
arise from the limited ability to control actions of the primary lender. Shared
National Credits, as defined by the banking regulatory agencies, represent
syndicated lending arrangements with three or more participating financial
institutions and credit exceeding $20 million in the aggregate. As of December
31, 2003, the Company had $15.9 million in Shared National Credits outstanding.
The Company also sells participations in loans it originates to other financial
institutions in order to build long-term customer relationships or limit loan
concentration. Strict policies are in place governing the degree of risk
assumed and volume of loans held. At December 31, 2003, other financial
institutions had $5.2 million in outstanding commercial and commercial real
estate loan participations sold by the Company, and the Company had $481,000 in
outstanding commercial and commercial real estate loan participations purchased
from other lenders, excluding Shared National Credits.
58
The Companys commercial real estate loans consist of loans secured by owner
occupied properties where an established banking relationship exists and
involves investment properties for warehouse, retail, and office space with a
history of occupancy and cash flow. The commercial real estate category
contains mortgage loans to developers and owners of commercial real estate.
Commercial real estate loans are governed by the same lending policies and
subject to credit risk as previously described for commercial loans. Although
terms and amortization periods vary, the Companys commercial mortgages
generally have maturities or repricing opportunities of five years or less. The
Company seeks to reduce the risks associated with commercial mortgage lending
by generally lending in its market area, using conservative loan-to-value
ratios and obtaining periodic financial statements and tax returns from
borrowers to perform annual loan reviews. It is also the Companys general
policy to obtain personal guarantees from the principals of the borrowers and
to underwrite the business entity from a cash flow perspective.
Commercial real estate loans secured by owner occupied properties are based
upon on the borrowers financial health and the ability of the borrower and the
business to repay. Whenever appropriate and available, the Bank seeks
governmental loan guarantees, such as the Small Business Administration loan
programs, to reduce risks. All borrowers are required to forward annual
corporate, partnership and personal financial statements. Interest rate risks
are mitigated by using either floating interest rates or by fixing rates for a
short period of time, generally less than three years. While loan amortizations
may be approved for up to 300 months, each loan generally has a call provision
(maturity date) of five years or less. A risk rating system is used to
determine loss exposure.
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 underwriting process is
designed to confirm that the project will be economically feasible and
financially viable; it is generally evaluated as though the Company will
provide permanent financing. The Companys portfolio growth objectives do not
include speculative commercial construction projects or projects lacking
reasonable proportionate sharing of risk. The Company has limited loan losses
in this area of lending through monitoring of development and construction
loans with on-site inspections and control of disbursements on loans in
process. Development and construction loans are secured by the properties under
development or construction and personal guarantees are typically obtained.
Further, to assure that reliance is not placed solely upon the value of the
underlying collateral, the Company considers the financial condition and
reputation of the borrower and any guarantors, the amount of the borrowers
equity in the project, independent appraisals, cost estimates and
pre-construction sales information.
Residential construction loans to residential builders are generally made for
the construction of residential homes for which a binding sales contract exists
and the prospective buyers had been pre-qualified for permanent mortgage
financing by either third-party lenders (mortgage companies or other financial
institutions) or the Company. Loans for the development of residential land are
extended when evidence is provided that the lots under development will be or
have been sold to builders satisfactory to the Company. These loans are
generally extended for a period of time sufficient to allow for the clearing
and grading of the land and the installation of water, sewer and roads,
typically a minimum of eighteen months to three years. In addition, residential
land development loans generally carry a loan-to-value ratio not to exceed 75%
of the value of the project as completed.
The Company 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
and end users located primarily in east coast states from New Jersey to Florida
and in Illinois. The typical lease is small ticket by industry standards,
averaging less than $30,000, with individual leases generally not exceeding
$250,000. Terms generally are fixed payment for up to five years. Leases are
extended based primarily upon the ability of the borrower to pay rather than
the value of the leased property.
The Company makes other commercial loans. Commercial term loans are made to
provide funds for equipment and general corporate needs. This loan category is
designed to support borrowers who have a proven ability to service debt over a
term generally not to exceed 84 months. The Company generally requires a first
lien position on all collateral and requires guarantees from owners having at
least a 20% interest in the involved business. Interest rates on commercial
term loans are generally floating or fixed for a term not to exceed five years.
Management carefully monitors industry and collateral concentrations to avoid
loan exposures to a large group of similar industries or similar collateral.
Commercial loans are evaluated for historical and projected cash flow
attributes, balance sheet strength, and primary and alternate resources of personal
guarantors. Commercial term loan
documents require borrowers to forward regular financial information on both
the business and personal guarantors. Loan covenants require at least annual
submission of complete financial information and in certain cases this
information is required monthly, quarterly or semi-annually depending on the
degree to which the Company desires information resources for monitoring a
borrowers financial condition and compliance with loan covenants. Examples of
properly margined collateral for loans, as required by bank policy, would be a
75% advance on the lesser of appraisal or recent sales
59
price on commercial property, 80% or less advance on eligible receivables, 50%
or less advance on eligible inventory and an 80% advance on appraised
residential property. Collateral borrowing certificates may be required to
monitor certain collateral categories on a monthly or quarterly basis. Loans
may require personal guarantees. Key person life insurance may be required as
appropriate and as necessary to mitigate the risk of loss of a primary owner or
manager.
Commercial lines of credit are granted to finance a business borrowers
short-term credit needs and/or to finance a percentage of eligible receivables
and inventory. In addition to the risks inherent in term loan facilities, line
of credit borrowers typically require additional monitoring to protect the
lender against increasing loan volumes and diminishing collateral values.
Commercial lines of credit are generally revolving in nature and require close
scrutiny. The Company generally requires at least an annual out of debt period
(for seasonal borrowers) or regular financial information (monthly or quarterly
financial statements, borrowing base certificates, etc.) for borrowers with
more growth and greater permanent working capital financing needs. Advances
against collateral value are limited. Lines of credit and term loans to the
same borrowers generally are cross-defaulted and cross-collateralized. Interest
rate charges on this group of loans generally float at a factor at or above the
prime lending rate.
Consumer Lending. Consumer lending continues to be very important to the
Companys full-service, community banking business. This category of loans
includes primarily home equity loans and lines, installment loans, personal
lines of credit, marine loans and student loans.
The home equity category consists mainly of revolving lines of credit to
consumers which are secured by residential real estate. Home equity lines of
credit and other home equity loans are originated by the Company for typically
up to 90% of the appraised value, less the amount of any existing prior liens
on the property. While home equity loans have maximum terms of up to fifteen
years and interest rates are generally fixed, home equity lines of credit have
maximum terms of up to fifteen years and interest rates are generally
adjustable. The Company secures these loans with mortgages on the homes
(typically a second mortgage). Purchase money second mortgage loans originated
by the Company have maximum terms ranging from ten to thirty years. These loans
generally carry a fixed rate of interest for the entire term or a fixed rate of
interest for the first five years, repricing every five years thereafter at a
predetermined spread to the prime rate of interest. Home equity lines are
generally governed by the same lending policies and subject to credit risk as
described above for residential real estate loans.
Other consumer loans include installment loans used by customers to purchase
automobiles, boats, recreational vehicles, manufactured housing, and student
loans. These consumer loans are generally governed by the same overall lending
policies as described for residential real estate. Credit risk for consumer
loans arises from borrowers lacking the ability or willingness to repay the
loan, and in the case of secured loans, by a shortfall in the value of the
collateral in relation to the outstanding loan balance in the event of a
default and subsequent liquidation of collateral.
Consumer installment loans are generally offered for terms of up to five years
at fixed interest rates. The Company makes loans for automobiles, recreational
vehicles, and marine craft, both new and used, directly to the borrowers. The
Company also makes indirect marine loans at fixed rates for terms of up to
twenty years. Automobile loans can be for up to 100% of the purchase price or
the retail value listed by the National Automobile Dealers Association. The
terms of the loans are determined by the age and condition of the collateral.
Collision insurance policies are required on all these loans, unless the
borrower has substantial other assets and income. The Companys student loans
are made in amounts of up to $18,500 per year. The Company offers a variety of
graduate and undergraduate loan programs under the Federal Family Education
Loan Program. Interest is capitalized annually until the student leaves school
and amortization over a ten-year period then begins. It is the Companys
practice to sell all such loans in the secondary market when the student leaves
school. The Company also makes other consumer loans, which may or may not be
secured. The term of the loans usually depends on the collateral Unsecured
loans usually do not exceed $100,000 and have a term of no longer than 12
months.
Availability of Filings Through the Companys Website
The Company provides internet access to annual reports on form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms
3, 4, and 5, and amendments to those reports, through the Investor Relations
area of the Companys Website, at www.sandyspringbank.com. Access to these
reports is provided by means of a link to a third-party vendor that maintains a
database of such filings. In general, the Company intends that these reports be
available as soon as reasonably practicable after they are filed with or
furnished to the SEC. However, technical and other operational obstacles or
delays caused by the vendor may delay their availability. The SEC maintains a
Website (www.sec.gov) where these filings also are available through the SECs
EDGAR system. There is no charge for access to these filings through either the
Companys site or the SECs site, although users should understand that there
may be costs associated with electronic access, such as usage charges from
Internet access providers and telephone companies that they may bear.
60
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 (1) 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; (2) acquiring
all or substantially all of the assets of another bank or bank holding company;
or (3) 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 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.
In general, bank holding companies that qualify as financial holding companies
under federal banking law may engage in an expanded list of non-bank
activities. Non-bank and financially related activities of bank holding
companies, including companies that become financial holding companies, also
may be 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.
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 Reserves view that a bank
holding company should pay cash dividends only to the extent that the companys
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 companys capital
needs, asset quality, and overall financial condition.
Bank Regulation. On September 21, 2001, the Banks 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,
61
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 Banks depositors and the BIF. In addition, the Bank is
required to furnish quarterly and annual reports to the Federal Reserve. The
Federal Reserves 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 the 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 11 - 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 Bancorps
non-banking subsidiaries are limited in amount to 10% of the Banks capital and
surplus and, with respect to Bancorp and all such non-banking subsidiaries, to
an aggregate of 20% of the Banks 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 Banks 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 Banks capital and
surplus and as to the Company and all other affiliates together to an aggregate
of 20% of the Banks 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
Companys 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 banks 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.
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
institutions capital level and supervisory evaluations. Institutions are
assigned to one of three capital groupswell-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% or
greater; (ii) Tier 1 risk-based capital ratio of 6% or greater; and (iii) Tier
1 leverage ratio of 5% 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% or greater; (ii) Tier 1 risk-based capital ratio of 4% or
greater; and (iii) Tier 1 leverage ratio of 4% 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
institutions primary supervisory authority and such other information as the
FDIC determines to be relevant to the institutions financial condition and the
risk it poses to the deposit insurance
62
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 2004. Deposit insurance rates may be increased
during 2004 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 organizations 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 organizations 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 securities (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. The
Company believes that the Board of Governors of the Federal Reserve System,
which is the holding Companys banking regulator, may rule on continued
inclusion of trust preferred securities in regulatory capital following the
issuance of FIN 46R. At this time, it is not possible to estimate the effect,
if any, on the Companys Tier 1 regulatory capital as a result of any future
action taken by the Board of Governors of the Federal Reserve System. 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.
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.
63
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 Reserves assessment of a banks capital adequacy
includes an assessment of the banks 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 2004, 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,
2003, the Bank was well-capitalized as defined in the Federal Reserves
regulations.
For information regarding the Companys and the Banks compliance with their
respective regulatory capital requirements, see Managements Discussion and
Analysis of Financial Condition and Results of Operations Capital Management
of this report and Note 21Regulatory Matters of the Notes to the
Consolidated Financial Statements of this Report.
Supervision and Regulation of Mortgage Banking Operations
The Companys 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 the
Federal National Mortgage Association (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 Companys 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 Companys mortgage banking operations also are affected by various
state and local laws and regulations and the requirements of various private
mortgage investors.
Competition
The Banks 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. 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 Banks 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
64
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 companys 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 banks 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.
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. Banks with or without holding
companies also may 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 ability to engage in new activities
and provide a wider array of products.
Employees
As of February 6, 2004, the Company and the Bank employed 611 persons,
including executive officers, loan and other banking and trust officers, branch
personnel, and others. None of the Companys or the Banks 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.
Executive Officers
The following listing sets forth the name, age (as of March 22, 2004) and
principal position regarding the executive officers of the Company and the Bank
who are not directors:
65
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 the Executive Vice President and Chief Information
Officer in 2002. Prior to that, Mr. Bentz was a Senior Vice President of the
Bank.
R. Louis Caceres became an Executive Vice President in 2002. Prior to that, Mr.
Caceres was a Senior Vice President of the Bank. Prior to joining the Bank, Mr.
Caceres was a Vice President of First Union National Bank.
Ronald E. Kuykendall became the Executive Vice President, General Counsel and
Corporate Secretary of Bancorp and the Bank in 2002. Prior to that, Mr.
Kuykendall was the 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 an Associate General Counsel at Crestar Financial Corporation.
James H. Langmead, CPA, became the Executive Vice President and Chief Financial
Officer of Bancorp and the Bank in 2001. Prior to that, Mr. Langmead was the
Vice President and Treasurer of Bancorp and Executive Vice President and Chief
Financial Officer of the Bank.
Lawrence T. Lewis, III became an Executive Vice President of Bancorp and the
Bank in 2001 and the Chief Investment Officer of Bancorp and the Bank in 2002.
Prior to that, Mr. Lewis was an Executive Vice President of the Bank.
Daniel J. Schrider became the Executive Vice President and Chief Credit Officer
effective January 1, 2003. Prior to that, Mr. Schrider served as a Senior Vice
President of the Bank.
Frank H. Small became an Executive Vice President of Bancorp and the Bank in
2001 and the Chief Operating Officer of Bancorp and the Bank in 2002. Prior to
that, Mr. Small was an Executive Vice President of the Bank.
Sara E. Watkins became an Executive Vice President of the Bank in 2002. Prior
to that, Ms. Watkins was a Senior Vice President of the Bank.
Controls and Procedures
The Companys management, under the supervision and with the participation of
its Chief Executive Officer and the Chief Financial Officer, evaluated as of
the last day of the period covered by this report, the effectiveness of the
design and operation of the Companys disclosure controls and procedures, as
defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were adequate. There were
no significant changes in the Companys internal controls over financial
reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during
the quarter ended December 31, 2003, that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
66
Properties
The locations of Sandy Spring Bancorp, Inc. and its subsidiaries are shown
below.
Community Banking Offices
67
Other Properties
68
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, 2003 and 2002
Consolidated Statements of Income for the years ended December 31, 2003,
2002, and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002, and 2001
Consolidated Statements of Changes in Stockholders Equity for the years
ended December 31, 2003, 2002, and 2001
Notes to the Consolidated Financial Statements
Reports 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:
69
The following Forms 8-K were filed during the fourth quarter of 2003:
Shareholders may obtain, free of charge, a copy of the exhibits to this Report
on Form 10-K by writing Ronald E. Kuykendall, Executive Vice President, General
Counsel and 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 Website at www.sec.gov or through the
Companys Investor Relations Website maintained at www.sandyspringbank.com.
