SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
quarterly period ended September
30, 2007
OR
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from __________
to
__________
Commission
File Number: 0-19065
Sandy
Spring Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
52-1532952
|
(State
of incorporation)
|
(I.R.S.
Employer
Identification
Number)
|
17801
Georgia Avenue, Olney, Maryland
|
|
20832
|
|
301-774-6400
|
(Address
of principal office)
|
|
(Zip
Code)
|
|
(Telephone
Number)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for
the
past 90 days.
YES
x
NO
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o
|
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
o
NO
x
The
number of shares of common stock outstanding as of October 23, 2007 is
16,453,803 shares.
SANDY
SPRING BANCORP,
INC.
INDEX
|
|
|
|
Page
|
PART
I - FINANCIAL
INFORMATION
|
|
|
|
|
|
|
|
ITEM
1.
|
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets at September 30, 2007 and December 31, 2006
|
|
1
|
|
|
|
|
|
|
|
Consolidated
Statements of Income for the Three Month and Nine Month Periods Ended
September 30, 2007 and 2006
|
|
2
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Nine Month Periods Ended September
30,
2007 and 2006
|
|
4
|
|
|
|
|
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Nine Month Periods
Ended September 30, 2007 and 2006
|
|
6
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
7
|
|
|
|
|
|
ITEM
2.
|
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
|
18
|
|
|
|
|
|
ITEM
3.
|
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
|
31
|
|
|
|
|
|
ITEM
4.
|
|
CONTROLS
AND PROCEDURES
|
|
31
|
|
|
|
|
|
PART
II - OTHER
INFORMATION
|
|
|
|
|
|
|
|
ITEM
1A.
|
|
RISK
FACTORS
|
|
31
|
|
|
|
|
|
ITEM
2.
|
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
|
32
|
|
|
|
|
|
ITEM
6.
|
|
EXHIBITS
|
|
32
|
|
|
|
|
|
SIGNATURES
|
|
33
|
PART
I -
FINANCIAL INFORMATION
Item
1.
FINANCIAL STATEMENTS
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
September
30,
|
|
December
31,
|
|
(Dollars
in thousands, except per share data)
|
|
2007
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
58,698
|
|
$
|
54,945
|
|
Federal
funds sold
|
|
|
13,375
|
|
|
48,978
|
|
Cash
and cash equivalents
|
|
|
72,073
|
|
|
103,923
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits with banks
|
|
|
483
|
|
|
2,974
|
|
Residential
mortgage loans held for sale
|
|
|
6,099
|
|
|
10,595
|
|
Investments
available-for-sale (at fair value)
|
|
|
196,138
|
|
|
256,845
|
|
Investments
held-to-maturity —
fair value
of $241,984
(2007)
and $273,206
(2006)
|
|
|
237,231
|
|
|
267,344
|
|
Other
equity securities
|
|
|
18,826
|
|
|
16,719
|
|
Total
loans and leases
|
|
|
2,201,599
|
|
|
1,805,579
|
|
Less:
allowance for loan and lease losses
|
|
|
(23,567
|
)
|
|
(19,492
|
)
|
Net
loans and leases
|
|
|
2,178,032
|
|
|
1,786,087
|
|
Premises
and equipment, net
|
|
|
55,016
|
|
|
47,756
|
|
Accrued
interest receivable
|
|
|
16,008
|
|
|
15,200
|
|
Goodwill
|
|
|
76,625
|
|
|
12,494
|
|
Other
intangible assets, net
|
|
|
17,754
|
|
|
10,653
|
|
Other
assets
|
|
|
91,207
|
|
|
79,867
|
|
Total
assets
|
|
$
|
2,965,492
|
|
$
|
2,610,457
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
453,536
|
|
$
|
394,662
|
|
Interest-bearing
deposits
|
|
|
1,826,566
|
|
|
1,599,561
|
|
Total
deposits
|
|
|
2,280,102
|
|
|
1,994,223
|
|
Short-term
borrowings
|
|
|
298,083
|
|
|
314,732
|
|
Other
long-term borrowings
|
|
|
7,793
|
|
|
1,808
|
|
Subordinated
debentures
|
|
|
35,000
|
|
|
35,000
|
|
Accrued
interest payable and other liabilities
|
|
|
33,890
|
|
|
26,917
|
|
Total
liabilities
|
|
|
2,654,868
|
|
|
2,372,680
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock —
par value $1.00; shares authorized 50,000,000; shares issued and
outstanding 16,420,911 (2007) and 14,826,805 (2006)
|
|
|
16,421
|
|
|
14,827
|
|
Additional
paid in capital
|
|
|
85,982
|
|
|
27,869
|
|
Retained
earnings
|
|
|
211,787
|
|
|
199,102
|
|
Accumulated
other comprehensive loss
|
|
|
(3,566
|
)
|
|
(4,021
|
)
|
Total
stockholders' equity
|
|
|
310,624
|
|
|
237,777
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,965,492
|
|
$
|
2,610,457
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
39,789
|
|
$
|
32,686
|
|
$
|
112,756
|
|
$
|
92,831
|
|
Interest
on loans held for sale
|
|
|
234
|
|
|
222
|
|
|
701
|
|
|
514
|
|
Interest
on deposits with banks
|
|
|
590
|
|
|
4
|
|
|
1,081
|
|
|
18
|
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,211
|
|
|
4,090
|
|
|
10,832
|
|
|
10,490
|
|
Exempt
from federal income taxes
|
|
|
2,468
|
|
|
2,839
|
|
|
7,776
|
|
|
8,783
|
|
Interest
on federal funds sold
|
|
|
666
|
|
|
177
|
|
|
1,720
|
|
|
432
|
|
TOTAL
INTEREST INCOME
|
|
|
46,958
|
|
|
40,018
|
|
|
134,866
|
|
|
113,068
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
15,898
|
|
|
10,378
|
|
|
45,263
|
|
|
26,846
|
|
Interest
on short-term borrowings
|
|
|
3,198
|
|
|
4,943
|
|
|
10,265
|
|
|
13,342
|
|
Interest
on long-term borrowings
|
|
|
650
|
|
|
575
|
|
|
1,912
|
|
|
1,729
|
|
TOTAL
INTEREST EXPENSE
|
|
|
19,746
|
|
|
15,896
|
|
|
57,440
|
|
|
41,917
|
|
NET
INTEREST INCOME
|
|
|
27,212
|
|
|
24,122
|
|
|
77,426
|
|
|
71,151
|
|
Provision
for loan and lease losses
|
|
|
750
|
|
|
550
|
|
|
2,369
|
|
|
2,545
|
|
NET
INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES
|
|
|
26,462
|
|
|
23,572
|
|
|
75,057
|
|
|
68,606
|
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
22
|
|
|
0
|
|
|
28
|
|
|
1
|
|
Service
charges on deposit accounts
|
|
|
2,999
|
|
|
1,904
|
|
|
7,937
|
|
|
5,702
|
|
Gains
on sales of mortgage loans
|
|
|
738
|
|
|
718
|
|
|
2,149
|
|
|
2,049
|
|
Fees
on sales of investment products
|
|
|
765
|
|
|
783
|
|
|
2,471
|
|
|
2,264
|
|
Trust
and investment management fees
|
|
|
2,365
|
|
|
2,164
|
|
|
7,007
|
|
|
6,476
|
|
Insurance
agency commissions
|
|
|
1,294
|
|
|
1,406
|
|
|
5,422
|
|
|
5,132
|
|
Income
from bank owned life insurance
|
|
|
720
|
|
|
591
|
|
|
2,097
|
|
|
1,711
|
|
Visa
check fees
|
|
|
730
|
|
|
603
|
|
|
2,037
|
|
|
1,750
|
|
Other
income
|
|
|
1,497
|
|
|
1,421
|
|
|
3,761
|
|
|
3,746
|
|
TOTAL
NONINTEREST INCOME
|
|
|
11,130
|
|
|
9,590
|
|
|
32,909
|
|
|
28,831
|
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
14,654
|
|
|
12,622
|
|
|
41,864
|
|
|
37,823
|
|
Occupancy
expense of premises
|
|
|
2,946
|
|
|
2,175
|
|
|
8,072
|
|
|
6,340
|
|
Equipment
expenses
|
|
|
1,631
|
|
|
1,384
|
|
|
4,734
|
|
|
4,112
|
|
Marketing
|
|
|
359
|
|
|
1,160
|
|
|
1,563
|
|
|
1,973
|
|
Outside
data services
|
|
|
870
|
|
|
872
|
|
|
2,873
|
|
|
2,486
|
|
Amortization
of intangible assets
|
|
|
1,123
|
|
|
743
|
|
|
2,956
|
|
|
2,227
|
|
Other
expenses
|
|
|
4,316
|
|
|
2,738
|
|
|
12,410
|
|
|
7,917
|
|
TOTAL
NONINTEREST EXPENSES
|
|
|
25,899
|
|
|
21,694
|
|
|
74,472
|
|
|
62,878
|
|
Income
Before Income Taxes
|
|
|
11,693
|
|
|
11,468
|
|
|
33,494
|
|
|
34,559
|
|
Income
Tax Expense
|
|
|
3,512
|
|
|
3,346
|
|
|
9,599
|
|
|
10,002
|
|
NET
INCOME
|
|
$
|
8,181
|
|
$
|
8,122
|
|
$
|
23,895
|
|
$
|
24,557
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (Continued)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands, except per share data)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic
Net Income Per Share
|
|
$
|
0.50
|
|
$
|
0.55
|
|
$
|
1.50
|
|
$
|
1.66
|
|
Diluted
Net Income Per Share
|
|
|
0.50
|
|
|
0.55
|
|
|
1.50
|
|
|
1.65
|
|
Dividends
Declared Per Share
|
|
|
0.23
|
|
|
0.22
|
|
|
0.69
|
|
|
0.66
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Dollars
in thousands)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
23,895
|
|
$
|
24,557
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,805
|
|
|
6,488
|
|
Provision
for loan and lease losses
|
|
|
2,369
|
|
|
2,545
|
|
Stock
compensation expense
|
|
|
848
|
|
|
461
|
|
Deferred
income taxes (benefits)
|
|
|
(2,564
|
)
|
|
1,360
|
|
Origination
of loans held for sale
|
|
|
(234,298
|
)
|
|
(210,617
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
240,944
|
|
|
202,062
|
|
Gains
on sales of loans held for sale
|
|
|
(2,149
|
)
|
|
(2,117
|
)
|
Securities
gains
|
|
|
(28
|
)
|
|
(1
|
)
|
Net
decrease (increase) in accrued interest receivable
|
|
|
967
|
|
|
(2,255
|
)
|
Net
increase in other assets
|
|
|
(3,535
|
)
|
|
(3,919
|
)
|
Net
increase in accrued expenses and other liabilities
|
|
|
3,561
|
|
|
2,054
|
|
Other
- net
|
|
|
(2,063
|
)
|
|
443
|
|
Net
cash provided by operating activities
|
|
|
35,752
|
|
|
21,061
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Net
decrease in interest-bearing deposits with banks
|
|
|
2,491
|
|
|
434
|
|
Proceeds
(purchases) of other equity securities
|
|
|
392
|
|
|
(2,137
|
)
|
Purchases
of investments available-for-sale
|
|
|
(19,045
|
)
|
|
(94,984
|
)
|
Proceeds
from sales of other real estate owned
|
|
|
(149
|
)
|
|
0
|
|
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
33,547
|
|
|
23,206
|
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
133,981
|
|
|
90,358
|
|
Net
increase in loans and leases
|
|
|
(101,448
|
)
|
|
(197,050
|
)
|
Purchase
of loans and leases
|
|
|
0
|
|
|
(2,148
|
)
|
Proceeds
from sale of loans and leases
|
|
|
0
|
|
|
68,087
|
|
Acquisition
of business activity, net
|
|
|
(15,769
|
)
|
|
0
|
|
Expenditures
for premises and equipment
|
|
|
(3,757
|
)
|
|
(3,854
|
)
|
Net
cash provided (used) in investing activities
|
|
|