70
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.
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 25, 2004.
71
(Dollars in thousands)
2003
2002
2001
$
516,528
$
571,688
$
522,308
54,605
46,031
39,157
18,611
18,708
124,197
16,786
16,757
11,878
25,363
24,743
27,273
7,567
7,659
7,816
639,460
685,586
732,629
70,672
87,714
9,995
266,962
253,146
154,926
21,111
19,812
16,929
358,745
360,672
181,850
$
998,205
$
1,046,258
$
914,479
(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, 2003, 2002 or 2001.
Years to Maturity
Within
Over 1
Over 5
Over
1
Through 5
Through 10
10
(In thousands)
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Total
Yield
$
396,291
3.82
%
$
117,285
3.46
%
$
418
6.00
%
$
0
0.00
%
$
513,994
3.74
%
6,287
6.61
25,787
6.64
17,757
6.46
2,965
6.91
52,796
6.59
1,893
4.46
15,088
5.02
1,571
5.67
0
0.00
18,552
5.02
7,053
6.30
7,808
4.80
1,269
7.33
0
0.00
16,130
5.66
0
0.00
15,616
9.69
4,867
9.23
2,610
8.24
23,093
9.43
$
411,524
3.91
%
$
181,584
4.63
%
$
25,882
6.84
%
$
5,575
7.53
%
$
624,565
4.27
%
$
70,672
3.85
%
$
0
0.00
%
$
0
0.00
%
$
0
0.00
%
$
70,672
3.85
%
23,021
6.24
107,464
6.51
131,817
7.06
4,660
6.90
266,962
6.76
$
93,693
4.44
%
$
107,464
6.51
%
$
131,817
7.06
%
$
4,660
6.90
%
$
337,634
6.15
%
*
Yields on state and municipal securities have been calculated on a
tax-equivalent basis using the applicable federal income tax rate.
December 31,
2003
2002
2001
2000
1999
Credit
Credit
Credit
Credit
Credit
(Dollars in thousands)
Amount
Mix
Amount
Mix
Amount
Mix
Amount
Mix
Amount
Mix
$
2,733
29
%
$
2,338
26
%
$
1,301
26
%
$
1,969
28
%
$
1,744
28
%
681
8
937
7
1,240
8
467
4
301
5
3,414
37
3,275
33
2,541
34
2,436
32
2,045
33
5,437
25
3,637
24
553
4
1,966
5
2,338
12
2,191
14
8,328
41
7,794
43
5,271
41
5,547
46
4,361
45
283
1
566
2
814
3
0
0
0
0
8,611
42
8,360
45
6,085
44
5,547
46
4,361
45
2,029
21
2,912
22
2,309
22
2,363
22
2,025
22
826
489
1,718
1,184
(200
)
$
14,880
$
15,036
$
12,653
$
11,530
$
8,231
Years Ended December 31,
(Dollars in thousands)
2003
2002
2001
2000
1999
$
15,036
$
12,653
$
11,530
$
8,231
$
7,350
0
2,865
2,470
2,690
1,216
0
0
0
1,300
0
(148
)
(165
)
(23
)
(220
)
(67
)
(122
)
(467
)
(1,180
)
(246
)
(123
)
(87
)
(158
)
(225
)
(303
)
(225
)
(357
)
(790
)
(1,428
)
(769
)
(415
)
126
0
0
0
0
63
284
54
36
32
12
24
27
42
48
201
308
81
78
80
(156
)
(482
)
(1,347
)
(691
)
(335
)
$
14,880
$
15,036
$
12,653
$
11,530
$
8,231
0.01
%
0.05
%
0.14
%
0.08
%
0.05
%
1.29
%
1.41
%
1.27
%
1.19
%
1.00
%
Years Ended December 31,
(Dollars in thousands)
2003
2002
2001
2000
1999
$
522
$
588
$
5,904
$
684
$
275
2,333
2,157
1,903
1,809
1,710
0
0
0
0
0
2,855
2,745
7,807
2,493
1,985
77
0
50
380
163
$
2,932
$
2,745
$
7,857
$
2,873
$
2,148
0.25
%
0.26
%
0.78
%
0.26
%
0.24
%
521
%
548
%
162
%
462
%
415
%
0.13
%
0.12
%
0.38
%
0.16
%
0.13
%
(1)
Gross interest income that would have been recorded in 2003 if non-accrual
loans and leases shown above had been current and in accordance with their
original terms was $66,000, while interest actually recorded on such loans was
$0.
(2)
Performing loans considered potential problem loans, as defined and
identified by management, amounted to $16,793,000 at December 31, 2003.
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 either non-performing or potential problem
loans consist only of other loans especially mentioned and do not, in
managements 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.
0-90
91-365
Over 1-3
Over 3-5
Over 5
(Dollars in thousands)
Days
Days
Years
Years
Years
$
460,501
$
150,608
$
254,101
$
214,999
$
73,219
162,616
138,559
154,121
50,942
172,554
12,725
19,755
42,560
86,850
157,523
23,603
0
0
0
0
659,445
308,922
450,782
352,791
403,296
6,662
19,985
53,292
53,292
91,041
5,921
17,764
47,371
47,371
69,083
18,665
55,995
149,319
94,532
58,211
120,397
157,190
62,551
64,806
63
142,868
365
188,006
150,706
81,436
294,513
251,299
500,539
410,707
299,834
$
364,932
$
422,555
$
372,798
$
314,882
$
418,344
15.64
%
18.11
%
15.98
%
13.49
%
17.93
%
2.24
1.77
1.36
1.22
1.24
*
This analysis is based upon a number of significant assumptions including
the following items. Loans and leases are repaid/rescheduled by
contractual maturity adjusted for prepayment assumptions 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 managements analysis of deposit
withdrawals. Time deposits are shown in the table based on contractual
maturity.
Months to Maturity
(Dollars in thousands)
3 or Less
Over 3 to 6
Over 6 to 12
Over 12
TOTAL
$
39,203
$
21,780
$
19,855
$
54,231
$
135,069
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
December 31,
2003
2002
$
38,397
$
38,998
10,670
9,135
724
813
12,209
38,435
639,460
685,586
337,634
340,860
21,111
19,812
1,153,428
1,063,853
(14,880
)
(15,036
)
1,138,548
1,048,817
37,679
36,007
13,661
14,957
7,642
7,642
11,446
13,927
64,161
52,415
$
2,333,342
$
2,307,404
$
368,319
$
320,583
1,193,511
1,171,629
1,561,830
1,492,212
413,223
488,214
35,000
35,000
115,158
90,500
14,682
23,454
2,139,893
2,129,380
14,496
14,536
18,970
21,128
153,280
131,939
6,703
10,421
193,449
178,024
$
2,333,342
$
2,307,404
Consolidated Statements of Income
(In thousands, except per share data)
Years Ended December 31,
2003
2002
2001
$
64,749
$
72,710
$
79,783
1,113
976
780
13
21
88
32,076
37,239
37,873
14,214
11,230
8,174
302
546
1,172
112,467
122,722
127,870
13,675
19,833
35,597
17,531
16,351
17,543
6,226
7,929
8,122
37,432
44,113
61,262
75,035
78,609
66,608
0
2,865
2,470
75,035
75,744
64,138
996
2,016
346
8,032
7,839
7,307
5,723
3,940
2,608
2,211
2,078
2,170
2,955
2,497
1,995
3,741
3,281
243
2,746
1,876
1,633
1,077
0
0
6,255
6,202
5,534
33,736
29,729
21,836
38,084
38,571
29,595
7,061
5,599
5,080
4,420
3,810
3,433
2,500
1,907
1,474
2,523
2,415
2,342
0
0
666
2,480
2,659
2,512
10,158
9,000
9,516
67,226
63,961
54,618
41,545
41,512
31,356
9,479
10,927
8,342
$
32,066
$
30,585
$
23,014
$
2.21
$
2.11
$
1.60
$
2.18
$
2.08
$
1.58
$
.74
$
.69
$
.61
Consolidated Statements of Cash Flows
Years Ended December 31,
(In thousands)
2003
2002
2001
$
32,066
$
30,585
$
23,014
6,718
6,052
6,225
0
2,865
2,470
(430
)
(433
)
1,565
(404,459
)
(331,325
)
(230,006
)
436,408
313,512
222,303
(5,723
)
(3,940
)
(2,608
)
(996
)
(2,016
)
(346
)
1,296
206
(39
)
(10,763
)
(15,505
)
(11,819
)
(9,471
)
3,541
4,337
4,715
(375
)
(4,272
)
49,361
3,167
10,824
89
27
(333
)
(115,220
)
(219,319
)
(79,656
)
(1,301
)
(2,883
)
(2,742
)
(1,201,063
)
(1,122,816
)
(984,951
)
197,231
316,295
142,658
118,278
43,338
49,235
1,042,364
865,460
638,389
142
81
459
(89,762
)
(67,963
)
(28,184
)
0
0
(1,231
)
(5,547
)
(7,366
)
(4,712
)
(54,789
)
(195,146
)
(271,068
)
69,618
104,753
143,532
(105,833
)
48,155
102,618
55,500
40,000
30,262
(3,325
)
0
0
1,127
833
2,767
(10,725
)
(10,012
)
(8,881
)
6,362
183,729
270,298
934
(8,250
)
10,054
48,133
56,383
46,329
$
49,067
$
48,133
$
56,383
$
36,657
$
44,838
$
60,766
12,384
9,291
9,236
$
187
$
29
$
82
30,842
28,855
200
$
0
$
0
$
2,605
0
0
(2,503
)
0
0
(2,227
)
0
0
3,725
0
0
1,600
0
0
(369
)
$
0
$
0
$
1,231
Consolidated Statements of Changes in Stockholders Equity
(Dollars in thousands, except per share data)
Accumulated
Additional
Other
Total
Common
Paid in
Retained
Comprehensive
Stockholders
Stock
Capital
Earnings
Income (Loss)
Equity
$
9,553
$
22,511
$
97,233
$
(2,147
)
$
127,150
4,777
(4,777
)
23,014
23,014
6,083
6,083
29,097
(8,881
)
(8,881
)
68
1,447
1,515
80
1,045
1,125
6
121
127
14,484
20,347
111,366
3,936
150,133
30,585
30,585
6,485
6,485
37,070
(10,012
)
(10,012
)
38
392
430
14
389
403
14,536
21,128
131,939
10,421
178,024
32,066
32,066
(3,718
)
(3,718
)
28,348
(10,725
)
(10,725
)
(105
)
(3,220
)
(3,325
)
49
604
653
16
458
474
$
14,496
$
18,970
$
153,280
$
6,703
$
193,449
(In thousands, except per share data)
2003
2002
2001
$
32,066
$
30,585
$
23,014
(1,574
)
(1,215
)
(1,041
)
$
30,492
$
29,370
$
21,973
$
2.21
$
2.11
$
1.60
$
2.10
$
2.02
$
1.53
$
2.18
$
2.08
$
1.58
$
2.07
$
1.99
$
1.51
2003
2002
Gross
Gross
Estimated
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Cost
Gains
Losses
Value
$
513,994
$
3,770
$
(1,236
)
$
516,528
$
561,796
$
10,001
$
(109
)
$
571,688
52,796
1,993
(184
)
54,605
44,348
1,726
(43
)
46,031
18,552
341
(282
)
18,611
18,078
636
(6
)
18,708
16,130
656
0
16,786
15,979
794
(16
)
16,757
23,093
2,270
0
25,363
23,263
1,480
0
24,743
624,565
9,030
(1,702
)
631,893
663,464
14,637
(174
)
677,927
3,949
3,618
0
7,567
5,144
2,515
0
7,659
$
628,514
$
12,648
$
(1,702
)
$
639,460
$
668,608
$
17,152
$
(174
)
$
685,586
Continuous Unrealized Losses
Existing for:
Total
Available-For-Sale
Less Than
More Than
Unrealized
(In thousands)
Fair Value
12 Months
12 Months
Losses
$
171,725
$
1,236
$
0
$
1,236
8,161
169
15
184
10,618
280
2
282
$
190,504
$
1,685
$
17
$
1,702
2003
2002
Estimated
Estimated
Amortized
Fair
Amortized
Fair
(In thousands)
Cost
Value
Cost
Value
$
411,524
$
412,171
$
432,230
$
436,141
181,584
186,588
198,642
207,094
25,882
27,384
26,725
28,585
5,575
5,750
5,867
6,107
$
624,565
$
631,893
$
663,464
$
677,927
(In thousands)
2003
2002
2001
$
197,231
$
316,295
$
142,658
1,782
3,472
708
813
1,434
566
2003
2002
Gross
Gross
Estimated
Gross
Gross
Estimated
Amortized
Unrealized
Unrealized
Fair
Amortized
Unrealized
Unrealized
Fair
(In thousands)
Cost
Gains
Losses
Value
Cost
Gains
Losses
Value
$
70,672
$
193
$
(195
)
$
70,670
$
87,714
$
1,049
$
0
$
88,763
266,962
8,303
(1,121
)
274,144
253,146
6,343
(1,390
)
258,099
$
337,634
$
8,496
$
(1,316
)
$
344,814
$
340,860
$
7,392
$
(1,390
)
$
346,862
Continuous Unrealized Losses
Existing for:
Total
Held-to-Maturity
Less Than
More Than
Unrealized
(In thousands)
Fair Value
12 Months
12 Months
Losses
$
36,052
$
195
$
0
$
195
55,290
541
580
1,121
$
91,342
$
736
$
580
$
1,316
2003
2002
Estimated
Estimated
Amortized
Fair
Amortized
Fair
(In thousands)
Cost
Value
Cost
Value
$
93,693
$
93,952
$
102,177
$
103,480
107,464
109,548
86,071
87,645
131,817
136,587
148,243
151,289
4,660
4,727
4,369
4,448
$
337,634
$
344,814
$
340,860
$
346,862
(In thousands)
2003
2002
$
1,826
$
1,826
19,285
17,986
$
21,111
$
19,812
(In thousands)
2003
2002
$
419,629
$
354,673
490,938
476,014
242,861
233,166
1,153,428
1,063,853
(14,880
)
(15,036
)
$
1,138,548
$
1,048,817
(In thousands)
2003
2002
2001
$
15,036
$
12,653
$
11,530
0
2,865
2,470
(357
)
(790
)
(1,428
)
201
308
81
(156
)
(482
)
(1,347
)
$
14,880
$
15,036
$
12,653
(In thousands)
2003
2002
2001
$
148
$
0
$
91
188
170
5,498
$
336
$
170
$
5,589
$
120
$
0
$
91
14,760
15,036
12,562
$
14,880
$
15,036
$
12,653
$
329
$
4,135
$
1,625
$
7
$
672
$
0
(In thousands)
2003
2002
$
8,505
$
8,505
33,643
29,926
21,763
19,789
63,911
58,220
(26,232
)
(22,213
)
$
37,679
$
36,007
Operating
(In thousands)
Leases
$
3,236
3,143
2,970
2,649
2,462
13,221
$
27,681
2003
2002
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
$
8,751
$
1,109
$
7,642
$
8,751
$
1,109
$
7,642
17,854
7,712
10,142
5.7
17,854
5,926
11,928
6.7
3,895
3,895
0
3,895
3,360
535
0.8
1,637
333
1,304
10.1
1,637
173
1,464
10.8
$
32,137
$
13,049
$
19,088
$
32,137
$
10,568
$
21,569
(In thousands)
Year
Amount
$
1,945
1,945
1,945
1,900
1,892
Years ended December 31,
(Dollars in thousands except per share data)
2003
2002
2001
$
0
$
0
$
666
0
0
428
$
32,066
$
30,585
$
23,014
0
0
428
$
32,066
$
30,585
$
23,442
$
2.21
$
2.11
$
1.60
0.00
0.00
0.03
$