30,243
|
|
|
(118,088
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
(decrease) increase in deposits
|
|
|
(50,797
|
)
|
|
144,640
|
|
Net
decrease in short-term borrowings
|
|
|
(35,717
|
)
|
|
(23,919
|
)
|
Retirement
of long-term borrowings
|
|
|
(64
|
)
|
|
0
|
|
Common
stock purchased and retired
|
|
|
(1,494
|
)
|
|
(866
|
)
|
Proceeds
from issuance of common stock
|
|
|
1,437
|
|
|
1,173
|
|
Dividends
paid
|
|
|
(11,210
|
)
|
|
(9,757
|
)
|
Net
cash (used) provided by financing activities
|
|
|
(97,845
|
)
|
|
111,271
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(31,850
|
)
|
|
14,244
|
|
Cash
and cash equivalents at beginning of period
|
|
|
103,923
|
|
|
53,443
|
|
Cash
and cash equivalents at end of period
|
|
$
|
72,073
|
|
$
|
67,687
|
|
Sandy
Spring Bancorp and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
|
|
Nine
Months Ended
September
30,
|
|
(Dollars
in thousands)
|
|
2007
|
|
2006
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
Interest
payments
|
|
$
|
57,437
|
|
$
|
40,866
|
|
Income
tax payments
|
|
|
3,974
|
|
|
7,042
|
|
Transfers
from loans to other real estate owned
|
|
|
90
|
|
|
0
|
|
Reclassification
of borrowings from long-term to short-term
|
|
|
568
|
|
|
262
|
|
Details
of Acquisition:
|
|
|
|
|
|
|
|
Fair
Value of assets acquired
|
|
$
|
417,434
|
|
|
0
|
|
Fair
Value of liabilities assumed
|
|
|
(365,709
|
)
|
|
0
|
|
Stock
issued for acquisition
|
|
|
(58,916
|
)
|
|
0
|
|
Purchase
price in excess of net assets acquired
|
|
|
62,640
|
|
|
0
|
|
Cash
paid for acquisition
|
|
|
55,449
|
|
|
0
|
|
Cash
and cash equivalents acquired with acquisition
|
|
|
(39,680
|
)
|
|
0
|
|
Acquisition
of business activity, net
|
|
$
|
15,769
|
|
|
0
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars
in thousands, except per share data)
|
|
Common
Stock
|
|
Additional
Paid-in Capital
|
|
Retained
Earnings
|
|
Accumulated
Other Compre- hensive
Income
(loss)
|
|
Total
Stock- holders’ Equity
|
|
Balances
at January 1, 2007
|
|
$
|
14,827
|
|
$
|
27,869
|
|
$
|
199,102
|
|
$
|
(4,021
|
)
|
$
|
237,777
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
23,895
|
|
|
|
|
|
23,895
|
|
Other
comprehensive income, net of tax effects and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
455
|
|
|
455
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,350
|
|
Cash
dividends - $0.69 per share
|
|
|
|
|
|
|
|
|
(11,210
|
)
|
|
|
|
|
(11,210
|
)
|
Stock
compensation expense
|
|
|
|
|
|
848
|
|
|
|
|
|
|
|
|
848
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Potomac Bank- 886,989 shares
|
|
|
887
|
|
|
32,190
|
|
|
|
|
|
|
|
|
33,077
|
|
Acquisition
of County National Bank- 690,047 shares
|
|
|
690
|
|
|
25,149
|
|
|
|
|
|
|
|
|
25,839
|
|
Director
stock purchase plan- 2,402 shares
|
|
|
2
|
|
|
75
|
|
|
|
|
|
|
|
|
77
|
|
Stock
option plan- 51,797shares (55,205 shares issued less 3,408 shares
withheld)
|
|
|
52
|
|
|
810
|
|
|
|
|
|
|
|
|
862
|
|
Employee
stock purchase plan- 17,709 shares
|
|
|
18
|
|
|
480
|
|
|
|
|
|
|
|
|
498
|
|
Stock
repurchases- 54,838 shares
|
|
|
(55
|
)
|
|
(1,439
|
)
|
|
|
|
|
|
|
|
(1,494
|
)
|
Balances
at September 30, 2007
|
|
$
|
16,421
|
|
$
|
85,982
|
|
$
|
211,787
|
|
$
|
(3,566
|
)
|
$
|
310,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at January 1, 2006
|
|
$
|
14,794
|
|
$
|
26,599
|
|
$
|
179,259
|
|
$
|
(594
|
)
|
$
|
220,058
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
24,557
|
|
|
|
|
|
24,557
|
|
Other
comprehensive income, net of tax effects and reclassification adjustment
|
|
|
|
|
|
|
|
|
|
|
|
242
|
|
|
242
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,799
|
|
Cash
dividends - $0.66 per share
|
|
|
|
|
|
|
|
|
(9,757
|
)
|
|
|
|
|
(9,757
|
)
|
Stock
compensation expense
|
|
|
|
|
|
461
|
|
|
|
|
|
|
|
|
461
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
stock purchase plan- 2,381 shares
|
|
|
3
|
|
|
81
|
|
|
|
|
|
|
|
|
84
|
|
Stock
option plan - 26,226 shares
|
|
|
26
|
|
|
622
|
|
|
|
|
|
|
|
|
648
|
|
Employee
stock purchase plan - 14,380 shares
|
|
|
14
|
|
|
427
|
|
|
|
|
|
|
|
|
441
|
|
Stock
repurchases- 25,000 shares
|
|
|
(25
|
)
|
|
(841
|
)
|
|
|
|
|
|
|
|
(866
|
)
|
Balances
at September 30, 2006
|
|
$
|
14,812
|
|
$
|
27,349
|
|
$
|
194,059
|
|
$
|
(352
|
)
|
$
|
235,868
|
|
See
Notes
to Consolidated Financial Statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
1 -
General
The
foregoing financial statements are unaudited. In the opinion of Management,
all
adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the results of the interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in Sandy Spring Bancorp's 2006 Annual Report on
Form
10-K. There have been no significant changes to the Company’s Accounting
Policies as disclosed in the 2006 Annual Report on Form 10-K. The results shown
in this interim report are not necessarily indicative of results to be expected
for the full year 2007.
The
accounting and reporting policies of Sandy Spring Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Sandy Spring Bank (the “Bank”), together with
its subsidiaries, Sandy Spring Insurance Corporation, The Equipment Leasing
Company, and West Financial Services, Inc., conform to accounting principles
generally accepted in the United States of America and to general practices
within the financial services industry. Certain reclassifications have been
made
to amounts previously reported to conform to current
classifications.
Consolidation
has resulted in the elimination of all significant intercompany accounts and
transactions.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash and
due
from banks and federal funds sold (which have original maturities of three
months or less).
Note
2 -
Acquisitions
In
January 2006, the Company completed the acquisition of Neff & Associates
(“Neff”), an insurance agency located in Ocean City, Maryland. Under the terms
of the acquisition agreement, the Company purchased Neff for cash totaling
approximately $1.9 million. Additional contingent payments may be made and
recorded in 2008 based on the financial results attained by Neff in that
year.
In
the
transaction, $0.3 million of assets were acquired, primarily accounts
receivable, and $0.3 million of liabilities were assumed, primarily operating
payables. The acquisition resulted in the recognition of $0.5 million of
goodwill, which will not be amortized, and $1.4 million of identified intangible
assets which will be amortized on a straight-line basis over a period of 5
to 10
years. This acquisition is considered immaterial and, accordingly, no pro forma
results of operations are provided for the pre-acquisition periods.
On
February 15, 2007, the Company completed the acquisition of Potomac Bank of
Virginia (“Potomac”), a bank headquartered in Fairfax, Virginia. Potomac
operated five branch offices in the Northern Virginia metropolitan market at
the
time of the acquisition. The primary reason for the merger with Potomac was
to
gain entry into the northern Virginia high growth market. The total
consideration paid to Potomac shareholders and related merger costs in
connection with the acquisition was $68.2 million. The results of Potomac’s
operations have been included in the Company’s consolidated financial results
subsequent to February 15, 2007. The assets and liabilities of Potomac were
recorded on the Consolidated Balance Sheet at their respective fair values.
The
fair values were determined as of February 15, 2007 and are not subject to
further refinements. The transaction resulted in total assets acquired as of
February 15, 2007 of $252.5 million, including approximately $196.0 million
of
loans and leases; liabilities assumed were $224.3 million, including $197.0
million of deposits. Additionally, the Company recorded $40.0 million of
goodwill, $5.1 million of core deposit intangibles (“CDI”) and $0.3 million of
other intangibles. CDI’s are subject to amortization and are being amortized
over seven years on a straight-line basis.
On
May
31, 2007, the Company completed the acquisition of CN Bancorp Inc. (“CNB”) and
its wholly owned subsidiary, County National Bank (“County National”). County
National was headquartered in Glen Burnie, Maryland, and had four full-service
branches located in Anne Arundel County, Maryland at the time of the
acquisition. The total consideration paid to CNB shareholder’s and related
merger costs in connection with the acquisition was $46.1 million. The results
of CNB’s operations have been included in the Company’s consolidated financial
results subsequent to May 31, 2007. The assets and liabilities of CNB were
recorded on the Consolidated Balance Sheet at their respective fair values.
The
fair values were determined as of May 31, 2007 and are not subject to further
refinements. The transaction resulted in total assets acquired as of May 31,
2007 of $164.9 million, including approximately $98.7 million of loans;
liabilities assumed were $141.4 million, including $138.4 million of deposits.
Additionally, the Company recorded $22.6 million of goodwill, $4.6 million
of
CDI’s and $0.1 million of other intangibles. CDI’s are subject to amortization
and are being amortized over seven years on a straight-line basis.
The
acquisitions of Potomac and County National, individually and in the aggregate,
are considered immaterial for purposes of the disclosures required by SFAS
No.
141, “Business Combinations.”
Note
3 -
New Accounting Pronouncements
Adopted
Accounting Pronouncements
In
February 2006, FASB issued SFAS 155, "Accounting
for Certain Hybrid Financial Instruments",
which
permits, but does not require, fair value accounting for any hybrid financial
instrument that contains an embedded derivative that would otherwise require
bifurcation in accordance with SFAS 133, “Accounting for Derivative Instruments
and Hedging Activities.” The statement also subjects beneficial interests in
securitized financial assets to the requirements of SFAS 133. This statement
was
effective for all financial instruments acquired, issued, or subject to
remeasurement for fiscal years beginning after September 15, 2006. The adoption
of this Statement did not have a material impact on the Company’s financial
position, results of operations or cash flows.
In
March
2006, the FASB issued SFAS No. 156, “Accounting
for Servicing of Financial Assets, and an amendment of FASB Statement No. 140”.
The
statement amends SFAS No. 140 by (1) requiring the separate accounting for
servicing assets and servicing liabilities, which arise from the sale of
financial assets; (2) requiring all separately recognized serving assets and
servicing liabilities to be initially measured at fair value, if practicable;
and (3) permitting an entity to choose between an amortization method or a
fair
value method for subsequent measurement for each class of separately recognized
servicing assets and servicing liabilities. This statement was effective
for fiscal years beginning after September 15, 2006, with earlier adoption
permitted. The adoption of this Statement did not have a material impact on
the
Company’s financial position, results of operations or cash flows.
In
June
2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes.”
This interpretation applies to all tax positions accounted for in accordance
with SFAS No. 109, “Accounting
for Income Taxes.” FIN
48 clarifies the application of SFAS No. 109 by defining the criteria that
an
individual tax position must meet in order for the position to be recognized
within the financial statements and provides guidance on measurement,
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition for tax positions. This interpretation
is effective for fiscal years beginning after December 15, 2006, with earlier
adoption permitted. The Company has evaluated the impact of the adoption
of this interpretation and has determined that it will not have a material
impact on its financial position, results of operations or cash
flows.
In
June
2006, the Emerging Issues Task Force (“EITF”) released Issue 06-05,
“Accounting
for Purchases of Life Insurance-Determining the Amount That Could Be Realized
in
Accordance with FASB Technical Bulletin No. 85-4, “Accounting for Purchases of
Life Insurance.”
On
September 7, 2006, the EITF concluded that a policyholder should consider any
additional amounts included in the contractual terms of the policy in
determining the amount that could be realized under the insurance contract.
Amounts that are recoverable by the policyholder at the discretion of the
insurance company should be excluded from the amount that could be realized.
Amounts that are recoverable by the policyholder in periods beyond one year
from
the surrender of the policy should be discounted utilizing an appropriate rate
of interest. The effective date of EITF 06-05 was for fiscal years beginning
after December 15, 2006. The adoption of this EITF release did not have a
material impact on the Company’s financial position, results of operations or
cash flows.
In
September 2006, the FASB issued Statement No. 158, (“SFAS No. 158”),
“Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R).”
SFAS No.
158 requires changes to the existing reporting for defined benefit
postretirement plans that, among other changes, requires the Company to
recognize on its balance sheet the overfunded or underfunded status of the
above
described defined benefit pension plan measured as the difference between the
fair value of plan assets and the projected benefit obligation. Such funding
difference was recorded as an adjustment to the December 31, 2006 balance shown
in accumulated other comprehensive income (loss), a component of the Company’s
Stockholders' Equity. At December 31, 2006 the projected benefit obligation
of
the plan exceeded the fair value of plan assets by $1.9 million. This amount
may
change significantly by December 31, 2007 and is contingent upon a management
decision regarding the amount of the 2007 contribution.
Pending
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.” This
Statement defines fair value, establishes a framework for measuring fair value,
and expands disclosures about fair value measurements. It clarifies that fair
value is the price that would be received to sell an asset or paid to transfer
a
liability (an exit price) in an orderly transaction between market participants
in the market in which the reporting entity operates. This Statement does not
require any new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or liabilities
to
be measured at fair value. The Statement emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. The Statement
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets and
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). This Statement is effective for fiscal years
beginning after November 15, 2007, with earlier adoption permitted. The Company
does not expect that the adoption of this Statement will have a material impact
on its financial position, results of operations or cash flows.
At
its
September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final
consensus on Issue 06-04, “Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements."
The
consensus stipulates that an agreement by an employer to share a portion of
the
proceeds of a life insurance policy with an employee during the postretirement
period is a postretirement benefit arrangement required to be accounted for
under SFAS No. 106 or Accounting Principles Board Opinion ("APB") No. 12,
"Omnibus Opinion - 1967." The consensus concludes that the purchase of a
split-dollar life insurance policy does not constitute a settlement under SFAS
No. 106 and, therefore, a liability for the postretirement obligation must
be
recognized under SFAS No. 106 if the benefit is offered under an arrangement
that constitutes a plan or under APB No. 12, if it is not part of a plan. Issue
06-04 is effective for annual or interim reporting periods beginning after
December 15, 2007. The Company has endorsement split-dollar life insurance
policies totaling $20.6 million as of September 30, 2007 and is currently
assessing the financial statement impact of implementing EITF
06-04.
In
November 2006, the EITF released Issue 06-10, “Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements”.
On
November 29, 2006 the FASB ratified the tentative conclusions reached by the
EITF on this Issue and approved the issuance of a draft abstract for a public
comment period. This Issue addresses questions raised about whether the
consensus reached in Issue 06-4 should apply to collateral assignment
split-dollar life insurance arrangements and the recognition and measurement
of
the employer’s asset in such arrangements. The EITF concluded that an employer
should recognize a liability for the postretirement benefit related to a
collateral assignment split-dollar life insurance arrangement in accordance
with
either SFAS No. 106 or APB No. 12 based on the substantive agreement with the
employee. In addition the EITF reached a conclusion that an employer should
recognize and measure an asset based on the nature and substance of the
collateral assignment split-dollar arrangement based on what future cash flows
the employer is entitled to, if any, as well as the employee’s obligation and
ability to repay the employer. The effective date of EITF 06-10 is for fiscal
years beginning after December 15, 2007. The Company had no collateral
assignment split dollar life insurance policies as of September 30, 2007 and
does not expect that the implementation of EITF 06-10 will have a material
impact on its financial position, results of operations or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”. This statement permits entities to
choose, at specified dates, to measure eligible items at fair value. This
election is referred to as the fair value option and must generally be applied
on an instrument by instrument basis; is irrevocable, unless a new election
occurs; and is applied only to an entire instrument, not to only specified
risks, specific cash flows, or portions of an instrument. A business entity
that
elects the fair value option, must report any unrealized gains and losses on
the
items involved, in earnings at each subsequent reporting date. The statement
also establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. The effective date of SFAS No. 159
is
for fiscal years beginning after November 15, 2007. The Company does not expect
that the adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
Note
4 -
Stock Based Compensation
At
December 31, 2006, the Company had three stock-based compensation plans in
existence, the 1992 and 1999 stock option plans (both expired but having
outstanding options that may still be exercised) and the 2005 Omnibus Stock
Plan, which is described below. In addition, the Company has assumed 60,503
options that were outstanding under the Potomac Bank Stock Option Plan and
17,308 options that were outstanding under the County National Bank Option
Plan.
The stock options from both of these plans were either vested or immediately
vested as a result of the acquisitions. There was no compensation expense
related to either the County National or Potomac Bank stock option plans for
the
first nine months of 2007 and none will be recognized in any subsequent periods
as all shares were vested prior to acquisition.
The
Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of
non-qualifying stock options to the Company’s directors, and incentive and
non-qualifying stock options, stock appreciation rights and restricted stock
grants to selected key employees on a periodic basis at the discretion of the
Board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of
common stock of which 1,488,593 are available for issuance at September 30,
2007, has a term of ten years, and is administered by a committee of at least
three directors appointed by the Board of Directors. Options granted under
the
plan have an exercise price which may not be less than 100% of the fair market
value of the common stock on the date of the grant and must be exercised within
ten years from the date of grant. 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 and 1999 Stock
Option Plans will continue until exercise or expiration.
Options
awarded prior to December 15, 2005 vest ratably over a two-year period, with
one
third vesting immediately upon grant. Effective October 19, 2005, the Board
of
Directors approved the acceleration, by one year, of the vesting of the then
outstanding options to purchase approximately 66,000 shares of the Company’s
common stock granted in December 2004. These included options held by certain
members of senior management. This effectively reduced the two-year vesting
period on these options to one year. The amount that would have been expensed
for such unvested options in 2006 had the Company not accelerated the vesting
would have been approximately $0.4 million. Additionally, stock options granted
in 2004 have a ten year life. The other terms of the option grants remain
unchanged.
Effective
December 13, 2006, and July 23, 2007, the Board of Directors approved the
granting of approximately 105,623 and 2,500 stock options, respectively, subject
to a three year vesting schedule with one third of the options vesting each
year
as of December 13, 2007, 2008, and 2009, and July 23, 2007, 2008, and 2009,
respectively. In addition, on December 13, 2006, and July 23, 2007, the Board
of
Directors granted 31,483 and 500 restricted shares, respectively, subject to
a
five year vesting schedule with one fifth of the shares vesting each year as
of
December 13, 2007, 2008, 2009, 2010, and 2011 and July 23, 2007, 2008, 2009,
2010 and 2011, respectively. Compensation expense is recognized on a
straight-line basis over the stock option vesting period. The fair value based
method for expense recognition of employee awards resulted in expense of
approximately $0.3 million, net of a tax benefit of approximately $15 thousand
and $0.1 million, net of tax benefit of approximately $23 thousand for the
three
month periods ended September 30, 2007 and 2006, respectively and $0.8 million,
net of tax benefit of approximately $44 thousand and $0.5 million, net of tax
benefit of approximately $0.1 million, for the nine month periods ended
September 30, 2007 and 2006, respectively.
The
fair
values of all of the options granted during the last three years have been
estimated using a binomial option-pricing model.
The
total
intrinsic value of options exercised during the nine months ended September
30,
2007 and 2006 was $0.8 million and $0.3 million.