2.21
$
2.11
$
1.63
$
2.18
$
2.08
$
1.58
0.00
0.00
0.03
$
2.18
$
2.08
$
1.61
(In thousands)
2003
2002
$
368,319
$
320,583
224,272
185,380
376,722
398,539
187,510
153,294
269,938
308,169
135,069
126,247
1,193,511
1,171,629
$
1,561,830
$
1,492,212
(In thousands)
2004
2005
2006
2007
2008
Total
$
50,246
$
12,306
$
27,469
$
37,399
$
405,007
2003
2002
(Dollars in thousands)
Amount
Rate
Amount
Rate
$
245,544
5.40
%
$
268,927
5.21
%
117,679
0.40
149,287
0.75
50,000
2.73
70,000
2.94
$
413,223
3.65
%
$
488,214
3.52
%
$
283,750
5.40
%
$
240,043
5.29
%
137,111
.57
150,775
1.12
44,521
3.22
62,951
3.11
$
302,398
$
268,927
152,621
169,128
64,000
75,000
(Dollars in thousands)
2003
2002
$
150
$
250
150
250
0
30,000
10,000
10,000
10,000
10,000
40,000
40,000
25,000
0
2,858
0
27,000
0
$
115,158
$
90,500
2003
2002
2001
Weighted
Weighted
Weighted
Number
Average
Number
Average
Number
Average
of
Exercise
of
Exercise
of
Exercise
Shares
Price
Shares
Price
Shares
Price
675,126
$
22.41
557,068
$
19.12
509,262
$
14.53
189,489
38.91
168,814
31.25
143,394
32.25
(13,375
)
26.46
(11,227
)
27.63
(16,067
)
16.77
(49,923
)
14.49
(39,529
)
12.33
(79,521
)
13.86
801,317
$
26.74
675,126
$
22.41
557,068
$
19.12
$
11.95
$
9.05
$
10.42
Options Outstanding
Exercisable Options
Weighted Average
Remaining
Weighted
Weighted
Range of
Outstanding
Contracted Life
Average
Exercisable
Average
Exercise Price
Number
(in years)
Exercise Price
Number
Exercise Price
33,750
1.9
$
9.53
33,750
$
9.53
156,796
6.4
14.30
156,796
14.30
131,937
5.2
17.55
131,937
17.55
289,345
8.5
31.70
235,441
31.80
189,489
10.0
38.91
63,183
38.91
801,317
7.6
26.74
621,107
23.87
2003
2002
2001
2.12
%
2.12
%
2.10
%
27.93
%
29.94
%
30.87
%
3.66
%
3.73
%
4.70
%
8
8
9
(Dollars in thousands)
2003
2002
$
9,647
$
8,189
1,140
830
731
581
2,156
290
(264
)
(243
)
13,410
9,647
11,121
8,061
9,115
7,423
1,819
(565
)
1,650
2,500
(264
)
(243
)
12,320
9,115
(1,090
)
(532
)
(1,282
)
(1,344
)
5,422
4,590
$
3,050
$
2,714
(In thousands)
2003
2002
2001
$
1,140
$
830
$
671
731
581
512
(787
)
(622
)
(677
)
(62
)
(63
)
(63
)
293
157
44
$
1,315
$
883
$
487
2003
2002
6.50
%
7.00
%
4.50
%
4.50
%
2003
2002
2001
7.00
%
7.25
%
7.50
%
8.00
%
8.00
%
8.50
%
4.50
%
4.50
%
4.50
%
Asset Category
2003
2002
66.1
%
65.4
%
24.4
%
32.9
%
9.5
%
1.7
%
100.0
%
100.0
%
(In thousands)
2003
2002
2001
$
8,917
$
8,637
$
8,157
992
1,857
1,750
9,909
10,494
9,907
(446
)
356
(1,289
)
16
77
(276
)
(430
)
433
(1,565
)
$
9,479
$
10,927
$
8,342
(Dollars in thousands)
2003
2002
$
4,824
$
4,776
2,072
1,829
167
207
1,626
478
8,689
7,290
(1,458
)
(1,353
)
(4,243
)
(6,557
)
(1,367
)
(1,234
)
(1,273
)
(1,016
)
(953
)
(495
)
(9,294
)
(10,655
)
$
(605
)
$
(3,365
)
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:
2003
2002
2001
35.0
%
35.0
%
35.0
%
(13.2
)
(10.2
)
(10.1
)
1.6
1.3
2.0
(.6
)
.3
(0.2
)
22.8
%
26.4
%
26.7
%
(In thousands, except per share data)
2003
2002
2001
$
32,066
$
30,585
$
23,014
14,493
14,508
14,389
$
2.21
$
2.11
$
1.60
$
32,066
$
30,585
$
23,014
14,493
14,508
14,389
215
214
169
14,708
14,722
14,558
$
2.18
$
2.08
$
1.58
(In thousands)
2003
2002
$
28,886
$
16,726
7,894
13,533
(14,335
)
(1,373
)
$
22,445
$
28,886
Unused portions of equity lines at year end amounted to $203,287,000 in 2003
and $165,410,000 in 2002. The Companys home equity line accounts are secured
by the borrowers residence.
2003
2002
Carrying
Estimated
Carrying
Estimated
(In thousands)
Amount
Fair Value
Amount
Fair Value
$
62,000
$
62,181
87,381
$
87,942
639,460
639,460
685,586
685,586
358,745
365,925
360,672
366,674
1,138,548
1,146,747
1,048,817
1,079,129
66,861
66,861
59,379
59,379
$
1,561,830
$
1,564,560
$
1,492,212
$
1,497,733
413,223
439,866
488,214
490,601
150,158
158,148
125,500
135,085
3,722
3,722
3,692
3,692
Estimated
Estimated
(In thousands)
Amount
Fair Value
Amount
Fair Value
$
432,427
$
273
$
368,781
$
163
22,241
111
22,004
110
(1)
Temporary investments include federal funds sold, interest-bearing deposits
with banks and residential mortgage loans held for sale.
(2)
Only financial instruments as defined in SFAS 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.
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.
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. Non-performing 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.
Deposits.
The fair value of demand, money market savings and regular savings
deposits, which have no stated maturity, were considered equal to their
carrying amount, 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 Banks deposit base. Management
believes that the Banks 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 of Atlanta 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 the Federal Home Loan Bank of Atlanta
advances and Trust Preferred securities was estimated by computing the
discounted value of contractual cash flows payable at current interest rates
for obligations with similar remaining terms.
Accrued interest payable and 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 commitments to extend credit
and irrevocable letters of credit was estimated based upon the amount of
unamortized fees collected or paid incident to granting or receiving the
commitment.
December 31,
(In thousands)
2003
2002
$
5,751
$
6,259
8,627
8,621
181,882
165,556
33,565
33,565
1,427
1,366
$
231,252
$
215,367
$
35,000
$
35,000
2,803
2,343
37,803
37,343
14,496
14,536
18,970
21,128
153,280
131,939
6,703
10,421
193,449
178,024
$
231,252
$
215,367
Years Ended December 31,
(In thousands)
2003
2002
2001
$
10,725
$
10,012
$
8,881
1,401
1,151
0
3,482
3,567
3,634
15,608
14,730
12,515
3,281
3,281
3,281
823
707
610
4,104
3,988
3,891
11,504
10,742
8,624
213
259
(90
)
11,291
10,483
8,714
20,775
20,102
14,300
$
32,066
$
30,585
$
23,014
Years Ended December 31,
(In thousands)
2003
2002
2001
$
32,066
$
30,585
$
23,014
(20,775
)
(20,102
)
(14,300
)
(1,401
)
(1,151
)
0
84
467
(30
)
(146
)
63
114
9,828
9,862
8,798
(426
)
(682
)
(333
)
3,013
2,302
36
2,587
1,620
(297
)
(3,325
)
0
0
1,127
833
2,767
(10,725
)
(10,012
)
(8,881
)
(12,923
)
(9,179
)
(6,114
)
(508
)
2,303
2,387
6,259
3,956
1,569
$
5,751
$
6,259
$
3,956
To Be Well
Capitalized Under
For Capital
Prompt Corrective
Actual
Adequacy Purposes
Action Provisions
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
$
219,166
15.51
%
$
113,070
8.00
%
N/A
205,654
14.64
112,404
8.00
$
140,505
10.00
%
202,658
14.34
56,535
4.00
N/A
157,198
11.19
56,202
4.00
84,303
6.00
202,658
8.67
70,162
3.00
N/A
157,198
6.75
69,860
3.00
116,434
5.00
$
197,202
14.95
%
$
105,529
8.00
%
N/A
182,603
13.93
104,850
8.00
$
131,063
10.00
%
181,034
13.72
52,765
4.00
N/A
133,943
10.22
52,425
4.00
78,638
6.00
181,034
8.08
67,225
3.00
N/A
133,943
6.00
66,948
3.00
111,580
5.00
First
Second
Third
Fourth
(In thousands, except per share data)
Quarter
Quarter
Quarter
Quarter
$
29,236
$
27,991
$
27,912
$
27,328
19,163
18,247
18,775
18,850
0
0
0
0
10,963
11,674
10,622
8,286
8,328
8,736
8,218
6,784
$
0.57
$
0.61
$
0.57
$
0.46
0.56
0.60
0.56
0.46
$
29,694
$
31,032
$
30,968
$
31,028
18,581
20,043
19,846
20,139
1,185
985
395
300
8,896
9,625
11,219
11,772
6,560
7,134
8,204
8,687
$
0.45
$
0.50
$
0.56
$
0.60
0.45
0.48
0.56
0.59
INDEPENDENT AUDITORS REPORT
Sandy Spring Bancorp, Inc.
Olney, Maryland 20832
Frederick, Maryland
January 22, 2004
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders of
Sandy Spring Bancorp, Inc.
January 31, 2003
MANAGEMENTS STATEMENT OF RESPONSIBILITY
/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
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.
Frank L. Bentz, III
45
Executive Vice President and Chief Information Officer of the Bank
R. Louis Caceres
41
Executive Vice President of the Bank
Ronald E. Kuykendall
51
Executive Vice President, General Counsel and Corporate Secretary of Bancorp
and the Bank
James H. Langmead
54
Executive Vice President and Chief Financial Officer of Bancorp and the Bank
Lawrence T. Lewis, III
55
Executive Vice President and Chief Investment Officer of Bancorp and the Bank
Daniel J. Schrider
39
Executive Vice President and Chief Credit Officer of the Bank
Frank H. Small
57
Executive Vice President and Chief Operating Officer of Bancorp and the Bank
Sara E. Watkins
47
Executive Vice President of the Bank
Airpark*
East Gude Drive*
Olney*
7653 Lindbergh Drive
1601 East Gude Drive
17801 Georgia Avenue
Gaithersburg, MD 20879
Rockville, MD 20850
Olney, MD 20832
Annapolis West*
Eastport*
Patrick Street*
2051 West Street
1013 Bay Ridge Avenue
14 West Patrick Street
Annapolis, MD 21401
Annapolis, MD 21403
Frederick, MD 21701
Ashton*
Edgewater*
Potomac*
1 Ashton Road
116 Mitchells Chance Road
9822 Falls Road
Ashton, MD 20861
Edgewater, MD 21037
Potomac, MD 20854
Asbury*
Gaithersburg Square*
Rockledge Plaza-40 West*
409 Russell Avenue
596 A North Frederick Avenue
Unit A
Gaithersburg, MD 20877
Gaithersburg, MD 20877
1100 West Patrick Street
Frederick, MD 21702
Bedford Court
Jennifer Road*
3701 International Drive
166 Jennifer Road
Rockville
Silver Spring, MD 20906
Annapolis, MD 21401
611 Rockville Pike
Rockville, MD 20852
Bethesda*
Laurel Lakes*
7126 Wisconsin Avenue
14404 Baltimore Avenue
Sandy Spring
Bethesda, MD 20814
Laurel, MD 20707
908 Olney-Sandy Spring Road
Sandy Spring, MD 20860
Burtonsville*
Layhill*
3535 Spencerville Road
14241 Layhill Road
Urbana*
Burtonsville, MD 20866
Silver Spring, MD 20906
8921 Fingerboard Road
Frederick, MD 21704
Clarksville*
Leisurewood Plaza*
12276 Clarksville Pike
3801 International Drive, Suite 100
Wildwood*
Clarksville, MD 21029
Silver Spring, MD 20906
10329 Old Georgetown Road
Bethesda, MD 20814
Colesville*
Lisbon*
13300 New Hampshire Avenue
704 Lisbon Centre Drive
* ATM available
Silver Spring, MD 20904
Woodbine, MD 21797
Congressional*
Milestone Center*
1647 Rockville Pike
20930 Frederick Avenue
Rockville, MD 20852
Germantown, MD 20876
Damascus*
Montgomery Village*
26250 Ridge Road
9921 Stedwick Road
Damascus, MD 20872
Montgomery Village, MD 20886
SANDY SPRING BANK
THE EQUIPMENT LEASING
SANDY SPRING MORTGAGE
FINANCIAL CENTER
COMPANY
Columbia Center
148 Jennifer Road
53 Loveton Circle, Suite 100
9112 Guilford Road, Suite 2
Annapolis, MD 21401
Sparks, MD 21152
Columbia, MD 21046
410-266-3000
410-472-0011
301-680-0200
HUMAN RESOURCES
ADMINISTRATIVE OFFICES
8875 Centre Park Drive
17735 Georgia Avenue
SANDY SPRING INSURANCE
Columbia, MD 21045
Olney, MD 20832
CORPORATION
410-740-8005
301-774-6400
T/A Chesapeake
Insurance Group
2661 Riva Road, Suite 1050
Annapolis, MD 21401
TRAINING CENTER
410-841-5320
18120 Hillcrest Drive, Suite A
Olney, MD 20832
301-774-6400
Exhibit No.
Description
Incorporated by Reference to:
3(a)
Articles of Incorporation of Sandy Spring
Bancorp, Inc.,
as Amended
Exhibit 3.1 to Form 10-Q for the quarter
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.,
Cash and Deferred Profit Sharing Plan and Trust
Exhibit 10(a) to Form 10-Q for the quarter
ended
September 30, 1997, SEC File No. 0-19065.
10(b)*
Sandy Spring Bancorp, Inc. 1982 Incentive Stock
Option Plan
Exhibit 10(c) to Form 10-Q for the quarter
ended
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
Stock Option Plan for Employees of Annapolis
Bancshares, Inc.
Exhibit 4 to Registration Statement on Form
S-8,
Registration Statement No. 333-11049.