A
summary
of share option activity for the nine month period ended September 30, 2007
follows:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number
|
|
Weighted
|
|
Average
|
|
|
|
|
|
of
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
Outstanding
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
(Dollars
in thousands, except per share data):
|
|
Shares
|
|
Price
|
|
Life
(Years)
|
|
Value
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
|
1,032,585
|
|
$
|
33.77
|
|
|
6.1
|
|
$
|
3,762
|
|
Options
(at fair value) related to option plans of acquired
companies
|
|
|
77,811
|
|
|
18.87
|
|
|
5.9
|
|
|
|
|
Exercised
|
|
|
(55,205
|
)
|
|
17.76
|
|
|
3.9
|
|
|
|
|
Granted
|
|
|
2,500
|
|
|
28.59
|
|
|
6.9
|
|
|
|
|
Forfeited
or expired
|
|
|
(35,146
|
)
|
|
36.50
|
|
|
7.0
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
1,022,545 |
|
$ |
33.34 |
|
|
5.4 |
|
$
|
2,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2007
|
|
|
843,369
|
|
$
|
32.46
|
|
|
|
|
$
|
2,109
|
|
The
aggregate intrinsic value, as presented in the preceding table, is calculated
by
taking the difference between the market price of the stock as of September
30
and the exercise price of the option and multiplying by the number of options
outstanding. Stock options that are anti-dilutive are not included in this
calculation.
A
summary
of the status of the Company’s nonvested options and restricted stock awards as
of September 30, 2007, and changes during the nine month period then ended,
is
presented below (unaudited):
|
|
Stock
Options
|
|
Restricted
Stock
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Number
|
|
Grant-Date
|
|
Number
|
|
Grant-Date
|
|
|
|
Of
shares
|
|
Fair
Value
|
|
Of
shares
|
|
Fair
Value
|
|
Nonvested
at January 1, 2007
|
|
|
183,075
|
|
$
|
7.54
|
|
|
31,483
|
|
$
|
37.40
|
|
Granted
|
|
|
2,500
|
|
|
7.82
|
|
|
500
|
|
$
|
28.59
|
|
Vested
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Forfeited
|
|
|
(6,399 |
) |
|
7.43
|
|
|
(1,203 |
) |
|
37.40
|
|
Nonvested
at September 30, 2007
|
|
|
179,176 |
|
|
7.55
|
|
|
30,780 |
|
|
37.26
|
|
The
number of options, exercise prices, and fair values has been retroactively
restated for all stock dividends occurring since the date the options were
granted.
The
total
of unrecognized compensation cost related to nonvested share-based compensation
arrangements was approximately $1.7 million as of September 30, 2007. That
cost
is expected to be recognized over a weighted average period of approximately
3
years.
The
Company generally issues authorized but previously unissued shares to satisfy
option exercises.
Note
5 -
Per Share Data
The
calculations of net income per common share for the three and nine month periods
ended September 30, 2007 and 2006 are as shown in the following table. Basic
net
income per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share calculation includes those
additional common shares that would have been outstanding if dilutive potential
common shares had been issued. Potential common shares that may be issued are
determined using the treasury stock method.
(Dollars
and amounts in thousands, except
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
per
share data)
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
8,181
|
|
$
|
8,122
|
|
$
|
23,895
|
|
$
|
24,557
|
|
Average
common shares outstanding
|
|
|
16,435
|
|
|
14,793
|
|
|
15,897
|
|
|
14,795
|
|
Basic
net income per share
|
|
$
|
0.50
|
|
$
|
0.55
|
|
$
|
1.50
|
|
$
|
1.66
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
8,181
|
|
$
|
8,122
|
|
$
|
23,895
|
|
$
|
24,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
16,435
|
|
|
14,793
|
|
|
15,897
|
|
|
14,795
|
|
Stock
option adjustment
|
|
|
74
|
|
|
122
|
|
|
83
|
|
|
125
|
|
Average
common shares outstanding-diluted
|
|
|
16,509
|
|
|
14,915
|
|
|
15,980
|
|
|
14,920
|
|
Diluted
net income per share
|
|
$
|
0.50
|
|
$
|
0.55
|
|
$
|
1.50
|
|
$
|
1.65
|
|
Options
for 655,342 shares and 581,724 shares of common stock were not included in
computing diluted net income per share for the nine month periods ended
September 30, 2007 and 2006, respectively, because their effects are
antidilutive. For the three months ended September 30, 2007 and 2006, options
for 849,970 and 573,423 shares of common stock were not included, respectively.
Note
6 -
Pension, 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 equal the sum of three parts: (a) the
benefit accrued as of December 31, 2000, based on the formula of 1.50% of the
highest five year average salary as of that date times years of service as
of
that date, plus (b) 1.75% of each year’s earnings after December 31, 2000
through December 31, 2005, plus (c) 1.00% of each year’s earnings after December
31, 2005. In addition, if the participant’s age plus years of service as of
January 1, 2001, equal at least 60 and the participant had at least 15 years
of
service at that date, he or she will receive an additional benefit of 1.00%
of
year 2000 earnings for each of the first 10 years of service completed after
December 31, 2000. Early retirement is also permitted by the Plan at age 55
after 10 years of service. 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 years. The Company’s funding policy is to contribute at
least the minimum amount necessary to keep the plan fully funded when comparing
the fair value of plan assets to the accumulated benefit obligation. The
Company, with input from its actuaries, estimates that the 2007 contribution
will be approximately $1.3 million which will maintain the pension plan’s fully
funded status based on its accumulated benefit obligation.
Net
periodic benefit cost for the three and nine month periods ended September
30
includes the following components:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$
|
320
|
|
$
|
276
|
|
$
|
960
|
|
$
|
828
|
|
Interest
cost on projected benefit obligation
|
|
|
341
|
|
|
307
|
|
|
1,023
|
|
|
922
|
|
Expected
return on plan assets
|
|
|
(379
|
)
|
|
(344
|
)
|
|
(1,137
|
)
|
|
(1,032
|
)
|
Amortization
of prior service cost
|
|
|
(44
|
)
|
|
(43
|
)
|
|
(132
|
)
|
|
(131
|
)
|
Recognized
net actuarial loss
|
|
|
136
|
|
|
112
|
|
|
408
|
|
|
334
|
|
Net
periodic benefit cost
|
|
$
|
374
|
|
$
|
308
|
|
$
|
1,122
|
|
$
|
921
|
|
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 under the 401(k) provision receive
a
matching contribution up to 4% of compensation. The Plan permits employees
to
purchase shares of Sandy Spring Bancorp common stock with their 401(k)
contributions, Company match, and other contributions under the Plan. The
Company had expenses related to the qualified Cash and Deferred Profit Sharing
Plan of $1.2 million and $1.1 million for the nine month periods ended September
30, 2007 and 2006, respectively, and $0.3 million for both the three month
periods ended September 30, 2007 and 2006.
Other
Employee Benefit Plans
The
Company also has a performance based compensation benefit which provides
incentives to employees based on the Company’s financial results as measured
against key performance indicator goals set by management. The Company had
expenses related to the performance based compensation benefit of $0 and $1.6
million for the nine month periods ended September 30, 2007 and 2006,
respectively, and $0 and $0.5 million for the three month periods ended
September 30, 2007 and 2006, respectively.
Supplemental
Executive Retirement Agreements
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 SERAs, if
any,
are integrated with other pension plan and Social Security retirement benefits
expected to be received by the executives. The Company is accruing the present
value of these benefits over the remaining years to the executives’ retirement
dates. The Company had expenses related to the SERAs of $0.7 million and $0.8
million for the nine month periods ended September 30, 2007 and 2006,
respectively, and $0.2 million and $0.3 million for the three month periods
ended September 30, 2007 and 2006, respectively.
Executive
Health Insurance Plan
The
Company has an Executive Health Insurance Plan that provides for payment of
defined medical, vision and dental insurance costs and out of pocket expenses
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. The Company had expenses related to the Executive Health Insurance
Plan of $0.1 million for both the nine month periods ended September 30, 2007
and 2006, and $28 thousand and $21 thousand for the three month periods ended
September 30, 2007 and 2006, respectively.
Note
7 -
Unrealized Losses on Investments
Shown
below is information that summarizes the gross unrealized losses and fair value
for the Company’s available-for-sale and held-to-maturity investment
portfolios.
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 September 30, 2007 and 2006 are as follows:
|
|
|
|
Continuous
unrealized
losses
existing for:
|
|
Total
|
|
Available
for sale as of September 30, 2007
|
|
Fair
Value
|
|
Less
than 12
months
|
|
More
than 12
months
|
|
Unrealized
Losses
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
U.S.
Agency
|
|
$
|
71,734
|
|
$
|
0
|
|
$
|
284
|
|
$
|
284
|
|
Mortgage-backed
|
|
|
11,539
|
|
|
89
|
|
|
6
|
|
|
95
|
|
CMO
|
|
|
103
|
|
|
0
|
|
|
0
|
|
|
0
|
|
State
and Municipals
|
|
|
967
|
|
|
3
|
|
|
0
|
|
|
3
|
|
|
|
$
|
84,343
|
|
$
|
92
|
|
$
|
290
|
|
$
|
382
|
|
|
|
|
|
Continuous
unrealized
losses
existing for:
|
|
Total
|
|
Available
for sale as of September 30, 2006
|
|
Fair
Value
|
|
Less
than 12
months
|
|
More
than 12
months
|
|
Unrealized
Losses
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
U.S.
Agency
|
|
$
|
189,163
|
|
$
|
180
|
|
$
|
1,802
|
|
$
|
1,982
|
|
State
and municipal
|
|
|
595
|
|
|
0
|
|
|
4
|
|
|
4
|
|
Mortgage-backed
|
|
|
332
|
|
|
0
|
|
|
5
|
|
|
5
|
|
|
|
$
|
190,090
|
|
$
|
180
|
|
$
|
1,811
|
|
$
|
1,991
|
|
Approximately
100% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of September 30, 2007 and 2006 are rated
AAA.
The securities representing the unrealized losses in the available-for-sale
portfolio as of September 30, 2007 and 2006 all have minimal duration risk
(1.09
years in 2007 and 1.37 years in 2006), low credit risk, and minimal loss
(approximately 0.45% in 2007 and 1.04% in 2006) 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 that 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.
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 September 30, 2007 and 2006 are as follows:
|
|
|
|
Continuous
unrealized
losses
existing for:
|
|
Total
|
|
Held
to Maturity as of September 30, 2007
|
|
Fair
Value
|
|
Less
than 12
months
|
|
More
than 12
months
|
|
Unrealized
Losses
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
U.S.
Agency
|
|
$
|
34,159
|
|
$
|
0
|
|
$
|
257
|
|
$
|
257
|
|
State
and municipal
|
|
|
10,459
|
|
|
13
|
|
|
92
|
|
|
105
|
|
Mortgage-backed
|
|
|
541
|
|
|
2
|
|
|
0
|
|
|
2
|
|
|
|
$
|
45,159
|
|
$
|
15
|
|
$
|
349
|
|
$
|
364
|
|
|
|
|
|
Continuous
unrealized losses existing for:
|
|
Total
|
|
Held
to Maturity as of September 30, 2006
|
|
Fair
Value
|
|
Less
than 12 months
|
|
More
than 12 months
|
|
Unrealized
Losses
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
U.S.
Agency
|
|
$
|
33,656
|
|
$
|
0
|
|
$
|
750
|
|
$
|
750
|
|
State
and municipal
|
|
|
14,490
|
|
|
5
|
|
|
101
|
|
|
106
|
|
|
|
$
|
48,146
|
|
$
|
5
|
|
$
|
851
|
|
$
|
856
|
|
Approximately
91% and 87% of the bonds carried in the held-to-maturity investment portfolio
experiencing continuous unrealized losses as of September 30, 2007 and 2006,
respectively, are rated AAA and 9% and 13% as of September 30, 2007 and 2006,
respectively, are rated AA1. The securities representing the unrealized losses
in the held-to-maturity portfolio all have modest duration risk (3.76 years
in
2007 and 4.53 years in 2006), low credit risk, and minimal losses (approximately
.80% in 2007 and 1.75% in 2006) 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 Company’s 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.
Note
8 -
Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing, and Investment Management. Only Community Banking currently meets
the
threshold for reportable segment reporting; however, the Company is disclosing
separate information for all four operating segments. Each of the operating
segments is a strategic business unit that offers different products and
services. The Insurance, Leasing, and Investment Management segments are
businesses that were acquired in separate transactions where management at
the
time of acquisition was retained. The accounting policies of the segments are
the same as those described in Note 1 to the consolidated financial statements.
However, the segment data reflect intersegment transactions and
balances.
The
Community Banking segment is conducted through Sandy Spring Bank and involves
delivering a broad range of financial products and services, including various
loan and deposit products to both individuals and businesses. Parent company
income is included in the Community Banking segment, as the majority of parent
company activities are related to this segment. Major revenue sources include
net interest income, gains on sales of mortgage loans, trust income, fees on
sales of investment products and service charges on deposit accounts. Expenses
include personnel, occupancy, marketing, equipment and other expenses. Included
in Community Banking expenses are noncash charges associated with amortization
of intangibles related to acquired entities totaling $0.8 million and $0.4
million for the three month periods ended September 30, 2007 and 2006,
respectively. For the nine months ended September 30, 2007 and 2006, the
amortization related to acquired entities totaled $2.1 million and $1.3 million,
respectively.
The
Insurance segment is conducted through Sandy Spring Insurance Corporation,
a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. In addition, Sandy Spring Insurance Corporation operates
the
Chesapeake Insurance Group, a general insurance agency located in Annapolis,
Maryland, Wolfe and Reichelt Insurance Agency, located in Burtonsville, Maryland
and Neff & Associates, located in Ocean City, Maryland. Major sources of
revenue are insurance commissions from commercial lines and personal lines.
Expenses include personnel and support charges. Included in insurance expenses
are non-cash charges associated with amortization of intangibles totaling $0.1
million for both the three month periods ended September 30, 2007 and 2006.
For
both the nine month periods ended September 30, 2007 and 2006, the expense
related to the amortization of intangibles totaled $0.3 million.
The
Leasing segment is conducted through The Equipment Leasing Company, a subsidiary
of the Bank that provides leases for such items 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
states along the east coast from New Jersey to Florida and in Illinois. The
typical lease is a “small ticket” by industry standards, averaging less than
$30,000, with individual leases generally not exceeding $500,000. Major revenue
sources include interest income. Expenses include personnel and support charges.
The
Investment Management segment is conducted through West Financial Services,
Inc., a subsidiary of the Bank that was acquired in October 2005. This asset
management and financial planning firm, located in McLean, Virginia, provides
comprehensive financial planning to individuals, families, small businesses
and
associations including cash flow analysis, investment review, tax planning,
retirement planning, insurance analysis and estate planning. West Financial
has
approximately $707.0 million in assets under management as of September 30,
2007. Major revenue sources include noninterest income earned on the above
services. Expenses include personnel and support charges. Included in investment
management expenses are non-cash charges associated with amortization of
intangibles totaling $0.2 million for both the three months ended September
30,
2007 and 2006, and $0.6 million for both the nine months ended September 30,
2007 and 2006.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
(In
thousands)
|
|
Community
Banking
|
|
Insurance
|
|
Leasing
|
|
Investment
Mgmt.
|
|
Inter-Segment
Elimination
|
|
Total
|
|
Quarter
ended
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
46,564
|
|
$
|
31
|
|
$
|
676
|
|
$
|
20
|
|
$
|
(333
|
)
|
$
|
46,958
|
|
Interest
expense
|
|
|
19,795
|
|
|
0
|
|
|
284
|
|
|
0
|
|
|
(333
|
)
|
|
19,746
|
|
Provision
for loan and lease losses
|
|
|
750
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
750
|
|
Noninterest
income
|
|
|
8,351
|
|
|
1,398
|
|
|
353
|
|
|
1,173
|
|
|
(145
|
)
|
|
11,130
|
|
Noninterest
expenses
|
|
|
23,308
|
|
|
1,503
|
|
|
326
|
|
|
907
|
|
|
(145
|
)
|
|
25,899
|
|
Income
before income taxes
|
|
|
11,062
|
|
|
(74
|
)
|
|
419
|
|
|
286
|
|
|
0
|
|
|
11,693
|
|
Income
tax expense
|
|
|
3,264
|
|
|
(29
|
)
|
|
166
|
|
|
111
|
|
|
0
|
|
|
3,512
|
|
Net
income
|
|
$
|
7,798
|
|
$
|
(45
|
)
|
$
|
253
|
|
$
|
175
|
|
$
|
0
|
|
$
|
8,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,966,737
|
|
$
|
11,635
|
|
$
|
35,090
|
|
$
|
9,327
|
|
$
|
(57,297
|
)
|
$
|
2,965,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
39,651
|
|
$
|
18
|
|
$
|
592
|
|
$
|
8
|
|
$
|
(251
|
)
|
$
|
40,018
|
|
Interest
expense
|
|
|
15,922
|
|
|
0
|
|
|
225
|
|
|
0
|
|
|
(251
|
)
|
|
15,896
|
|
Provision
for loan and lease losses
|
|
|
550
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
550
|
|
Noninterest
income
|
|
|
6,878
|
|
|
1,715
|
|
|
156
|
|
|
1,047
|
|
|
(206
|
)
|
|
9,590
|
|
Noninterest
expenses
|
|
|
19,374
|
|
|
1,417
|
|
|
252
|
|
|
857
|
|
|
(206
|
)
|
|
21,694
|
|
Income
before income taxes
|
|
|
10,683
|
|
|
316
|
|
|
271
|
|
|
198
|
|
|
0
|
|
|
11,468
|
|
Income
tax expense
|
|
|
3,036
|
|
|
125
|
|
|
108
|
|
|
77
|
|
|
0
|
|
|
3,346
|
|
Net
income
|
|
$
|
7,647
|
|
$
|
191
|
|
$
|
163
|
|
$
|
121
|
|
$
|
0
|
|
$
|
8,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,595,057
|
|
$
|
12,777
|
|
$
|
31,943
|
|
$
|
7,625
|
|
$
|
(48,944
|
)
|
$
|
2,598,458
|
|
(In
thousands)
|
|
Community
Banking
|
|
Insurance
|
|
Leasing
|
|
Investment
Mgmt.
|
|
Inter-Segment
Elimination
|
|
Total
|
|
Year
to Date
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
133,690
|
|
$
|
77
|
|
$
|
1,992
|
|
$
|
52
|
|
$
|
(945
|
)
|
$
|
134,866
|
|
Interest
expense
|
|
|
57,565
|
|
|
0
|
|
|
820
|
|
|
0
|
|
|
(945
|
)
|
|
57,440
|
|
Provision
for loan and lease losses
|
|
|
2,369
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,369
|
|
Noninterest
income
|
|
|
23,440
|
|
|
5,849
|
|
|
697
|
|
|
3,380
|
|
|
(457
|
)
|
|
32,909
|
|
Noninterest
expenses
|
|
|
67,159
|
|
|
4,126
|
|
|
838
|
|
|
2,806
|
|
|
(457
|
)
|
|
74,472
|
|
Income
before income taxes
|
|
|
30,037
|
|
|
1,800
|
|
|
1,031
|
|
|
626
|
|
|
0
|
|
|
33,494
|
|
Income
tax expense
|
|
|
8,233
|
|
|
713
|
|
|
408
|
|
|
245
|
|
|
0
|
|
|
9,599
|
|
Net
income
|
|
$
|
21,804
|
|
$
|
1,087
|
|
$
|
623
|
|
$
|
381
|
|
$
|
0
|
|
$
|
23,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,966,737
|
|
$
|
11,635
|
|
$
|
35,090
|
|
$
|
9,327
|
|
$
|
(57,297
|
)
|
$
|
2,965,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
to Date
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
111,983
|
|
$
|
48
|
|
$
|
1,649
|
|
$
|
15
|
|
$
|
(627
|
)
|
$
|
113,068
|
|
Interest
expense
|
|
|
41,978
|
|
|
0
|
|
|
565
|
|
|
1
|
|
|
(627
|
)
|
|
41,917
|
|
Provision
for loan and lease losses
|
|
|
2,545
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,545
|
|
Noninterest
income
|
|
|
19,871
|
|
|
5,839
|
|
|
670
|
|
|
3,062
|
|
|
(611
|
)
|
|
28,831
|
|
Noninterest
expenses
|
|
|
55,870
|
|
|
4,255
|
|
|
727
|
|
|
2,637
|
|
|
(611
|
)
|
|
62,878
|
|
Income
before income taxes
|
|
|
31,461
|
|
|
1,632
|
|
|
1,027
|
|
|
439
|
|
|
0
|
|
|
34,559
|
|
Income
tax expense
|
|
|
8,777
|
|
|
646
|
|
|
406
|
|
|
173
|
|
|
0
|
|
|
10,002
|
|
Net
income
|
|
$
|
22,684
|
|
$
|
986
|
|
$
|
621
|
|
$
|
266
|
|
$
|
0
|
|
$
|
24,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,595,057
|
|
$
|
12,777
|
|
$
|
31,943
|
|
$
|
7,625
|
|
$
|
(48,944
|
)
|
$
|
2,598,458
|
|
Note
9 -
Comprehensive Income
The
components of total comprehensive income for the three and nine month periods
ended September 30, 2007 and 2006 are as follows:
|
|
For
the three months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
(In
thousands)
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Net
Income
|
|
|
|
|
$ |
8,181
|
|
|
|
|
$ |
8,122
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (losses) gains arising
during the period
|
|
|
1,221
|
|
|
(478
|
)
|
|
743
|
|
|
2,111
|
|
|
(834
|
)
|
|
1,277
|
|
Reclassification
adjustment for (gains)
losses included in net income
|
|
|
(22
|
)
|
|
9
|
|
|
(13
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
change in other comprehensive
income
|
|
|
1,199
|
|
|
(469
|
)
|
|
730
|
|
|
2,111
|
|
|
(834
|
)
|
|
1,277
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
$
|
8,911
|
|
|
|
|
|
|
|
$
|
9,399
|
|
|
|
For
the nine months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
(In
thousands)
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Net
Income
|
|
|
|
|
|
|
|
$
|
23,895
|
|
|
|
|
|
|
|
$
|
24,557
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (losses) gains arising
during the period
|
|
|
1,421
|
|
|
(558
|
)
|
|
863
|
|
|
402
|
|
|
(159
|
)
|
|
243
|
|
Reclassification
adjustment for (gains)
losses included in net income
|
|
|
(28
|
)
|
|
11
|
|
|
(17
|
)
|
|
(1
|
)
|
|
0
|
|
|
(1
|
)
|
Adjustment
for pensions (FAS 158)
|
|
|
(643
|
)
|
|
252
|
|
|
(391
|
)
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
change in other comprehensive
income
|
|
|
750
|
|
|
(295
|
)
|
|
455
|
|
|
401
|
|
|
(159
|
)
|
|
242
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
$
|
24,350
|
|
|
|
|
|
|
|
$
|
24,799
|
|
Note
10-
Derivative Financial Instruments
Customer
Derivatives
The
Company enters into several commercial loan swaps in order to provide commercial
loan clients the ability to swap from variable to fixed interest rates. Under
these agreements, the Company enters into a variable-rate loan agreement with
a
client in addition to a swap agreement. The swap agreement effectively swaps
the
clients variable-rate loan to a fixed-rate loan. The Company then enters into
a
corresponding swap agreement with a third party in order to offset its exposure
on the variable and fixed components of the customer agreement. At September
30,
2007 and December 31, 2006 the notional amount of such arrangements was $5.5
million and $0, respectively. As the interest rate swaps with the clients and
third parties are not designated as hedges under SFAS 133, “Accounting for
Derivative Instruments and Hedging Activities”, the instruments are marked to
market in earnings. As the interest rate swaps are structured to offset each
other, changes in market values will have no net earnings impact. The Company
earned $5,000 in fee revenue for both the three and nine month periods ended
September 30, 2007, as compared to $0 for the same periods in 2006.