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
Health Insurance Plan
Exhibit 10 to Form 10-Q for the quarter ended
March 31, 2002, SEC File No. 0-19065.
10(g)*
Sandy Spring National Bank of Maryland Executive
Health Expense Reimbursement Plan, as amended
Exhibit 10(g) to Form 10-K for the year ended
December 31, 2001, SEC File No. 0-19065.
10(h)*
Form of Director Fee Deferral Agreement, August
26, 1997,
as amended
10(i)*
Supplemental Executive Retirement Agreement by and
between Sandy Spring National Bank of Maryland and
Hunter R. Hollar, as amended
10(j)*
Form of Supplemental Executive Retirement
Agreement
by and between Sandy Spring Bank and each of
Frank L.
Bentz, III; R. Louis Caceres; Ronald E.
Kuykendall; James H.
Langmead, Lawrence T. Lewis, III, Daniel J.
Schrider; Frank
H. Small; and Sara E. Watkins, as amended
Exhibit No.
Description
Incorporated by Reference to:
10(k)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank of Maryland, and
Hunter H. Hollar
Exhibit 10A to Form 10-Q for the
quarter ended
March 31, 2003, SEC File No. 0-19065.
10(l)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and James H.
Langmead
Exhibit 10(l) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(m)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Lawrence
T. Lewis, III
Exhibit 10(m) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(n)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Daniel J.
Schrider
Exhibit 10(n) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(o)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Frank H.
Small
Exhibit 10(o) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(p)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Sara E.
Watkins
Exhibit 10(p) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(q)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Ronald E.
Kuykendall
Exhibit 10(q) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(r)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and Frank L.
Bentz, III
Exhibit 10(r) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(s)*
Employment Agreement by and among Sandy Spring
Bancorp, Inc., Sandy Spring Bank, and R. Louis
Caceres
Exhibit 10(s) to Form 10-K for the year
ended
December 31, 2002, SEC File No. 0-19065.
10(t)
Form of Sandy Spring National Bank of Maryland
Officer
Group Term Replacement Plan
Exhibit 10(t) to Form 10-K for the year
ended
December 31, 2001, SEC File No. 0-19065.
10(u)
Sandy Spring Bancorp, Inc. Directors Stock
Purchase Plan
21
Subsidiaries
23
Consent of Independent Auditors
31 (a),(b)
Rule 13a-14(a)/15d-14(a) Certifications
32 (a),(b)
18 U.S.C. Section 1350 Certifications
*
Management Contract or Compensatory Plan or Arrangement filed
pursuant to Item 15(c) of this Report.
(a)
On October 15, 2003, the Company furnished under Item 9 and Item 12,
its news release including results of operations and financial condition
and related information concerning non-GAAP financial measures.
(b)
On December 19, 2003, the Company furnished under Item 9 its news
release providing revised earnings guidance.
(Registrant)
By:
/s/ Hunter R. Hollar
Hunter R. Hollar
President and
Chief
Executive Officer
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
John Chirtea
Director
/s/ Susan D. Goff
Susan D. Goff
Director
/s/ Solomon Graham
Solomon Graham
Director
/s/ Gilbert L. Hardesty
Gilbert L. Hardesty
Director
/s/ Joyce R. Hawkins
Joyce R. Hawkins
Director
/s/ Charles F. Mess
Charles F. Mess
Director
/s/ Robert L. Mitchell
Robert L. Mitchell
Director
/s/ Robert L. Orndorff, Jr.
Robert L. Orndorff, Jr.
Director
/s/ David E. Rippeon
David E. Rippeon
Director
/s/ Craig A. Ruppert
Craig A. Ruppert
Director
/s/ Lewis R. Schumann
Lewis R. Schumann
Director
/s/ W. Drew Stabler
W. Drew Stabler
Chairman of the Board,
Director
Exhibit 10(h)
DIRECTORS FEE DEFERRAL AGREEMENT
As Amended
THIS AGREEMENT, made this day of , 2003 by and between Sandy Spring Bank (the Bank), and (the Director) amends and restates as of this day any and all Directors Fee Agreement(s) previously entered by the Bank and the Director.
INTRODUCTION
To encourage the Director to remain a member of the Banks Board of
Directors, the Bank is willing to provide the Director an opportunity to defer
receipt of Directors fees and to accumulate interest on the fees so deferred
as provided in this Agreement. Amounts payable pursuant to this Agreement are
unfunded, and the Bank will pay benefits from its general assets. Deferred fees
and interest on them are subject to substantial restrictions and limitations.
AGREEMENT
The Director and the Bank agree as follows:
Article 1
1.1
Definitions.
Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
Definitions
1.1.1
Change in Control
means the transfer of 51% or more of the
Banks outstanding voting common stock followed within twenty-four
months by termination of the Directors status as a member of the
Banks Board of Directors.
1.1.2
Code
means the Internal Revenue Code of 1986, as amended.
References to a code section shall be deemed to be that section as
it now exists and to any successor provision.
1.1.3
Election Form
means the form attached as Exhibit I.
1.1.4
Fees
means the total Directors fees payable to the
Director.
1
1.1.5
Insurance Policy
means a single premium life insurance
policy which may be acquired by the Bank, in its sole discretion, as
the sole owner, on the life of the Director in connection with this
Agreement.
1.1.6.
Joint and Survivor Annuity Payments means a form of benefit
equal to the monthly payments that would be payable under a
straight-life, maximum monthly payment, lifetime joint and survivor
annuity for the Director and the Directors spouse, that could be
purchased from an issuer rated superior by A.M. Best (or, in the
Banks discretion, with an equivalent rating from another rating
organization of similar reputation) for cash equal to the applicable
amount of benefit. Joint and Survivor Annuity Payments terminate
upon the payment for the month of death of the survivor of the
Director and this spouse.
1.1.7
Prime Rate
for a calendar year means the lowest Prime Rate
reported for the last business day before January 1 of that year in
the Money Rates column of the Wall Street Journal, or, if such
rate is not published or its definition of such rate in the Wall
Street Journal is substantially changed, such reasonably equivalent
rate that the Board of Directors of the Bank in its good faith
discretion shall establish.
1.1.8
Termination of Service
means the Directors ceasing to be
a member of the Banks Board of Directors (excluding
directors
emeriti
) for any reason whatsoever.
Article 2
Deferral Election
2.1 Initial Election. The Director shall make an initial deferral election under this Agreement by filing with the Bank a signed Election Form within 30 days after the date of this Agreement. The Election Form shall set forth the amount of fees to be deferred and the form of benefit payment. The Election Form shall be effective to defer only fees earned after the date the Election Form is received by the Bank.
2.2 Election Changes
2.2.1
Generally.
The Director may modify the amount of Fees to be
deferred by filing with the Bank a signed Election Form. The
Election shall set forth the amount of Fees to be deferred and the
form of benefit payment. The modified deferral or form of benefit
shall not be effective until the calendar year following the year in
which the subsequent Election Form is received by the Bank. The
Election Form shall be effective to defer only Fees earned after the
date the Election Form is received by the Bank.
2.2.2
Hardship.
If an unforeseeable financial emergency arising
from the death of a family member, divorce, sickness, injury,
catastrophe or similar event outside the control of the Director
occurs, the Director, by written instruction to the Bank may
2
cease deferrals under this Agreement. |
Article 3
Deferral Account
3.1 Establishing and Crediting. The Bank shall establish a Deferral Account on its books for the Director, and shall credit to the Deferral Account the following amounts:
3.1.1 | Deferrals. The Fees deferred by the Director as of the time the fees would have otherwise been paid to the Director. | |||
3.1.2 | Interest. On the first day of each month and immediately prior to the payment of any benefits, interest on the account balance since the preceding credit under this Section 3.1.2, if any, at an annual rate, compounded monthly, equal to the Prime Rate for the calendar year for the period or periods for which such accrual is recorded. |
3.2 Statement of Accounts. The Bank shall provide to the Director, within one-hundred and twenty days after each calendar year-end, a statement setting forth the Deferral Account balance.
3.3
Accounting Device Only.
The Deferral Account is solely a device for
measuring amounts to be paid under this Agreement. The Deferral Account is not
a trust fund of any kind. The Director is a general unsecured creditor of the
Bank for the payment of benefits. The benefits represent the mere Bank promise
to pay such benefits. The Directors rights are not subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by the Directors creditors.
ARTICLE 4
4.1
Normal Termination Benefit.
Upon the Directors Termination of
Service, the Bank shall pay to the Director the benefit described in this
Section 4.1.
Lifetime Benefits
4.1.1
Amount of Benefit.
The benefit under this Section 4.1 is
the Deferral Account balance at the Directors Termination of
Service.
4.1.2
Payment of Benefit.
The Bank shall pay the benefit to the
Director in the form elected by the Director on the Election Form.
The Bank shall continue to credit interest under Section 3.1.2 on
any unpaid balance of the benefit, other than benefits for which the
Joint and Survivor Annuity Payments form of payment has
3
been elected. |
4.2 Change in Control Benefit. Upon a Change in Control while the Director is in the active service of the Bank, the Bank shall pay to the Director the benefit described in this Section 4.2 in lieu of any other benefit under this Agreement.
4.2.1
Amount of Benefit.
The benefit under this Section 4.2 is
the Deferral Account balance at the date of the Directors
termination of Service.
4.2.2
Payment of Benefit.
The Bank shall pay the benefit to the
Director in a lump sum within ten calendar days after the Directors
Termination of Service.
4.3
Hardship Distribution.
Upon the Banks determination (following
petition by the Director) that the Director has suffered an unforeseeable
financial emergency as described in Section 2.2.2, the Bank shall distribute to
the Director all or a portion of the Deferral Account balance as determined by
the Bank, but in no event shall the distribution be greater than is necessary
to relieve the financial hardship as determined in by majority vote of the
Board of Directors of the Bank in its good faith discretion, with the Director
abstaining.
Article 5
5.1
Death During Active Service.
If the Director dies while in the active
service of the Bank, the Bank shall pay to the Directors beneficiary the
benefit described in this Section 5.1.
Death Benefits
5.1.1
Insurance Policy in Effect.
If the Director dies while the
Insurance Policy is validly in effect, the benefit under Section 5.1
is the greater of (a) the applicable Projected Benefit for the
payment method in effect at death as shown on the last effective
annual statement of insurance benefit prepared for delivery to the
Director under this plan, or (b) payout of the Deferral Account
balance at the date of the Directors death under the payment method
in effect at death.
5.1.2
Insurance Policy Not in Effect.
If the Director dies while
the Insurance Policy is not validly in effect, the benefit under
Section 5.1 is the Deferral Account balance at the date of the
Directors death.
5.1.3
Payment of Benefit.
The Bank shall pay the benefit to the
beneficiary in the form elected by the Director on the Election Form
and in effect at death. The Bank shall continue to credit interest
under Section 3.1.2 on any unpaid balance of the benefit. If the
Director dies during active service, any amount of benefits for
which the Director had elected the Joint and Survivor Annuity form
of payment shall instead be paid as if the Director had elected to
be paid in equal monthly installments for 120 months.
4
5.2 Death During Benefit Period. If the Director dies after benefit payments have commenced under this Agreement but before receiving all such payments, the Bank shall pay the remaining benefits to the Directors beneficiary at the same time and in the same amounts they would have been paid to the Director had the Director survived. The benefits under this Section 5.2 shall be paid in lieu of any benefits payable in the event of death during active service pursuant to Section 5.1.
Article 6
Beneficiaries
6.1 Beneficiary Designations. The Director shall designate a beneficiary by filing a written designation with the Bank. The Director may revoke or modify the designation at any time by filing a new designation. Such designation and modifications thereto may be made on a Beneficiary Designation form that is properly completed and filed with and accepted by the Bank. Designations will only be effective if signed by the Director and accepted by the Bank during the Directors lifetime. The Directors beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Director, or if the Director names a spouse as beneficiary and the marriage is subsequently dissolved. If the Director dies without a valid beneficiary designation, all payments shall be made to the Directors surviving spouse, if any, and if none, to the Directors surviving children and the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Directors estate.
6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Bank may require proof of incompetency, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
Article 7
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any benefit under this Agreement that is attributable to the interest accrued on Director contributions:
7.1 Excess Parachute Payment. To the extent the benefit would be an excess parachute payment under Section 280G of the Code.
7.2 Suicide. If the Director commits suicide within two years after the date of this Agreement, or if the Director has made any material misstatement of fact on any application for the
5
Insurance Policy.
7.3 Cooperation by Beneficiary. The Bank may require that the Director and the beneficiary provide information reasonably necessary to calculate the amount of Joint and Survivor Annuity Payments as a condition of receipt of such benefits in that form. If such information is not provided to the reasonable satisfaction of the Bank, the Bank may, in its discretion, (i) calculate the Joint and Survivor Annuity Payments based upon assumptions it deems reasonable, or (ii) pay benefits as if the Director had elected to be paid in equal monthly installments for 120 months.
Article 8
Claims and Review Procedures
8.1 Claims Procedure. The Bank shall notify the Directors beneficiary in writing, within ninety days of his or her written application for benefits, of his or her eligibility or non-eligibility for benefits under the Agreement. If the Bank determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreements claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed. If the Bank determines that there are special circumstances requiring additional time to make a decision, the Bank shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an additional ninety-day period.
8.2 Review Procedure. If the beneficiary is determined by the Bank not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within sixty days after receipt of the notice issued by the Bank. Said petition shall state the specific reasons which the beneficiary believes entitle him or her to benefits or to greater or different benefits. Within sixty days after receipt by the Bank of the petition, the Bank shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Bank orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents. The Bank shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Bank, but notice of this deferral shall be given to the beneficiary.
6
Article 9
Amendments and Termination
The Bank may amend or terminate this Agreement at any time prior to the Directors Termination of Service by written notice to the Director. In no event shall this Agreement be terminated without payment to the Director of the Deferral Account balance attributable to the Directors deferrals and interest credited on such amounts.
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the Director and the Bank, and their beneficiaries, survivors, executors, administrators and transferees.
10.2 No Guaranty of Employment or Election. This Agreement is not a contract for services. It does not give the Director the right to remain a Director of the Bank, nor does it interfere with the shareholders rights to replace the Director. It also does not require the Director to remain a Director nor interfere with the Directors right to terminate services at any time.
10.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
10.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
10.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Maryland, except to the extent preempted by the laws of the United States of America.
10.6 Unfunded Arrangement. The Director and beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. The Insurance Policy and any other insurance on the Directors life in which the Bank has an interest is a general asset of the Bank to which neither the Director nor any beneficiary has any preferred or secured claim of any kind, and does not represent funding for the benefit under this Agreement. Any representation or assertion contrary to this Section 10.6 is a material breach of this Agreement by the representing or asserting party, which, if such party is the Executive or, following his death, a beneficiary, shall immediately result in the cessation of any and all payments and the elimination of any liability hereunder for any payment not made prior to such assertion or representation, and, if such party is the Bank, shall subject it to liability for actual damages for such breach.
10.7 Successors. This Agreement shall inure to the benefit of and be binding upon any
7
corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank.
IN WITNESS WHEREOF, the Director and a duly authorized Bank officer have
signed this Agreement.
SANDY SPRING BANK
By
Title
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Exhibit 10(i)
SANDY SPRING BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Amendment
THIS AMENDMENT (the Amendment) to the Sandy Spring Bank Supplemental Retirement Agreement by and between Sandy Spring Bank, a Maryland corporation with its main office in Olney, Maryland (the Bank), and (the Executive), is made this day of January, 2004.
The Agreement hereby is amended in order to provide the Executive with an optional form of payment of benefits as stated below.
1. In the case of benefits under the Agreement payable upon Normal Retirement pursuant to Section 2.1, Early Retirement pursuant to Section 2.2, Disability pursuant to Section 2.3, Termination of Employment following a Change in Control pursuant to Section 2.4, or following other Terminations pursuant to Section 2.5, the Executive may elect either of the following forms of payment:
(i) Single Annuity Payments consisting of the payments calculated as set forth in the Agreement prior to this amendment; or
(ii) Joint and Survivor Annuity Payments equal to the monthly payments that would be payable under a straight-life, maximum monthly payment, lifetime joint and survivor annuity for the Executive and the Executives spouse, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the cost of an annuity with payments equal to the applicable Single Annuity Payments or, if the cost of such an annuity is not practically determinable, the actuarial present value of the applicable Single Annuity Payments as calculated in good faith by the Bank. Joint and Survivor Annuity Payments terminate upon the payment for the month of death of the survivor of the Executive and the Executives spouse.
2. Article 3, Death Benefits, shall be amended in its entirety to read as follows:
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executives beneficiary the benefit described in this Section 3.1.
3.1.1 Insurance Policy in Effect. If the Executive dies while the Insurance Policy is validly in effect, the benefit under Section 3.1 is the greater of (i) the lifetime benefit that would have been paid to the Executive under Section 2.1 calculated as if the date of the Executives death were the Normal Retirement Date, or (ii) the straight life, maximum monthly payment, fifteen-year annuity for the Executive (calculated as if he or she were not deceased), or if elected by the Executive, the straight life, maximum monthly payment, lifetime annuity for the Executives surviving spouse (a Spousal Annuity), for payments beginning the month following the Executives death, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to three times the Executives Final Average Pay.
3.1.2 Insurance Policy Not in Effect. If the Executive dies while the Insurance Policy is not validly in effect, the benefit under Section 3.1 is the Accrued Benefit at the date of the Executives death divided by one-hundred and eighty.
3.1.3 Payment of Benefit.
3.1.3.1. If the Executive dies while the Insurance Policy is in effect, the Bank shall pay the benefit to the Beneficiary on the first day of each month commencing with the month following the Executives death and (i) if the benefit amount calculated in Section 3.1.1 is not based upon a Spousal Annuity, under the Single Annuity Method, commencing with the month following the Executives death and continuing for one-hundred and seventy-nine additional months, (ii) if the benefit amount calculated in Section 3.1.1 is a Spousal Annuity under the Spousal Annuity Method, in payments equal to the monthly
payments that would be payable under such an annuity, commencing with the month following the Executives death and continuing until the payment for the month of death of the Executives spouse.
3.1.3.2 If the Executive dies while the Insurance Policy is not in effect, the Executive may elect either of the following forms of payment: (i) Single Annuity Payments consisting of equal monthly payments on the first day of each month commencing with the month following the Executives death and continuing for one-hundred and seventy-nine additional months, or (ii) Spousal Annuity Payments equal to the monthly payments that would be payable under a straight-life, maximum monthly payment, lifetime annuity for the Executives Spouse, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the cost of an annuity with payments equal to the amounts payable under alternative (i), or, if the cost of such an annuity is not practically determinable, the actuarial present value of the applicable Single Annuity Payments as calculated in good faith by the Bank. Spousal Annuity Payments terminate upon the payment for the month of death of the Executives spouse.
3. The right of the Bank to purchase an annuity issued by a third party for or to transfer ownership rights in such an annuity to the Executive in settlement of its obligations set forth in Section 2.5.3 applies to both Single Annuity Payments and Joint and Survivor Annuity Payments.
4. The Bank may require that the Executive and the beneficiary provide information reasonably necessary to calculate the amount of Joint and Survivor Annuity Payments or Spousal Annuity Payments as a condition of receipt of such benefits in that form. If such information is not provided to the reasonable satisfaction of the Bank, the Bank may, in its discretion, (i) calculate the Joint and Survivor Annuity Payments or Spousal Annuity Payments based upon assumptions it deems reasonable, or (ii) pay benefits as if the Executive had elected to be paid in Single Annuity Payments.
5. Elections of form of payment may be made prior to or within ten days following termination.
6. Notwithstanding anything in the Agreement or this Amendment to the contrary, the Joint and Survivor Annuity Payment method or Spousal Annuity Payment method may not be elected, and the Single Annuity Payment form shall be used, unless the Executive has validly designated his living spouse as his primary beneficiary prior to the earlier of (i) the Executives death, and (ii) the expiration of ten days of the Executives termination of employment, and such designation remains in effect at such time.
7. The Agreement is not amended except as explicitly provided herein.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have
signed this Agreement.
EXECUTIVE
SANDY SPRING BANK
By
Title
SANDY SPRING BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
BENEFICIARY DESIGNATION
THIS BENEFICIARY DESIGNATION is made this day of , by the undersigned (the Executive), pursuant to the Supplemental Executive Retirement Agreement (the Agreement) by and between Sandy Spring Bank and the Executive, and is subject to the terms, requirements, and conditions of the Agreement.
I hereby designate the following as my beneficiary under the Agreement:
Primary Beneficiary:
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Secondary Beneficiary:
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SIGNED:
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(Print or Type Name on the Above Line) | |
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(Signature) |
FORM OF PAYMENT ELECTION
THIS FORM OF PAYMENT ELECTION is made this day of , by the undersigned (the Executive), pursuant to the Supplemental Executive Retirement Agreement (the Agreement) by and between Sandy Spring Bank and the Executive, and is subject to the terms, requirements, and conditions of the Agreement.
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Singe Annuity Payments | |
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Joint and Survivor Annuity Payments/Spousal Annuity Payments* |
SIGNED: |
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(Print or Type Name on the Above Line) | |
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(Signature) |
SANDY SPRING NATIONAL BANK OF MARYLAND
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
THIS AGREEMENT is made this 14th day of May, 1997 by and between Sandy Spring National Bank of Maryland (the Bank), and Hunter R. Hollar (theExecutive).
INTRODUCTION
To encourage the Executive to remain a senior officer of the Bank, the Bank is willing to provide salary continuation benefits to the Executive. The Bank will pay the benefits from its general assets.
AGREEMENT
The Executive and the Bank agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1.1 Accrued Benefit means the amount of liability for benefits to be paid under this Agreement recorded on the books of the Bank in accordance with Generally Accepted Accounting Principles and without reduction for any income tax benefit related thereto.
1.1.2 Benefit Percentage means 70%.
1.1.3 Change in Control means the earliest of:
a. The acquisition by any entity, person or group (other than the acquisition by a tax-qualified retirement plan sponsored by Sandy Spring Bancorp, Inc. (Bancorp) or the Bank) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 25% of the outstanding capital stock of Bancorp or the Bank entitled to vote for the election of directors (Voting Stock);
b. The commencement by any entity, person, or group (other than Bancorp or the Bank, a subsidiary of Bancorp or the Bank, or a tax-qualified retirement plan sponsored by Bancorp or the Bank) of
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a tender offer or an exchange offer for more than 20% of the outstanding Voting Stock of Bancorp or the Bank;
c. The effective time of (i) a merger or consolidation of Bancorp or the Bank with one or more other corporations as a result of which the holders of the outstanding Voting Stock of Bancorp or the Bank immediately prior to such merger exercise voting control over less than 80% of the Voting Stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the property of Bancorp or the Bank other than to an entity of which Bancorp or the Bank owns at least 80% of the Voting Stock;
d. Upon the acquisition by any entity, person, or group of the control of the election of a majority of the Banks or Bancorps directors;
e. At such time that, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Bancorp or the Bank (the Continuing Directors) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director.
1.1.4 Code means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be to that section as it now exists and to any successor provisions.
1.1.5 Disability means a physical or mental infirmity that impairs the Executives ability to substantially perform his duties under this Agreement and that results in the Executives becoming eligible for long-term disability benefits under a long-term disability plan maintained for Bank employees (or, if the Bank has no such plan in effect, that impairs the Executives ability to substantially perform his duties for a period of one-hundred and eighty consecutive days). The board of directors of the Bank shall determine whether or not the Executive is and continues to be permanently disabled for purposes of this Agreement in good faith, based upon competent medical advice and other factors that it reasonably believes to be relevant. As a condition to any benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Banks Board of Directors deems appropriate.
1.1.6 Early Retirement Date means the date on which the Executive has both (a) attained age sixty and (b) completed ten Years of Service.
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1.1.7 Final Average Pay means the Executives three-year average cash compensation, determined by adding (a) the total base salary paid to the Executive for the thirty-six months preceding the date of termination (or other date specified in this Agreement) divided by three, and (b) one-third of the total cash bonuses (including, without limitation, bonuses awarded under the Banks Stakeholder Program and similar programs) awarded to the Executive during the three calendar years preceding the date of termination (or other date specified in this Agreement). Final Average Pay shall not be reduced for any pay reduction contributions (x) to cash or deferred arrangements under Section 401(k) of the Code, (y) to a cafeteria plan under Section 125 of the Code, or (z) to a nonqualified deferred compensation plan. Final Average Pay shall not be increased by any reimbursed expenses, credits, or benefits under any plan of deferred compensation to which the Bank contributes, or any additional cash compensation or compensation payable in a form other than cash.
1.1.8 Good Reason means the occurrence of any of the following without Executives express written consent: a. A material breach by Bancorp or the Bank of their obligation under a binding employment agreement with the Executive; b. A material reduction in the Executivess responsibilities or authority, or a requirement that the Executive report to any person or group other than the board of directors of Bancorp and the Bank (or any other effective reduction in reporting responsibilities) in connection with his employment with Bancorp or the Bank; c. Assignment to the Executive of duties of a nonexecutive nature or duties for which he is not reasonably equipped by his skills and experience; d. Failure of the Executive to be elected or reelected to the Board of Bancorp or the Bank; e. Any reduction in salary or material reduction in benefits below the amounts to which he was entitled prior to a Change in Control; f. Termination of incentive and benefit plans, programs or arrangements, or reduction of the Executives participation to such an extent as to materially reduce their aggregate value below their aggregate value immediately prior to a Change in Control. g. A requirement that the Executive relocate his principal business office or his principal place of residence outside Montgomery County, Maryland, or the assignment to the Executive of duties that would reasonably require such a relocation; h. A requirement that the Executive spend more than thirty normal working days away from Montgomery County, Maryland during any consecutive twelve-month period; or i. Failure to provide office facilities, secretarial services, and other administrative services to Executive that are substantially equivalent
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to the facilities and services provided to the Executive immediately prior to the Change in Control (excluding brief periods during which office facilities may be temporarily unavailable due to fire, natural disaster, or other calamity).
Notwithstanding the foregoing a reduction or elimination of the Executives benefits under one or more benefit plans maintained by Bancorp or the Bank as part of a good faith, overall reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of Bancorp or the Bank or any company that controls either of them under a plan or plans in or under which the Executive is not entitled to participate, and receive benefits, on a fair and nondiscriminatory basis. This provision shall not affect the rights of the Executive to enforce this Agreement.
A termination with Good Reason means a Termination of Employment by the Executive by written notice to the Bank, which notice may be immediately effective, given within ninety days of the event of Good Reason.
1.1.9 Insurance Policy means a single premium life insurance policy which may be acquired by the Bank, in its sole discretion, as sole owner, on the life of the Executive in connection with this Agreement.
1.1.10 Just Cause means, as determined in good faith by the Banks board of directors, the Executives: a. Personal dishonesty; b. Incompetence; c. Willful misconduct; d. Breach of fiduciary duty involving personal profit; e. Intentional failure to perform duties under this Agreement; f. Other, continuing material failure to perform his duties after reasonable notification (which shall be stated in writing and given at least fifteen days prior to termination) by the board of directors of the Bank of such failure; g. Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order; or h. Material breach by the Executive of any provision of this Agreement or an Employment Agreement to which he and the Bank are parties.
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1.1.11 Normal Retirement Date means the date on which the Executive has both (a) attained age sixty-five and (b) completed ten Years of Service.
1.1.12 Termination of Employment means the Executives ceasing to be employed by the Bank for any reason whatsoever, voluntary or involuntary, other than by reason of an approved leave of absence.
1.1.13 Years of Service means the total number of twelve-month periods during which the Executive is employed on a full-time basis by the Bank prior to and after the date of this Agreement, inclusive of any approved leaves of absence.
Article 2 Lifetime Benefits
2.1 Normal Retirement Benefit. If the Executive terminates employment on or after the Normal Retirement Date for reasons other than death, the Bank shall pay the Executive the benefit described in this Section 2.1.
2.1.1. Amount of Benefit. The benefit under this Section 2.1 is one-twelfth of the Executives Final Average Pay multiplied by the Benefit Percentage, which product is reduced by:
2.1.1.1 Social Security Benefits. One-half of the amount of monthly unreduced primary (not family) retirement benefits under the United States Social Security Act that the Executive would be eligible for if application were made as of the Executives sixty-fifth birthday, assuming that the Executive had earnings at or above the maximum contribution and benefit base under Section 230 of the United States Social Security Act for his working career; and
2.1.1.2 Banks Qualified Pension Plan Benefits. The straight life, monthly payment, annuity benefit the Executive would be entitled to receive under the Banks qualified pension plan as of the Executives Termination of Employment.
2.1.1.3 Prior Employers Pension Plan Benefits. The straight life, monthly payment, annuity benefit the Executive would be entitled to receive as of the Executives Termination of Employment because of employment by any and all other banks or companies prior to the Executives full time employment by the Bank under any and all qualified, defined benefit pension plans maintained by any and all such other banks or companies.
2.1.1.4 Banks Qualified 401(k) and Profit Sharing Plan. The straight life, maximum monthly payment, fifteen-year annuity that may be
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purchased at the date of Termination from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the value of the Executives account at the date of Termination under the Banks Cash and Deferred Profit Sharing Plan and Trust (or any successor plan) attributable to Bank contributions, including the earnings thereon.
2.1.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments.
2.2. Early Retirement Benefit. If the Executive terminates employment on or after the Early Retirement Date but before the Normal Retirement Date, and for reasons other than death or Disability, the Bank shall pay to the Executive the benefit described in this Section 2.2.
2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the amount of the Accrued Benefit at the date of such early retirement divided by one-hundred and eighty.
2.2.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executives Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments.
2.3 Disability Benefit. If the Executives employment is terminated for Disability prior to the Normal Retirement Date, the Bank shall pay to the Executive the benefit described in this Section 2.3.
2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the amount of the Accrued Benefit at the date of such early retirement divided by one-hundred and eighty.
2.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executives Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional months.