Item
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
Sandy
Spring Bancorp makes forward-looking statements in this report. These
forward-looking statements may include: statements of goals, intentions,
earnings expectations, and other expectations; estimates of risks and of future
costs and benefits; assessments of probable loan and lease losses; assessments
of market risk; and statements of the ability to achieve financial and other
goals. Forward-looking
statements are typically identified by words such as “believe,” “expect,”
“anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other
similar words and expressions. Forward-looking statements are subject to
numerous assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date they are made. The Company
does not assume any duty and does not undertake to update its forward-looking
statements. Because forward-looking statements are subject to assumptions and
uncertainties, actual results or future events could differ, possibly
materially, from those that the Company anticipated in its forward-looking
statements, and future results could differ materially from historical
performance.
The
Company’s forward-looking statements are subject to the following principal
risks and uncertainties:
general
economic conditions and trends, either nationally or locally; conditions in
the
securities markets; changes in interest rates; changes in deposit flows, and
in
the demand for deposit, loan, and investment products and other financial
services; changes in real estate values; changes in the quality or composition
of the Company’s loan or investment portfolios; changes in competitive pressures
among financial institutions or from non-financial institutions; the Company’s
ability to retain key members of management; changes in legislation, regulation,
and policies;
and a
variety of other matters which, by their nature, are subject to significant
uncertainties.
The
Company provides greater detail regarding some of these factors in its Form
10-K
for the year ended December 31, 2006, including in the Risk Factors section
of that report. The Company’s forward-looking statements may also be subject to
other risks and uncertainties, including those that it may discuss elsewhere
in
this report or in its other filings with the SEC.
THE
COMPANY
The
Company is the registered bank holding company for Sandy Spring Bank (the
"Bank"), headquartered in Olney, Maryland. The Bank operates forty-two community
offices in Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince
George’s Counties in Maryland and Fairfax and Loudon counties in Virginia,
together with an insurance subsidiary headquartered in Annapolis, Maryland,
an
equipment leasing company in Sparks, Maryland, and an investment management
company in McLean, Virginia.
The
Company offers a broad range of financial services to consumers and businesses
in this market area. Through September 30, 2007, year-to-date average commercial
loans and leases and commercial real estate loans accounted for approximately
55% of the Company’s loan and lease portfolio, and year-to-date average consumer
and residential real estate loans accounted for approximately 45%. The Company
has established a strategy of independence, and intends to establish or acquire
additional offices, banking organizations, and non-banking organizations as
appropriate opportunities may arise.
RECENT
ACQUISITIONS
On
February 15, 2007, the Company completed the acquisition of Potomac Bank of
Virginia (“Potomac”), a bank headquartered in Fairfax, Virginia. Potomac
operated five branch offices in the Northern Virginia metropolitan market at
the
time of the acquisition. The primary reason for the merger with Potomac was
to
gain entry into the northern Virginia high growth market. The total
consideration paid to Potomac shareholders in connection with the acquisition
was $68.2 million. The results of Potomac’s operations have been included in the
Company’s consolidated financial results subsequent to February 15, 2007.
On
May
31, 2007, the Company completed the acquisition of CN Bancorp Inc. (“CNB”) and
it’s wholly owned subsidiary, County National Bank (“County National”). County
National was headquartered in Glen Burnie, Maryland, and had four full-service
branches located in Anne Arundel County, Maryland at the time of the
acquisition. The total consideration paid to CNB shareholder’s and related
merger costs in connection with the acquisition was $46.9 million. The results
of CNB’s operations have been included in the Company’s consolidated financial
results subsequent to May 31, 2007.
CRITICAL
ACCOUNTING POLICIES
The
Company’s 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 could reflect different
estimates, assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and judgments and as
such
have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent
upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information
used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. The estimates used in management’s assessment of the adequacy of
the allowance for loan and lease losses require that management make assumptions
about matters that are uncertain at the time of estimation. Differences in
these
assumptions and differences between the estimated and actual losses could have
a
material effect.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure as defined in Securities and Exchange Commission
Regulation G and Item 10 of Commission Regulation S-K. This traditional
efficiency ratio is used as a measure of operating expense control and
efficiency of operations. Management believes that its traditional ratio better
focuses attention on the operating performance of the Company over time than
does a GAAP-based ratio, and that it is highly useful in comparing
period-to-period operating performance of the Company’s core business
operations. It is used by management as part of its assessment of its
performance in managing noninterest expenses. However, this measure is
supplemental, and is not a substitute for an analysis of performance based
on
GAAP measures. The reader is cautioned that the traditional efficiency ratio
used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios
reported by other financial institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of net
interest income plus total noninterest income. This is a GAAP financial measure.
Noninterest expenses used in the calculation of the traditional, non-GAAP
efficiency ratio exclude intangible asset amortization. Income for the
traditional ratio is increased for the favorable effect of tax-exempt income,
and excludes securities gains and losses, which can vary widely from period
to
period without appreciably affecting operating expenses. The traditional measure
is different from the GAAP-based efficiency ratio. The GAAP-based measure is
calculated using noninterest expense and income amounts as shown on the face
of
the Consolidated Statements of Income. The traditional and GAAP-based efficiency
ratios are presented and reconciled in Table 1.
Table
1 -
GAAP based and traditional efficiency ratios
|
|
Three
Months Ended
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
(Dollars
in thousands)
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Noninterest
expenses-GAAP based
|
|
$
|
25,899
|
|
$
|
21,694
|
|
$
|
74,472
|
|
$
|
62,878
|
|
Net
interest income plus noninterest income-
|
|
|
|
|
|
|
|
|
|
|
GAAP
based
|
|
|
38,342
|
|
|
33,712
|
|
|
110,335
|
|
|
99,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio-GAAP based
|
|
|
67.55
|
%
|
|
64.35
|
%
|
|
67.50
|
%
|
|
62.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses-GAAP based
|
|
$
|
25,899
|
|
$
|
21,694
|
|
$
|
74,472
|
|
$
|
62,878
|
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
1,123
|
|
|
743
|
|
|
2,956
|
|
|
2,227
|
|
Noninterest
expenses-traditional ratio
|
|
|
24,776
|
|
|
20,951
|
|
|
71,516
|
|
|
60,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
based
|
|
|
38,342
|
|
|
33,712
|
|
|
110,335
|
|
|
99,982
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
1,447
|
|
|
1,677
|
|
|
4,096
|
|
|
4,618
|
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains (losses)
|
|
|
22
|
|
|
0
|
|
|
28
|
|
|
1
|
|
Net
interest income plus noninterest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
- traditional ratio
|
|
|
39,767
|
|
|
35,389
|
|
|
114,403
|
|
|
104,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio - traditional
|
|
|
62.30
|
%
|
|
59.20
|
%
|
|
62.51
|
%
|
|
57.98
|
%
|
A.
FINANCIAL CONDITION
The
Company's total assets were $3.0 billion at September 30, 2007, increasing
$355.0 million or 14% during the first nine months of 2007. Earning assets
increased by 11% or $268.5 million in the first nine months of 2007 to $2.7
billion at September 30, 2007. Asset growth was primarily the result of two
acquisitions, which added $417.4 million of total assets, including $376.1
million of earning assets and $72.7 million of goodwill and other intangible
assets.
Total
loans and leases, excluding loans held for sale, increased 22% or $396.0 million
during the first nine months of 2007, to $2.2 billion. During this period,
commercial loans and leases increased by $317.5 million or 35%, attributable
primarily to commercial loans (up 69%) and commercial mortgage loans (up 27%).
Consumer loans increased by $26.8 million or 8%, due to an 11% increase in
equity lines of credit. Residential real estate loans increased by $51.7 million
or 10%. Residential mortgage loans held for sale decreased by $4.5 million
from
$10.6 million at December 31, 2006, to $6.6 million at September 30, 2007.
The
two acquisitions accounted for approximately 72% of the loan growth during
the
first nine months of 2007. Excluding these acquisitions, the loan portfolio
has
increased 6% in 2007.
Certain
loan terms may create concentrations of credit risk and increase the lender’s
exposure to loss. These include terms that permit the deferral of principal
payments or payments that are smaller than normal interest accruals (negative
amortization); loans with high loan-to-value ratios (“LTV”); loans, such as
option adjustable-rate mortgages, that may expose the borrower to future
increases in repayments that are in excess of increases that would result solely
from increases in market interest rates; and interest-only loans. The Company
does not make loans that provide for negative amortization. The Company
originates option adjustable-rate mortgages infrequently and sells all of them
in the secondary market. At September 30, 2007, the Company had a total of
$57.9
million in residential real estate loans and $1.7 million in consumer loans
with
a LTV greater than 90%. Commercial loans with a LTV greater than 75% to 85%,
depending on the type of loan, totaled $43.5 million at September 30, 2007.
Interest only loans at September 30, 2007 include almost all of the $214.7
million outstanding under the Company’s equity lines of credit (included in the
consumer loan portfolio) and $84.9 million in other loans. The aggregate of
these loan concentrations was $402.7 million at September 30, 2007, which
represented 18% of total loans and leases outstanding at that date. The Company
is of the opinion that its loan underwriting procedures are structured to
adequately assess any additional risk that the above types of loans might
present.
Table
2 -
Analysis of Loans and Leases
The
following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In
thousands)
|
|
September
30, 2007
|
|
%
|
|
December
31, 2006
|
|
%
|
|
Residential
real estate
|
|
$
|
593,999
|
|
|
27
|
%
|
$
|
542,251
|
|
|
30
|
%
|
Commercial
loans and leases
|
|
|
1,236,012
|
|
|
56
|
|
|
918,511
|
|
|
51
|
|
Consumer
|
|
|
371,588
|
|
|
17
|
|
|
344,817
|
|
|
19
|
|
Total
Loans and Leases
|
|
|
2,201,599
|
|
|
100
|
%
|
|
1,805,579
|
|
|
100
|
%
|
Less:Allowance
for loan and lease losses
|
|
|
(23,567
|
)
|
|
|
|
|
(19,492
|
)
|
|
|
|
Net
loans and leases
|
|
$
|
2,178,032
|
|
|
|
|
$
|
1,786,087
|
|
|
|
|
The
total
investment portfolio decreased by 16% or $88.7 million to $452.2 million at
September 30, 2007 from $540.9 million at December 31, 2006. The decrease was
driven by a decrease of $60.7 million or 24% in available-for-sale securities
and $30.1 million or 11% in held-to-maturity securities, slightly offset by
an
increase of $2.1 million or 13% in other equity securities. The aggregate of
federal funds sold and interest-bearing deposits with banks decreased by $38.1
million during the first nine months of 2007, reaching $13.9 million at
September 30, 2007. The decreases in available-for-sale and held-to-maturity
securities were primarily due to the exercise of call options by the issuers
of
the securities. These proceeds were used to fund loan growth and the repayment
of borrowings discussed below.
Total
deposits were $2.3 billion at September 30, 2007, increasing $285.9 million
or
14% from December 31, 2006. During the first nine months of 2007, growth rates
of 6% were achieved for time deposits of less than $100,000 (up $23.7 million),
and 11% for time deposits of $100,000 or more (up $31.0 million). Over the
same
period, non-interest bearing demand deposits increased 15% (up $58.9 million)
which was somewhat offset by decreases of 4% in interest-bearing regular savings
(down $6.2 million) and 1% for interest bearing demand deposits (down $2.1
million). The overall increase in deposits was mainly the result of the two
acquisitions. Excluding these acquisitions, deposits increased 1% compared
to
December 31, 2006, which is reflective of intense competition for deposits
in
the marketplace.
Table
3 -
Analysis of Deposits
The
following table presents the trends in the composition of deposits at the dates
indicated:
(In
thousands)
|
|
September
30, 2007
|
|
%
|
|
December
31, 2006
|
|
%
|
|
Noninterest-bearing
deposits
|
|
$
|
453,536
|
|
|
20
|
|
$
|
394,662
|
|
|
20
|
%
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
231,753
|
|
|
10
|
|
|
233,841
|
|
|
12
|
|
Money
market savings
|
|
|
698,721
|
|
|
30
|
|
|
518,146
|
|
|
26
|
|
Regular
savings
|
|
|
153,846
|
|
|
7
|
|
|
160,035
|
|
|
8
|
|
Time
deposits less than $100,000
|
|
|
430,618
|
|
|
19
|
|
|
406,910
|
|
|
20
|
|
Time
deposits $100,000 or more
|
|
|
311,628
|
|
|
14
|
|
|
280,629
|
|
|
14
|
|
Total
interest-bearing
|
|
|
1,826,566
|
|
|
80
|
|
|
1,599,561
|
|
|
80
|
|
Total
deposits
|
|
$
|
2,280,102
|
|
|
100
|
%
|
$
|
1,994,223
|
|
|
100
|
%
|
Total
borrowings were $340.9 million at September 30, 2007, which represented a
decrease of $10.7 million or 3% from December 31, 2006. This decrease was mainly
due to maturities of long-term advances from the Federal Home Loan Bank of
Atlanta (“FHLB”) that were not renewed.
Market
Risk and Interest Rate Sensitivity
Overview
The
Company’s 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
Company’s Board of Directors has established a comprehensive interest rate risk
management policy, which is administered by Management’s Asset Liability
Management Committee (“ALCO”). The policy establishes limits of risk, which are
quantitative measures of the percentage change in net interest income (a measure
of net interest income at risk) and the fair value of equity capital (a measure
of economic value of equity (“EVE”) at risk) resulting from a hypothetical
change in U.S. Treasury interest rates for maturities from one day to thirty
years. The Company measures 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. 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.
The
Company prepares a current base case and eight alternative simulations, at
least
once a quarter, and reports the analysis to the Board of Directors. In addition,
more frequent forecasts are produced when interest rates are particularly
uncertain or when other business conditions so dictate.
If
a
measure of risk produced by the alternative simulations of the entire balance
sheet violates policy guidelines, ALCO is required to develop a plan to restore
the measure of risk to a level that complies with policy limits within two
quarters.
The
Company’s interest rate risk management goals are (1) to increase net interest
income at a growth rate consistent with the growth rate of total assets and
(2)
to minimize fluctuations in net interest margin as a percentage of earning
assets. Management attempts to achieve these goals by balancing, within policy
limits, the volume of floating-rate liabilities with a similar volume of
floating-rate assets; by keeping the average maturity of fixed-rate asset and
liability contracts reasonably matched; by maintaining a pool of administered
core deposits; and by adjusting pricing rates to market conditions on a
continuing basis.
The
balance sheet is subject to quarterly testing for eight alternative interest
rate shock possibilities to indicate the inherent interest rate risk. Average
interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”),
although the Company may elect not to use particular scenarios that it
determines are impractical in a current rate environment. It is management’s
goal to structure the balance sheet so that net interest earnings at risk over
a
twelve-month period and the economic value of equity at risk do not exceed
policy guidelines at the various interest rate shock levels.
The
Company augments its quarterly interest rate shock analysis with alternative
external interest rate scenarios on a monthly basis. These alternative interest
rate scenarios may include non-parallel rate ramps and non-parallel yield curve
twists.
Analysis
Measures
of net interest income at risk produced by simulation analysis are indicators
of
an institution’s short-term performance in alternative rate environments. These
measures are typically based upon a relatively brief period, usually one year.
They do not necessarily indicate the long-term prospects or economic value
of
the institution.
ESTIMATED
CHANGES IN NET INTEREST INCOME
CHANGE
IN
INTEREST
RATES:
|
|
+
400 bp
|
|
+
300 bp
|
|
+
200 bp
|
|
+
100 bp
|
|
-
100 bp
|
|
-
200 bp
|
|
-300
bp
|
|
-400
bp
|
|
POLICY
LIMIT
|
|
|
-25
|
%
|
|
-20
|
%
|
|
-17.5
|
%
|
|
-12.5
|
%
|
|
-12.5
|
%
|
|
-17.5
|
%
|
|
-20
|
%
|
|
-25
|
%
|
September
2007
|
|
|
-10.15
|
|
|
-6.71
|
|
|
-3.82
|
|
|
-
0.65
|
|
|
2.52
|
|
|
1.59
|
|
|
0.12
|
|
|
-4.03
|
|
December
2006
|
|
|
-13.67
|
|
|
-10.94
|
|
|
-7.68
|
|
|
-3.12
|
|
|
0.37
|
|
|
-2.27
|
|
|
-5.37
|
|
|
-9.87
|
|
The
Net
Interest Income at Risk position improved since the 4th
quarter
of 2006 in all rate scenarios. All of the above measures of net interest income
at risk remained well within prescribed policy limits. Although assumed to
be
unlikely, our largest exposure is at the +400bp level, with a measure of
-10.15%. This is also well within our prescribed policy limit of 25%.
The
acquisitions of County National Bank and Potomac Bank added a large amount
of
variable loans to our loan portfolio, causing an improvement in our interest
income at risk position in all rising rate scenarios.
The
measures of equity value at risk indicate the ongoing economic value of the
Company by considering the effects of changes in interest rates on all of the
Company’s cash flows, and discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these discounted values
of the assets and liabilities is the economic value of equity, which, in theory,
approximates the fair value of the Company’s net assets.
ESTIMATED
CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
CHANGE
IN
INTEREST
RATES:
|
|
+
400 bp
|
|
+
300 bp
|
|
+
200 bp
|
|
+
100 bp
|
|
-
100 bp
|
|
-200
bp
|
|
-300
bp
|
|
-400
bp
|
|
POLICY
LIMIT
|
|
|
-40
|
%
|
|
-30
|
%
|
|
-22.5
|
%
|
|
-10.0
|
%
|
|
-12.5
|
%
|
|
-22.5
|
%
|
|
-30
|
%
|
|
-40
|
%
|
September
2007
|
|
|
-15.77
|
|
|
-10.98
|
|
|
-5.51
|
|
|
-0.80
|
|
|
-3.62
|
|
|
-8.24
|
|
|
-13.65
|
|
|
-19.69
|
|
December
2006
|
|
|
-17.78
|
|
|
-13.07
|
|
|
-7.18
|
|
|
-1.67
|
|
|
-6.09
|
|
|
-14.95
|
|
|
-24.51
|
|
|
-35.53
|
|
Measures
of the economic value of equity (EVE) at risk position decreased over year-end
2006 in all rate scenarios. The risk position improved substantially due mainly
to additional core deposits from the Potomac Bank and County National Bank
acquisitions. Although assumed to be unlikely, our largest exposure is at the
-400bp level, with a measure of -19.69%. This is also well within our prescribed
policy limit of 40%.
Liquidity
Liquidity
is measured using an approach designed to take into account loan and lease
payments, maturities, calls and pay-downs of securities, earnings, balance
sheet
growth, mortgage banking activities, investment portfolio liquidity, and other
factors. Through this approach, implemented by the funds management subcommittee
of ALCO under formal policy guidelines, the Company’s liquidity position is
measured weekly, looking forward at thirty-day intervals out to 180
days. The
measurement is based upon the asset-liability management model’s projection of a
funds’ sold or purchased position, along with ratios and trends developed to
measure dependence on purchased funds and core growth. Resulting projections
as
of September 30, 2007 showed short-term investments exceeding short-term
borrowings over the subsequent 180 days by $100.4 million, which increased
from
an excess of $96.0 million at June 30, 2007. This excess of liquidity over
projected requirements for funds indicates that the Company can increase its
loans and other earning assets without incurring additional
borrowing.
The
Company also has external sources of funds, which can be drawn upon when
required. The main source of external liquidity is a line of credit for $928.0
million from the Federal Home Loan Bank of Atlanta, of which $641.8 million
was
available based on pledged collateral with $183.7 million outstanding at
September 30, 2007. 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 $143.2 million at September 30, 2007,
all
of which was available. Based upon its liquidity analysis, including external
sources of liquidity available, management believes the liquidity position
is
appropriate at September 30, 2007.