2.4 Change in Control Benefits. If within the period beginning six months prior to and ending two years after a Change in Control, (a) the Bank shall terminate the Executives employment without Just Cause, or (b) the Executive shall terminate his employment with Good Reason, the Bank shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement.
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2.4.1 Amount of Benefit. The benefit under this Section 2.4 is the Normal Retirement Benefit described in Section 2.1 calculated as if the date of Termination of Employment were the Executives Normal Retirement Date, or, if elected by the Executive pursuant to Section 2.4.2.1, the Early Retirement Benefit described in Section 2.4.1 calculated as if the date of Termination of Employment were the Executives Early Retirement Date.
2.4.2 Payment of Benefits.
2.4.2.1 Approved Change in Control. If the Change in Control was approved in advance by a majority of the Continuing Directors, the Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the day on which: (i) the Executive attains age sixty-five, or, if the Executive so elects in writing within ten days of Termination of Employment, (ii) the Executive attains age sixty, and, in either case, continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments.
2.4.2.2 Unapproved Change in Control. If the Change in Control was not approved in advance by a majority of the Continuing Directors, the Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Termination of Employment and continuing until the later of the Executives death or one-hundred and seventy-nine (179) additional monthly payments.
2.5. Vested Benefits following Other Terminations. Subject to Section 2.4, if (i) the Executive voluntarily terminates employment before the Early Retirement Date for reasons other than Death or Disability, or (ii) the Bank terminates the Executives Employment without Just Cause, the Bank shall pay to the Executive the benefits described in this section.
2.5.1 Amount of Benefit. The benefit under this Section 2.5 is the straight life, maximum monthly payment, fifteen-year annuity beginning on the first day of the month following the date on which (i) the Executive attains age sixty-five, or, if the Executive so elects in writing within ten days of Termination of Employment, (ii) the Executive attains age sixty, that may be purchased in the two months following the date of Termination from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the amount of the vested Accrued Benefit at the date of such termination.
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2.5.2 Vested Accrued Benefit. For purposes of this section 2.5, only, the Accrued Benefit shall vest in accordance with the following schedule: <TABLE> <CAPTION>
Years of Percentage of Accrued Service Benefit That Is Vested
less than 4 0% 4 20% 5 25% 6 30% 7 35% 8 40% 9 45% 10 50% 11 60% 12 70% 13 80% 14 90% 15 100% .
2.5.3 Payment of Benefit. The Bank shall pay the monthly benefit (or cause such benefit to be paid) to the Executive, or his beneficiary after the Executives death, on the first day of each month commencing with the month following the month in which the Executive attains (i) age sixty-five, or if elected by the Executive pursuant to section 2.5.2. (ii) age sixty. The Bank may, in its sole discretion, purchase such an annuity for or transfer its ownership rights to the Executive in settlement of this obligation, in which case all of the Banks obligations under this Agreement shall immediately terminate.
Article 3 Death Benefits 3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executives beneficiary the benefit described in this Section 3.1.
3.1.1 Insurance Policy in Effect. If the Executive dies while the Insurance Policy is validly in effect, the benefit under Section 3.1 is the greater of (i) the lifetime benefit that would have been paid to the Executive under Section 2.1 calculated as if the date of the Executives death were the Normal Retirement Date, or (ii) the straight life, maximum monthly payment, fifteen-year annuity, for payments beginning the month following the Executives death, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to three times the Executives Final Average Pay.
3.1.2 Insurance Policy Not in Effect. If the Executive dies while the Insurance Policy is not validly in effect, the benefit under Section 3.1 is the Accrued Benefit at the date of the Executives death divided by one-hundred and eighty.
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3.1.3 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary on the first day of each month commencing with the month following the Executives death and continuing for one-hundred and seventy-nine additional months.
Article 4 Beneficiaries 4.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executives lifetime. The Executives beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executives surviving spouse, if any, and if none, to the Executives surviving children and to the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executives estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetency, minority, or guardianship as it may deem appropriate prior to the distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
Article 5 General Limitations Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any amount of any benefit under this Agreement: 5.1 Excess Parachute Payment. To the extent the amount of benefit would be an excess parachute payment under Section 280G of the Code, with consideration for any right of the Executive, under an employment agreement with the Bank or otherwise, to waive benefits hereunder or other payments in order to prevent an excess parachute payment.
5.2 Termination for Cause. If the Bank terminates the Executives employment for Just Cause.
5.3 Suicide. No benefits shall be payable if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for the Insurance Policy.
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Article 6 Claims and Review Procedures 6.1 Claims Procedures. The Bank shall notify the Executives beneficiary in writing, within ninety days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Bank determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (a) the specific reasons for such denial, (b) a specific reference to the provisions of the Agreement on which the denial is based, (c) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (d) an explanation of the Agreements claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed. If the Bank determines that there are special circumstances requiring additional time to make a decision regarding eligibility for benefits, the Bank shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time by which notice may be given of such decision for up to an additional ninety-day period.
6.2 Review Procedure. If the beneficiary is determined by the Bank not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within sixty days after receipt of the notice issued by the Bank. Such petition shall state the specific reasons that the beneficiary believes entitle him or her to benefits or to greater or different benefits. Within sixty days after receipt by the Bank of the petition, the Bank shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Bank orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents. The Bank shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary, and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, notice of such decision may be deferred for up to another sixty-day period at the election of the Bank, but notice of this deferral shall be given to the beneficiary.
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Article 7 Amendments and Termination This Agreement may be amended or terminated only by a written agreement signed by the Bank and the Executive.
Article 8 Miscellaneous 8.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators, and transferees.
8.2 No Guaranty of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Banks right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executives right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached, or encumbered in any manner.
8.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Maryland, except to the extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. The Insurance Policy and any other insurance on the Executives life in which the Bank has an interest is a general asset of the Bank to which neither the Executive nor any beneficiary has any preferred or secured claim of any kind, and does not represent funding for the benefit under this Agreement. Any representation or assertion contrary to this section 8.6 is a material breach of this Agreement by the representing or asserting party, which, if such party is the Executive or, following his death, a beneficiary, shall immediately result in the cessation of any and all payments and the elimination of any liability hereunder for any payment not made prior to such assertion or representation, and, if such party is the Bank, shall subject it to liability for actual damages for such breach.
8.7 Non-Competition Provisions. Regardless of anything herein to the contrary, except in the case of a Termination of Employment by the Bank without Just Cause, a Termination of
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Employment by the Executive with Good Reason, or with the permission of the Bank, during the two years immediately following the Executives Termination of Employment, the Executive shall not serve as an officer or director or employee of any bank holding company, bank, savings association, savings and loan holding company, or mortgage company (any of which, a Financial Institution) which Financial Institution offers products or services competing with those offered by the Bank from offices in any county in the State of Maryland or of any other State in which the Bank or any of its affiliates has a branch, and shall not interfere with the relationship of the Bank and any of its employees, agents, or representatives. In the event of any breach by the Executive of this Covenant Not to Compete, the Board of Directors of the Bank shall direct that any unpaid balance of any payments to the Executive under this Agreement be suspended, and shall thereupon notify the Executive of such suspension, in writing. Thereupon, if the Board of Directors of the Bank shall determine that such breach by the executive exists at any time after a period of one month following notification of the such suspension, all rights of the Executive and his beneficiary under this agreement, including rights to any and all further payments hereunder, shall thereupon terminate.
8.8 Successors. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have signed this Agreement.
SANDY SPRING NATIONAL BANK OF MARYLAND
By /s/ W. Drew Stabler
Title: Chairman of the Board
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Exhibit 10(j)
SANDY SPRING BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Amendment
THIS AMENDMENT (the Amendment) to the Sandy Spring Bank Supplemental Retirement Agreement by and between Sandy Spring Bank, a Maryland corporation with its main office in Olney, Maryland (the Bank), and (the Executive), is made this day of January, 2004.
The Agreement hereby is amended in order to provide the Executive with an optional form of payment of benefits as stated below.
1. In the case of benefits under the Agreement payable upon Normal Retirement pursuant to Section 2.1, Early Retirement pursuant to Section 2.2, Disability pursuant to Section 2.3, Termination of Employment following a Change in Control pursuant to Section 2.4, or following other Terminations pursuant to Section 2.5, the Executive may elect either of the following forms of payment:
(i) Single Annuity Payments consisting of the payments calculated as set forth in the Agreement prior to this amendment; or | |
(ii) Joint and Survivor Annuity Payments equal to the monthly payments that would be payable under a straight-life, maximum monthly payment, lifetime joint and survivor annuity for the Executive and the Executives spouse, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the cost of an annuity with payments equal to the applicable Single Annuity Payments or, if the cost of such an annuity is not practically determinable, the actuarial present value of the applicable Single Annuity Payments as calculated in good faith by the Bank. Joint and Survivor Annuity Payments terminate upon the payment for the month of death of the survivor of the Executive and the Executives spouse. |
2. Article 3, Death Benefits, shall be amended in its entirety to read as follows:
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executives beneficiary the benefit described in this Section 3.1. |
3.1.1 Insurance Policy in Effect. If the Executive dies while the Insurance Policy is validly in effect, the benefit under Section 3.1 is the greater of (i) the lifetime benefit that would have been paid to the Executive under Section 2.1 calculated as if the date of the Executives death were the Normal Retirement Date, or (ii) the straight life, maximum monthly payment, fifteen-year annuity for the Executive (calculated as if he or she were not deceased), or if elected by the Executive, the straight life, maximum monthly payment, lifetime annuity for the Executives surviving spouse (a Spousal Annuity), for payments beginning the month following the Executives death, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to three times the Executives Final Average Pay. |
3.1.2 Insurance Policy Not in Effect. If the Executive dies while the Insurance Policy is not validly in effect, the benefit under Section 3.1 is the Accrued Benefit at the date of the Executives death divided by one-hundred and eighty. |
3.1.3 Payment of Benefit. |
3.1.3.1. If the Executive dies while the Insurance Policy is in effect, the Bank shall pay the benefit to the Beneficiary on the first day of each month commencing with the month following the Executives death and (i) if the benefit amount calculated in Section 3.1.1 is not based upon a Spousal Annuity, under the Single Annuity Method, commencing with the month following the Executives death |
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and continuing for one-hundred and seventy-nine additional months, (ii) if the benefit amount calculated in Section 3.1.1 is a Spousal Annuity under the Spousal Annuity Method, in payments equal to the monthly payments that would be payable under such an annuity, commencing with the month following the Executives death and continuing until the payment for the month of death of the Executives spouse. | |
3.1.3.2 If the Executive dies while the Insurance Policy is not in effect, the Executive may elect either of the following forms of payment: (i) Single Annuity Payments consisting of equal monthly payments on the first day of each month commencing with the month following the Executives death and continuing for one-hundred and seventy-nine additional months, or (ii) Spousal Annuity Payments equal to the monthly payments that would be payable under a straight-life, maximum monthly payment, lifetime annuity for the Executives Spouse, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the cost of an annuity with payments equal to the amounts payable under alternative (i), or, if the cost of such an annuity is not practically determinable, the actuarial present value of the applicable Single Annuity Payments as calculated in good faith by the Bank. Spousal Annuity Payments terminate upon the payment for the month of death of the Executives spouse. |
3. The right of the Bank to purchase an annuity issued by a third party for or to transfer ownership rights in such an annuity to the Executive in settlement of its obligations set forth in Section 2.5.3 applies to both Single Annuity Payments and Joint and Survivor Annuity Payments.
4. The Bank may require that the Executive and the beneficiary provide information reasonably necessary to calculate the amount of Joint and Survivor Annuity Payments or Spousal Annuity Payments as a condition of receipt of such benefits in that form. If such information is not provided to the reasonable satisfaction of the Bank, the Bank may, in its discretion, (i) calculate the Joint and Survivor Annuity Payments or Spousal Annuity Payments based upon assumptions it deems reasonable, or (ii) pay benefits as if the Executive had elected to be paid in Single Annuity Payments.
5. Elections of form of payment may be made prior to or within ten days following termination.
6. Notwithstanding anything in the Agreement or this Amendment to the contrary, the Joint and Survivor Annuity Payment method or Spousal Annuity Payment method may not be elected, and the Single Annuity Payment form shall be used, unless the Executive has validly designated his living spouse as his primary beneficiary prior to the earlier of (i) the Executives death, and (ii) the expiration of ten days of the Executives termination of employment, and such designation remains in effect at such time.
7. The Agreement is not amended except as explicitly provided herein.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have
signed this Agreement.
EXECUTIVE
SANDY SPRING BANK
By
Title
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SANDY SPRING BANK
BENEFICIARY DESIGNATION
THIS BENEFICIARY DESIGNATION is made this day of
, by the undersigned (the Executive), pursuant to the
Supplemental Executive Retirement Agreement (the Agreement) by and between
Sandy Spring Bank and the Executive, and is subject to the terms, requirements,
and conditions of the Agreement.
I hereby designate the following as my beneficiary under the Agreement:
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Primary Beneficiary:
Secondary Beneficiary:
SIGNED:
(Print or Type Name on the Above Line)
(Signature)
FORM OF PAYMENT ELECTION
THIS FORM OF PAYMENT ELECTION is made this day of , by the undersigned (the Executive), pursuant to the Supplemental Executive Retirement Agreement (the Agreement) by and between Sandy Spring Bank and the Executive, and is subject to the terms, requirements, and conditions of the Agreement.
Singe Annuity Payments
Joint and Survivor Annuity Payments/Spousal Annuity Payments*
SIGNED: |
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(Print or Type Name on the Above Line) | ||
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(Signature) |
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SANDY SPRING BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
THIS AGREEMENT is made this day of , by and between Sandy Spring Bank, a Maryland corporation with its main office in Olney, Maryland (the Bank), and (the Executive).
INTRODUCTION
To encourage the Executive to remain a senior officer of the Bank, the Bank is willing to provide salary continuation benefits to the Executive. The Bank will pay the benefits from its general assets.
AGREEMENT
The Executive and the Bank agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and phrases shall have the meanings specified:
1.1.1 Accrued Benefit means the amount of liability for benefits to be paid under this Agreement recorded on the books of the Bank in accordance with Generally Accepted Accounting Principles and without reduction for any income tax benefit related thereto. |
1.1.2 Benefit Percentage means 65%. |
1.1.3 Change in Control means the earliest of: |
a. | The acquisition by any entity, person or group (other than the acquisition by a tax-qualified retirement plan sponsored by Sandy Spring Bancorp, Inc. (Bancorp) or the Bank) of beneficial ownership, as that term is defined in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 25% of the outstanding capital stock of Bancorp or the Bank entitled to vote for the election of directors (Voting Stock); | ||
b. | The commencement by any entity, person, or group (other than Bancorp or the Bank, a subsidiary of Bancorp or the Bank, or a tax-qualified retirement plan sponsored by Bancorp or the Bank) of |
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a tender offer or an exchange offer for more than 20% of the outstanding Voting Stock of Bancorp or the Bank; | |||
c. | The effective time of (i) a merger or consolidation of Bancorp or the Bank with one or more other corporations as a result of which the holders of the outstanding Voting Stock of Bancorp or the Bank immediately prior to such merger exercise voting control over less than 80% of the Voting Stock of the surviving or resulting corporation, or (ii) a transfer of substantially all of the property of Bancorp or the Bank other than to an entity of which Bancorp or the Bank owns at least 80% of the Voting Stock; | ||
d. | Upon the acquisition by any entity, person, or group of the control of the election of a majority of the Banks or Bancorps directors; | ||
e. | At such time that, during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Bancorp or the Bank (the Continuing Directors) cease for any reason to constitute at least two-thirds thereof, provided that any individual whose election or nomination for election as a member of the Board was approved by a vote of at least two-thirds of the Continuing Directors then in office shall be considered a Continuing Director. |
1.1.4 Code means the Internal Revenue Code of 1986, as amended. References to a Code section shall be deemed to be to that section as it now exists and to any successor provisions. |
1.1.5 Disability means a physical or mental infirmity that impairs the Executives ability to substantially perform the Executives duties under this Agreement and that results in the Executives becoming eligible for long-term disability benefits under a long-term disability plan maintained for Bank employees (or, if the Bank has no such plan in effect, that impairs the Executives ability to substantially perform job duties for a period of one-hundred and eighty consecutive days). The Board of Directors of the Bank shall determine whether or not the Executive is and continues to be permanently disabled for purposes of this Agreement in good faith, based upon competent medical advice and other factors that it reasonably believes to be relevant. As a condition to any benefits, the Bank may require the Executive to submit to such physical or mental evaluations and tests as the Banks Board of Directors deems appropriate. |
1.1.6 Early Retirement Date means the date on which the Executive has both (a) attained age sixty and (b) completed ten Years of Service. |
1.1.7 Effective Date means the date of the Agreement as set forth in paragraph one of this Agreement. |
1.1.8 Final Average Pay means the Executives three-year average cash compensation, determined by adding (a) the total base salary paid to the Executive for the thirty-six months preceding the date of termination (or other date specified in this Agreement) divided by three, and (b) one-third of the total cash bonuses (including, without limitation, bonuses awarded under the Banks Stakeholders Program and similar programs) awarded to the Executive during the three calendar years preceding the date of termination (or other date specified in this Agreement). Final Average Pay shall not be reduced for any pay reduction contributions (x) to cash or deferred arrangements under Section 401(k) of the Code, (y) to a cafeteria plan under Section 125 of the Code, or (z) to a nonqualified deferred compensation plan. Final Average Pay shall not be increased by any reimbursed expenses, credits, or benefits under any plan of deferred compensation to which the Bank contributes, or any additional cash compensation or compensation payable in a form other than cash. |
1.1.9 Good Reason means the occurrence of any of the following without Executives express written consent: |
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(a) | A material reduction in the Officers responsibilities or authority in connection with the Officers employment with Bancorp or the Bank; | ||
(b) | Assignment to the Officer of duties of a nonexecutive nature or duties for which the Officer is not reasonably equipped by the Officers skills and experience; | ||
(c) | A reduction in salary or benefits contrary to the terms of this Agreement, or, following a Change in Control as defined in Section 1.1.3 of this Agreement, any reduction in salary or material reduction in benefits below the amounts to which the Officer was entitled prior to the Change in Control; | ||
(d) | Termination of incentive and benefit plans, programs, or arrangements, or reduction of the Officers participation to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; | ||
(e) | A requirement that the Officers principal business office or principal place of residence be relocated outside any county in which the Bank has its main office, its branches, or its deposit taking Automatic Teller Machines; or the assignment to the Officer of duties that would reasonably require such a relocation; | ||
(f) | A requirement that the Officer spend more than thirty normal working days away from any county in which the Bank has its main office, its branches, or its deposit taking Automatic Teller Machines during any consecutive twelve-month period; or | ||
(g) | Failure to provide office facilities, secretarial services, and other administrative services to Officer which are substantially equivalent to the facilities and services provided to the Officer on the Effective Date (excluding brief periods during which office facilities may be temporarily unavailable due to fire, natural disaster, or other calamity). | ||
(h) | In the event of a Change in Control as defined in Section 1.1.3 of this Agreement, Officer shall have the right to resign for any reason during the first sixty (60) days immediately following the first six months after the closing date of a definitive purchase and assumption agreement (as defined in such agreement), the execution of which brought about a Change in Control. |
Notwithstanding the foregoing: (i) a reduction or elimination of the Executives benefits under one or more benefit plans maintained by the Bank as part of a good faith, overall reduction or elimination of such plan or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against the Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of the Bank or any company that controls either of them under a plan or plans in or under which the Executive is not entitled to participate, and receive benefits, on a fair and nondiscriminatory basis; and (ii) a requirement that the Executive report to and be subject to the direction or supervision of a senior officer of the Bank other than the President and Chief Executive shall not constitute an event of Good Reason or a material breach of this Agreement. This provision shall not affect the rights of the Executive to enforce this Agreement. |
A termination with Good Reason means a Termination of Employment by the Executive by written notice to the Bank, which notice may be immediately effective, given within ninety days of the event of Good Reason. |
1.1.10 Insurance Policy means a single premium life insurance policy which may be acquired by the Bank, in its sole discretion, as sole owner, on the life of the Executive in connection with this Agreement. |
1.1.11 Just Cause means, as determined in good faith by the Banks Board of Directors, the Executives: |
(a) | Personal dishonesty; | ||
(b) | Willful misconduct; | ||
(c) | Breach of fiduciary duty involving personal profit; |
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(d) | Intentional failure to perform duties under this Agreement; | ||
(e) | Other, continuing material failure to perform duties assigned to the Officer under this Agreement after reasonable notification (which shall be stated in writing and given at least fifteen days prior to termination) by the Board of such failure; | ||
(f) | Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order; or | ||
(g) | Material breach by the Officer of any provision of this Agreement or an Employment Agreement to which the Officer and the Bank are parties. |
1.1.12 Normal Retirement Date means the date on which the Executive has both (a) attained age sixty-five and (b) completed ten Years of Service. |
1.1.13 Termination of Employment means the Executives ceasing to be employed by the Bank for any reason whatsoever, voluntary or involuntary, other than by reason of an approved leave of absence. |
1.1.14 Years of Service means the total number of twelve-month periods during which the Executive is employed on a full-time basis by the Bank prior to and after the date of this Agreement, inclusive of any approved leaves of absence. |
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. If the Executive terminates employment on or after the Normal Retirement Date for reasons other than death, the Bank shall pay the Executive the benefit described in this Section 2.1.
2.1.1. Amount of Benefit. The benefit under this Section 2.1 is one-twelfth of the Executives Final Average Pay multiplied by the Benefit Percentage, which product is reduced by: |
2.1.1.1 Social Security Benefits. One-half of the amount of monthly unreduced primary (not family) retirement benefits under the United States Social Security Act that the Executive would be eligible for if application were made as of the Executives sixty-fifth birthday, assuming that the Executive had earnings at or above the maximum contribution and benefit base under Section 230 of the United States Social Security Act for the Executives working career; and |
2.1.1.2 Banks Qualified Pension Plan Benefits. The straight life, monthly payment, annuity benefit the Executive would be entitled to receive under the Banks qualified pension plan as of the Executives Termination of Employment. |
2.1.1.3 Prior Employers Pension Plan Benefits. The straight life, monthly payment, annuity benefit the Executive would be entitled to receive as of the Executives Termination of Employment because of employment by any and all other banks or companies prior to the Executives full time employment by the Bank under any and all qualified, defined benefit pension plans maintained by any and all such other banks or companies. |
2.1.1.4 Banks Qualified 401(k) and Profit Sharing Plan. The straight life, maximum monthly payment, fifteen-year annuity that may be purchased at the date of Termination from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the value of the Executives account at the date of Termination under the Banks Cash and Deferred Profit Sharing Plan and Trust (or any successor plan) attributable to Bank contributions, including the earnings thereon. |
2.1.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments. |
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2.2. Early Retirement Benefit. If the Executive terminates employment on or after the Early Retirement Date but before the Normal Retirement Date, and for reasons other than death or Disability, the Bank shall pay to the Executive the benefit described in this Section 2.2.
2.2.1 Amount of Benefit. The benefit under this Section 2.2 is the amount of the Accrued Benefit at the date of such early retirement divided by one-hundred and eighty. |
2.2.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executives Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments. |
2.3 Disability Benefit. If the Executives employment is terminated for Disability prior to the Normal Retirement Date, the Bank shall pay to the Executive the benefit described in this Section 2.3.
2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the amount of the Accrued Benefit at the date of such early retirement divided by one-hundred and eighty. |
2.3.2 Payment of Benefit. The Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Executives Termination of Employment and continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional months. |
2.4 Change in Control Benefits. If within the period beginning six months prior to and ending two years after a Change in Control, (a) the Bank shall terminate the Executives employment without Just Cause, or (b) the Executive shall terminate his employment with Good Reason, the Bank shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement.
2.4.1 Amount of Benefit. The benefit under this Section 2.4 is the Normal Retirement Benefit described in Section 2.1 calculated as if the date of Termination of Employment were the Executives Normal Retirement Date, or, if elected by the Executive pursuant to Section 2.4.2.1, the Early Retirement Benefit described in Section 2.4.1 calculated as if the date of Termination of Employment were the Executives Early Retirement Date. |
2.4.2 Payment of Benefits. |
2.4.2.1 Approved Change in Control. If the Change in Control was approved in advance by a majority of the Continuing Directors, the Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the day on which: (i) the Executive attains age sixty-five, or, if the Executive so elects in writing within ten days of Termination of Employment, (ii) the Executive attains age sixty, and, in either case, continuing until the later of the Executives death or the payment of one-hundred and seventy-nine additional monthly payments. |
2.4.2.2 Unapproved Change in Control. If the Change in Control was not approved in advance by a majority of the Continuing Directors, the Bank shall pay the benefit to the Executive on the first day of each month commencing with the month following the Termination of Employment and continuing until the later of the Executives death or one-hundred and seventy-nine (179) additional monthly payments. |
2.5. Vested Benefits following Other Terminations. Subject to Section 2.4, if (i) the Executive voluntarily terminates employment before the Early Retirement Date for reasons other than Death or Disability, or (ii) the Bank terminates the Executives Employment without Just Cause, the Bank shall pay to the Executive the benefits described in this section.
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2.5.1 Amount of Benefit. The benefit under this Section 2.5 is the straight life, maximum monthly payment, fifteen-year annuity beginning on the first day of the month following the date on which (i) the Executive attains age sixty-five, or, if the Executive so elects in writing within ten days of Termination of Employment, (ii) the Executive attains age sixty, that may be purchased in the two months following the date of Termination from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to the amount of the vested Accrued Benefit at the date of such termination. | |
2.5.2 Vested Accrued Benefit. For purposes of this section 2.5, only, the Accrued Benefit shall vest in accordance with the following schedule: |
Years of | Percentage of Accrued | |||||||
Service | Benefit That Is Vested | |||||||
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<4 | 0 | % | ||||||
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4 | 20 | % | |||||
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5 | 25 | % | |||||
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6 | 30 | % | |||||
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7 | 35 | % | |||||
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8 | 40 | % | |||||
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9 | 45 | % | |||||
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10 | 50 | % | |||||
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11 | 60 | % | |||||
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12 | 70 | % | |||||
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13 | 80 | % | |||||
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14 | 90 | % | |||||
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15 | 100 | % |
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2.5.3 Payment of Benefit. The Bank shall pay the monthly benefit (or cause such benefit to be paid) to the Executive, or his beneficiary after the Executives death, on the first day of each month commencing with the month following the month in which the Executive attains (i) age sixty-five, or if elected by the Executive pursuant to section 2.5.2. (ii) age sixty. The Bank may, in its sole discretion, purchase such an annuity for or transfer its ownership rights to the Executive in settlement of this obligation, in which case all of the Banks obligations under this Agreement shall immediately terminate. |
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active service of the Bank, the Bank shall pay to the Executives beneficiary the benefit described in this Section 3.1.
3.1.1 Insurance Policy in Effect. If the Executive dies while the Insurance Policy is validly in effect, the benefit under Section 3.1 is the greater of (i) the lifetime benefit that would have been paid to the Executive under Section 2.1 calculated as if the date of the Executives death were the Normal Retirement Date, or (ii) the straight life, maximum monthly payment, fifteen-year annuity, for payments beginning the month following the Executives death, that could be purchased from an issuer rated superior by A.M. Best (or, in the Banks discretion, with an equivalent rating from another rating organization of similar reputation) for cash equal to three times the Executives Final Average Pay. |
3.1.2 Insurance Policy Not in Effect. If the Executive dies while the Insurance Policy is not validly in effect, the benefit under Section 3.1 is the Accrued Benefit at the date of the Executives death divided by one-hundred and eighty. |
3.1.3 Payment of Benefit. The Bank shall pay the benefit to the Beneficiary on the first day of each month commencing with the month following the Executives death and continuing for one-hundred and seventy-nine additional months. |
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary by filing a written designation with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Bank during the Executives lifetime. The Executives beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive, or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the Executives surviving spouse, if any, and if none, to the Executives surviving children and to the descendants of any deceased child by right of representation, and if no children or descendants survive, to the Executives estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetency, minority, or guardianship as it may deem appropriate prior to the distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
Article 5
Adjustment of Certain Payments and Benefits
The Bank shall indemnify and hold the Officer harmless from any and all loss, expense, or liability that the Officer may ever incur under Code § 4999, or any successor provision, as the result of payments or benefits that the Officer receives from the Bank or any successor to any of its interests. The Bank shall have this obligation with respect to any excise taxes (and any federal, state, and local income taxes on those excise taxes) for which the Officer is liable under Code § 4999, or any successor provision, pursuant to a tax return on which the Officer reports such excise tax
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liability based on a reasonable analysis (that the Officer need not file with the return) prepared by the Officers legal counsel. This paragraph shall survive termination or expiration of this Agreement for any reason.
Article 6
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the Bank shall not pay any amount of any benefit under this Agreement:
5.1 Termination for Cause. If the Bank terminates the Executives employment for Just Cause.
5.2 Suicide. No benefits shall be payable if the Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for the Insurance Policy.
Article 7
Claims and Review Procedures
6.1 Claims Procedures. The Bank shall notify the Executives beneficiary in writing, within ninety days of his or her written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Bank determines that the beneficiary is not eligible for benefits or full benefits, the notice shall set forth (a) the specific reasons for such denial, (b) a specific reference to the provisions of the Agreement on which the denial is based, (c) a description of any additional information or material necessary for the claimant to perfect his or her claim, and a description of why it is needed, and (d) an explanation of the Agreements claims review procedure and other appropriate information as to the steps to be taken if the beneficiary wishes to have the claim reviewed. If the Bank determines that there are special circumstances requiring additional time to make a decision regarding eligibility for benefits, the Bank shall notify the beneficiary of the special circumstances and the date by which a decision is expected to be made, and may extend the time by which notice may be given of such decision for up to an additional ninety-day period.
6.2 Review Procedure. If the beneficiary is determined by the Bank not to be eligible for benefits, or if the beneficiary believes that he or she is entitled to greater or different benefits, the beneficiary shall have the opportunity to have such claim reviewed by the Bank by filing a petition for review with the Bank within sixty days after receipt of the notice issued by the Bank. Such petition shall state the specific reasons that the beneficiary believes entitle him or her to benefits or to greater or different benefits. Within sixty days after receipt by the Bank of the petition, the Bank shall afford the beneficiary (and counsel, if any) an opportunity to present his or her position to the Bank orally or in writing, and the beneficiary (or counsel) shall have the right to review the pertinent documents. The Bank shall notify the beneficiary of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the beneficiary, and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty-day period is not sufficient, notice of such decision may be deferred for up to another sixty-day period at the election of the Bank, but notice of this deferral shall be given to the beneficiary.
Article 8
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement signed by the Bank and the Executive. This Agreement shall supersede any prior Agreement, which shall be deemed terminated by agreement of the parties immediately prior to the Effective Date.
Article 9
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors, administrators, and transferees.
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8.2 No Guaranty of Employment. This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Banks right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executives right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached, or encumbered in any manner.
8.4 Tax Withholding. The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Maryland, except to the extent preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. The Insurance Policy and any other insurance on the Executives life in which the Bank has an interest is a general asset of the Bank to which neither the Executive nor any beneficiary has any preferred or secured claim of any kind, and does not represent funding for the benefit under this Agreement. Any representation or assertion contrary to this section 8.6 is a material breach of this Agreement by the representing or asserting party, which, if such party is the Executive or, following his death, a beneficiary, shall immediately result in the cessation of any and all payments and the elimination of any liability hereunder for any payment not made prior to such assertion or representation, and, if such party is the Bank, shall subject it to liability for actual damages for such breach.
8.7 Non-Competition Provisions. Regardless of anything herein to the contrary, except in the case of a Termination of Employment by the Bank without Just Cause, a Termination of Employment by the Executive with Good Reason, or with the permission of the Bank, during the two years immediately following the Executives Termination of Employment, the Executive shall not serve as an officer or director or employee of any bank holding company, bank, savings association, savings and loan holding company, or mortgage company (any of which, a Financial Institution) which Financial Institution offers products or services competing with those offered by the Bank from offices in any county in the State of Maryland or of any other State in which the Bank or any of its affiliates has a branch, and shall not interfere with the relationship of the Bank and any of its employees, agents, or representatives; provided, however, that the provisions of this noncompetition clause shall only apply to termination of the Officer before a Change in Control as defined in Section 1.1.3. (It being the intent of the parties that the noncompetition clause shall not apply to terminations resulting from or due to a Change in Control). In the event of any breach by the Executive of this Covenant Not to Compete, the Board of Directors of the Bank shall direct that any unpaid balance of any payments to the Executive under this Agreement be suspended, and shall thereupon notify the Executive of such suspension, in writing. Thereupon, if the Board of Directors of the Bank shall determine that such breach by the executive exists at any time after a period of one month following notification of the such suspension, all rights of the Executive and his beneficiary under this agreement, including rights to any and all further payments hereunder, shall thereupon terminate.
8.8 Successors. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Bank.
IN WITNESS WHEREOF, the Executive and a duly authorized Bank officer have
signed this Agreement.
EXECUTIVE
SANDY SPRING BANK
By
Title
12
SANDY SPRING BANK
BENEFICIARY DESIGNATION
THIS BENEFICIARY DESIGNATION is made this day of
, by the undersigned (the Executive), pursuant to the
Supplemental Executive Retirement Agreement (the Agreement) by and between
Sandy Spring Bank and the Executive, and is subject to the terms, requirements,
and conditions of the Agreement.
I hereby designate the following as my beneficiary under the Agreement:
SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT
Primary Beneficiary:
Secondary Beneficiary:
SIGNED:
(Print or Type Name on the Above Line)
(Signature)
13
Exhibit 10 (u)
SANDY SPRING BANCORP, INC.
DIRECTORS STOCK PURCHASE PLAN
1. PURPOSE OF THE PLAN. The purpose of the Sandy Spring Bancorp, Inc. Directors Stock Purchase Plan is to provide a convenient means for Directors of Bancorp to acquire shares of Bancorps Common Stock at market value in lieu of all or a portion of their annual retainers for Board service. The Plan is effective December 31, 2003 for retainers payable in 2004 and thereafter.
2. DEFINITIONS.
a. | Board means the Board of Directors of the Bancorp. | ||
b. | Business Day means a day on which the New York Stock Exchange is open for regular trading. | ||
c. | Code means the Internal Revenue Code of 1986, as amended. | ||
d. | Committee means the Directors Stock Purchase Plan Committee appointed by the Board. | ||
e. | Common Stock means Bancorps Common Stock, par value $1.00 per share. | ||
f. | Director means a member of Bancorps Board. | ||
g. | Bancorp means Sandy Spring Bancorp, Inc. | ||
h. | Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto. | ||
i. | Fair Market Value means, with respect to a share of Common Stock, the last sales price (or average of the quoted closing bid and asked prices if there is no closing sales price reported) of a share of Common Stock as reported by the Nasdaq National Market (or by the principal national stock exchange on which the Common Stock is then listed) on the Purchase Date, if such date is a Business Day, or the immediately preceding Business Day, if such date is not a Business Day. In the absence of an established market for Common Stock, the Fair Market Value of a share of Common Stock shall be determined in good faith by the Board. | ||
j. | Plan means the Sandy Spring Bancorp, Inc. Directors Stock Purchase Plan. | ||
k. | Plan Start Date means December 31, 2003. | ||
l. | Purchase Date means the date that checks for the Retainer are issued by Bancorp, or if no such checks are issued, the date of the May meeting of the Board. | ||
m. | Retainer means the annual retainer paid to Directors for service on the Board. | ||
n. | Rule 16b-3 means Rule 16b-3 under the Exchange Act. |
3. ELECTION.
a. Subject to other limitations provided in this Plan, a Director may elect to receive from 50% to 100% of his or her annual retainer in shares of Stock. Elections shall be made, on a form supplied by Bancorp, on or before December 31 of each year applicable to the Retainer received in the following year, provided that an election may be made within thirty days after the date that a Director first takes office with respect to the next Retainer payable to the Director.
b. A Director may not revoke his or her election.
c. The Plan is not intended to provide a deferral of Director compensation for state or federal income tax purposes. Amounts of fees that a Director has elected to defer pursuant to a Directors Fee Deferral Agreement may not be used to purchase shares under this Plan. An election under this Plan to purchase shares under this Plan does not act to revoke an election made pursuant to a Directors Fee Deferral Agreement.
4. PURCHASE PRICE, AND NUMBER OF SHARES ISSUED. The purchase price of each share of Common Stock sold pursuant this Plan shall be the Fair Market Value of the Common Stock on the
Effective December 31, 2003
1
Purchase Date. The number of shares issued to a Director with respect to a Retainer shall be determined by dividing the dollar amount of the percentage of the Retainer elected under the Plan, rounded down to the nearest whole share. No fractional shares shall be issued under the Plan.
5. DELIVERY. The Plan will not hold shares on behalf of any Director. All Shares of Common Stock issued under this plan will be evidenced by certificates containing a legend in a form satisfactory to Bancorp stating that the shares have been issued to an affiliate of Bancorp.
6. TAX WITHHOLDING. At the time the Common Stock is issued to a Director under the Plan, the Director must make adequate provision for Bancorps federal, state or other tax withholding obligations, if any, that may arise upon such issuance. At any time, Bancorp may, but shall not be obligated to, withhold from a Directors compensation the amount necessary for Bancorp to meet applicable withholding obligations, including any withholding required to make available to Bancorp any tax deductions attributed to the issuance of the shares of Stock under this Plan.
7. NO ASSIGNMENT OF DIRECTORS INTEREST IN PLAN. A Director may not assign, sell, transfer, pledge, hypothecate or alienate any rights or interests in or under the Plan. A Directors death will act to revoke an election under this Plan with respect to any Retainer not yet paid.
8. VESTING, RIGHTS, AND PRIVILEGES. All Directors shall have the same rights and privileges under the Plan. Directors shall have no interest or voting rights in shares of Common Stock covered by this Plan until such shares have been issued to the Director. Each Director will immediately acquire full ownership of all shares of Common Stock at the time such shares are issued.
9. NO INTEREST OR FEES PAID. No fees will be payable by any Director with respect to participation in this Plan. No interest will be paid to or credited to the a Director under this Plan.
10. CONDITIONS UPON ISSUANCE OF COMMON STOCK.
a. The issuance of shares to each Director pursuant to this Plan shall be subject to the annual approval of the Board in the manner required to qualify for an exemption pursuant to Rule 16b-3 under the Exchange Act.
b. Notwithstanding anything herein to the contrary, Bancorps obligation to issue shares of Common Stock under the Plan is subject to the approval required of any governmental authority in connection with the authorization, issuance, sale or transfer of such shares, to any requirements of Nasdaq or any national securities exchange applicable thereto, and to compliance by Bancorp with other applicable legal requirements in effect from time to time., including without limitation any applicable tax withholding requirements.
c. As a condition to the issuance of shares to a Director under this Plan, Bancorp may require the Director to represent and warrant at the time of such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel of Bancorp, such representation is appropriate under applicable law.
11. THE COMMITTEE. The Plan shall be administered by the Committee, which shall consist of not less than three (3) Directors appointed by the Board. Members of the Committee shall be Non-Employee Directors within the meaning of Rule 16b-3, and shall serve at the pleasure of the Board. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be deemed the action of the Committee. In the absence at any time of a duly appointed Committee, the Plan shall be administered by the Board. The Committee shall be entitled to adopt and apply guidelines and procedures consistent with the purposes of the Plan. In order to effectuate the purposes of the Plan, the Committee shall have the discretionary authority to construe and interpret the Plan, to supply any omissions therein, to reconcile and correct any errors or inconsistencies, to decide any questions in the administration and application of the Plan, and to make equitable adjustments for any mistakes or errors made in the administration of the Plan, and all such actions or determinations made by the Committee, and the application of rules and regulations to a particular case or issue by the Committee, in good faith, shall not be subject to review by anyone, but shall be final, binding and conclusive on all persons ever interested hereunder.
12. SHARES ISSUABLE UNDER THE PLAN. The maximum number of shares which shall be issued under the Plan, subject to adjustment upon changes in Common Stock as described in this Section,
Effective December 31, 2003
2
shall be 15,000 shares. If, on a given Purchase Date, the number of shares to be issued under this Plan exceeds the number of shares available under the Plan, Bancorp shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and it shall determine to be equitable, and the balance of the Retainer shall paid to the Director as promptly as possible. If any change is made in the Common Stock (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, revise stock split, liquidating dividend, combination of shares, exchange of shares, change incorporate structure or otherwise), the Committee may make appropriate adjustments in (a) the number of shares and price per share of Common Stock subject to the Plan, and (b) the number of shares of Common Stock that have been authorized under the Plan but not yet issued.
13. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN Bancorp, acting through the Committee, reserves the right to amend, suspend, or terminate the Plan at any time or times; provided, however, any amendment that would require the consent of stockholders under applicable law, rule or regulation (including, without limitation, the Code, the Exchange Act or any self regulatory organization such as a national securities exchange), will not be made unless such stockholders consent is obtained. In addition, the Plan shall terminate automatically on the tenth anniversary of the Plan Start Date, or on any Purchase Date on which Directors elect to purchase a number of shares greater than the number of reserved shares remaining available for issuance, subject to the allocation of remaining shares pursuant to Section 12.
14. COMPANYS RIGHT TO RESTRUCTURE, ETC. This Plan shall not affect in any way the right or power of Bancorp to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets.
15. NO EFFECT ON BOARD SERVICE. No provision of this Plan shall provide any right to a Director to serve as a Director for any specified period.
16. GOVERNING LAW. The Plan shall be governed by and construed in accordance with the laws of the State of Maryland, except to the extent that federal law shall be deemed to apply.
17. SEVERABILITY OF PROVISIONS. If any provision of this Plan is determined to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect the remaining provisions of this Plan, but such invalid, illegal or unenforceable provisions shall be fully severable, and the Plan shall be construed and enforced as if such provision had never been inserted herein.
18. SUCCESSORS AND ASSIGNS. The Plan shall be binding upon Bancorps successors and assigns.
***
Effective December 31, 2003
3
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the Registrant.
Jurisdiction of
Name
Incorporation
Delaware
Maryland
Maryland
Maryland
* | Direct subsidiaries of Sandy Spring Bank |
Exhibit 23(a)
Audit Committee of
The Board of Directors
Sandy Spring Bancorp, Inc.
We hereby consent to the incorporation by reference in the prospectuses included in Registration Statements No. 33-29316, 33-48453, 333-81249, 33-35319, 33-56692, 333-11049, and 333-63126 each on Form S-8, for Sandy Spring Bancorp, Inc. of our report, dated January 22, 2004, appearing in this Annual Report on Form 10-K of Sandy Spring Bancorp, Inc. for the year ended December 31, 2003.
/s/ McGladrey & Pullen, LLP
Frederick, Maryland
March 10, 2004
Exhibit 23(b)
Audit Committee of
The Board of Directors
Sandy Spring Bancorp, Inc.
We hereby consent to the incorporation by reference in the prospectuses included in Registration Statements No. 33-29316, 33-48453 (including Registration Statement on Form S-8 and Post Effective Amendments to Form S-8 with respect to Registration Statements No. 33-29316, 33-48453, and 333-81249), 33-35319, 33-56692, 333-11049, and 333-63126 each on Form S-8, and in the Annual Report on Form 10-K of Sandy Spring Bancorp, Inc. for the year ended December 31, 2003, of our report dated January 31, 2003, relating to the consolidated financial statements of Sandy Spring Bancorp, Inc. and Subsidiaries.
/s/ Stegman & Company
Baltimore, Maryland
March 9, 2004
Exhibit 31(a)
Rule 13a-14(a) /15d-14(a) Certifications
I, Hunter R. Hollar, certify that:
1. I have reviewed this annual report on Form 10-K of Sandy Spring Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) N/A
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 26, 2004
/s/ Hunter R. Hollar
Hunter R. Hollar
President and Chief
Executive Officer
Exhibit 31(b)
I, James H. Langmead, certify that:
1. I have reviewed this annual report on Form 10-K of Sandy Spring Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure control and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) N/A
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: February 26, 2004
/s/ James H. Langmead
James H. Langmead
Executive Vice President and
Chief Financial Officer
Exhibit 32(a)
18 U.S.C. Section 1350 Certifications
I hereby certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge and belief, that the accompanying Form 10-K of Sandy Spring Bancorp,
Inc. (Bancorp) for the year ended December 31, 2003, fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934(15 U.S.C. 78m or 78o(d)); and that the information contained in this Form
10-K fairly presents, in all material respects, the financial condition and
results of operations of Bancorp.
By: /s/ HUNTER R. HOLLAR
Hunter R. Hollar
President and Chief Executive Officer
Date: February 26, 2004
Exhibit 32(b)
I hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section. 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the accompanying Form 10-K of Sandy Spring Bancorp, Inc. (Bancorp) for the year ended December 31, 2003, fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934(15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Bancorp.
By: /s/ JAMES H. LANGMEAD
James H. Langmead
Executive Vice President and
Chief Financial Officer
Date: February 26, 2004