The
following is a schedule of significant commitments at September 30,
2007:
|
|
(In
thousands)
|
|
|
|
|
|
|
Unused
lines of credit (home equity and business)
|
|
$
|
417,599
|
|
Other
commitments to extend credit
|
|
|
189,645
|
|
|
|
|
37,672
|
|
|
|
$
|
644,916
|
|
Capital
Management
The
Company had a total risk-based capital ratio of 11.50% at September 30, 2007,
compared to 13.62% at December 31, 2006; a tier 1 risk-based capital ratio
of
10.52%, compared to 12.64%; and a capital leverage ratio of 8.72%, compared
to
9.81%. Capital adequacy, as measured by these ratios, was above regulatory
requirements. Management believes the level of capital at September 30, 2007,
is
appropriate.
Stockholders'
equity at September 30, 2007, totaled $310.6 million, representing an increase
of $72.8 million or 31% from $237.8 million at December 31, 2006. The
accumulated other comprehensive loss, a component of stockholders’ equity
comprised of net unrealized losses on available-for-sale securities and net
actuarial loss and prior service costs relating to the defined benefit pension
plan, net of taxes, decreased by 10% or $0.4 million from $4.0 million at
December 31, 2006 to $3.6 million at September 30, 2007.
Internal
capital generation (net income less dividends) added $12.7 million to total
stockholders’ equity during the first nine months of 2007. When internally
formed capital is annualized and expressed as a percentage of average total
stockholders’ equity, the resulting rate was 6% compared to 9% reported for the
full-year 2006.
External
capital formation (equity created through the issuance of stock under the
employee stock purchase plan, stock option plan, director stock purchase plan
and for the acquisitions of Potomac Bank and County National Bank) totaled
$60.4
million during the nine month period ended September 30, 2007. Shares
repurchased amounted to $1.5 million over the same period, for a net increase
in
stockholders’ equity from these sources of $58.9 million.
Dividends
for the first nine months of the year were $0.69 per share in 2007, compared
to
$0.66 per share in 2006, for respective dividend payout ratios (dividends
declared per share to diluted net income per share) of 46% versus 40%.
B.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2007 AND SEPTEMBER
30,
2006
Net
income for the first nine months of the year decreased $0.7 million or 3% to
$23.9 million in 2007 from $24.6 million in 2006, representing annualized
returns on average equity of 11.28% in 2007 and 14.64% in 2006, respectively.
Diluted earnings per share (EPS) for the first nine months of the year were
$1.50 in 2007, compared to $1.65 in 2006.
The
primary factor driving the decrease in net income for the first nine months
of
2007 was the $11.6 million increase in noninterest expenses which was primarily
the result of a $4.0 million, or 11%, increase in salaries and employee benefits
and a $4.5 million, or 57%, increase in other expenses. The increase in other
expenses was primarily the result of $1.5 million in merger costs associated
with the acquisitions of Potomac Bank and County National Bank. These increases
in expenses were partially offset by a $6.3 million, or 9%, increase in net
interest income, due primarily to loan growth, and a $4.1 million, or 14%,
increase in noninterest income, due primarily to a $2.2 million, or 39%,
increase in service charges on deposit accounts.
The
net
interest margin decreased by 20 basis points to 4.10% for the nine months ended
September 30, 2007, from 4.30% for the same period in 2006, as the net interest
spread decreased by 27 basis points. These results are due to relatively high
short-term interest rates compared to long-term rates (a flattening yield
curve), together with an increase in higher yielding average time
deposits.
Table
4 - Consolidated Average Balances, Yields and Rates
(Dollars
in thousands and tax
equivalent)
|
|
|
For
the nine months ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
Annualized
|
|
|
|
Average
Balance
|
|
Interest
(1)
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
(1)
|
|
Average
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases (2)
|
|
$
|
2,073,002
|
|
$
|
113,457
|
|
|
7.31
|
%
|
$
|
1,779,941
|
|
$
|
93,345
|
|
|
7.01
|
%
|
Total
securities
|
|
|
511,013
|
|
|
22,704
|
|
|
5.95
|
|
|
564,228
|
|
|
23,891
|
|
|
5.67
|
|
Other
earning assets
|
|
|
71,617
|
|
|
2,801
|
|
|
5.23
|
|
|
12,560
|
|
|
450
|
|
|
4.80
|
|
TOTAL
EARNING ASSETS
|
|
|
2,655,632
|
|
|
138,962
|
|
|
7.00
|
%
|
|
2,356,729
|
|
|
117,686
|
|
|
6.68
|
%
|
Nonearning
assets
|
|
|
258,816
|
|
|
|
|
|
|
|
|
192,116
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,914,448
|
|
|
|
|
|
|
|
$
|
2,548,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
237,173
|
|
|
626
|
|
|
0.35
|
%
|
$
|
229,629
|
|
|
497
|
|
|
0.29
|
%
|
Money
market savings deposits
|
|
|
611,881
|
|
|
17,349
|
|
|
3.79
|
|
|
375,259
|
|
|
8,102
|
|
|
2.89
|
|
Regular
savings deposits
|
|
|
168,957
|
|
|
421
|
|
|
0.33
|
|
|
189,042
|
|
|
556
|
|
|
0.39
|
|
Time
deposits
|
|
|
784,995
|
|
|
26,867
|
|
|
4.58
|
|
|
613,283
|
|
|
17,691
|
|
|
3.86
|
|
Total
interest-bearing deposits
|
|
|
1,803,006
|
|
|
45,263
|
|
|
3.36
|
|
|
1,407,213
|
|
|
26,846
|
|
|
2.55
|
|
Short-term
borrowings
|
|
|
313,681
|
|
|
10,265
|
|
|
4.38
|
|
|
440,131
|
|
|
13,342
|
|
|
4.05
|
|
Long-term
borrowings
|
|
|
42,358
|
|
|
1,912
|
|
|
6.02
|
|
|
37,021
|
|
|
1,729
|
|
|
6.23
|
|
Total
interest-bearing liabilities
|
|
|
2,159,045
|
|
|
57,440
|
|
|
3.56
|
|
|
1,884,365
|
|
|
41,917
|
|
|
2.97
|
|
Noninterest-bearing
demand deposits
|
|
|
441,151
|
|
|
|
|
|
|
|
|
416,167
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
30,916
|
|
|
|
|
|
|
|
|
21,810
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
283,336
|
|
|
|
|
|
|
|
|
226,503
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
2,914,448
|
|
|
|
|
|
|
|
$
|
2,548,845
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
$
|
81,522
|
|
|
3.44
|
%
|
|
|
|
$
|
75,769
|
|
|
3.71
|
%
|
Less:
tax equivalent adjustment
|
|
|
|
|
|
4,096
|
|
|
|
|
|
|
|
|
4,618
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
77,426
|
|
|
|
|
|
|
|
|
71,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
4.10
|
%
|
|
|
|
|
|
|
|
4.30
|
%
|
Ratio
of average earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities
|
|
|
123.00
|
%
|
|
|
|
|
|
|
|
125.07
|
%
|
|
|
|
|
|
|
|
(1)
Interest income includes the effects of taxable-equivalent adjustments
(reduced by the nondeductible portion of interest expense) using
the
appropriate federal income tax rate of 35.00% and, where applicable,
the
marginal state income tax rate of 6.55% (or a combined marginal federal
and state rate of 39.26%) for 2007 and a marginal income state income
tax
rate of 7.00% (or a combined marginal federal and state rate of 39.55%)
for 2006, to increase tax-exempt interest income to a taxable-equivalent
basis. The annualized taxable-equivalent adjustment amounts utilized
in
the above table to compute yields were $5.5 million and $6.2 million
for
the nine months ended September 30, 2007 and 2006,
respectively.
|
|
|
|
(2)
Non-accrual loans are included in the average balances.
|
|
|
|
(3)
Net interest margin equals annualized net interest income on a
tax-equivalent basis divided by total interest-earning
assets.
|
Net
Interest Income
Net
interest income for the first nine months of the year was $77.4 million in
2007,
an increase of 9% from $71.2 million in 2006, due primarily to a 16% increase
in
average loans and leases and a 30 basis point increase in tax-equivalent yield
on loans when compared to the first nine months of 2006. Non-GAAP tax-equivalent
net interest income, which takes into account the benefit of tax advantaged
investment securities, increased by 8%, to $81.5 million in 2007 from $75.8
million in 2006. The effects of changes in average balances, yields and rates
are presented in Table 5.
For
the
first nine months, total interest income increased by $21.8 million or 19%
in
2007, compared to 2006. On a non-GAAP tax-equivalent basis, interest income
increased by 18%. Average earning assets increased by 13% versus the prior
period to $2.7 billion from $2.4 billion; while the average yield earned on
those assets increased by 32 basis points to 7.00%. Comparing the first nine
months of 2007 versus the same period in 2006, average total loans and leases
grew by 16% to $2.1 billion (78% of average earning assets, versus 76% a year
ago), while recording a 30 basis point increase in average yield to 7.31%.
Average commercial loans and leases grew by 35% (due to increases in all
categories of commercial loans and leases); average consumer loans increased
by
5% (attributable primarily to home equity line growth); and average residential
real estate loans decreased by 3% (reflecting decreases in both mortgage and
construction lending). Over the same period, average total securities decreased
by 9% to $511.0 million (19% of average earning assets, versus 24% a year ago),
while the average yield earned on those assets increased by 28 basis points
to
5.95%.
Interest
expense for the first nine months of the year increased by $15.5 million or
37%
in 2007 compared to 2006. Average total interest-bearing liabilities increased
by 15% over the prior year period, while the average rate paid on these funds
increased by 59 basis points to 3.56%. As shown in Table 4, all categories
of
interest-bearing liabilities with the exception of regular savings deposits
and
long term borrowings showed increases in the average rate as market interest
rates continued to rise.
Table
5 -
Effect of Volume and Rate Changes on Net Interest Income
|
|
|
|
2007
vs. 2006
|
|
|
|
2006
vs. 2005
|
|
|
|
Increase
|
|
Due
to Change
|
|
Increase
|
|
Due
to Change
|
|
|
|
Or
|
|
In
Average:*
|
|
Or
|
|
In
Average:*
|
|
(In
thousands and tax equivalent)
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
Interest
income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
20,112
|
|
$
|
15,687
|
|
$
|
4,425
|
|
$
|
24,658
|
|
$
|
13,016
|
|
$
|
11,642
|
|
Securities
|
|
|
(1,187
|
)
|
|
(2,335
|
)
|
|
1,148
|
|
|
(931
|
)
|
|
(1,860
|
)
|
|
929
|
|
Other
earning assets
|
|
|
2,351
|
|
|
2,307
|
|
|
44
|
|
|
(179
|
)
|
|
(430
|
)
|
|
251
|
|
Total
interest income
|
|
|
21,276
|
|
|
15,659
|
|
|
5,617
|
|
|
23,548
|
|
|
10,726
|
|
|
12,822
|
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
129
|
|
|
17
|
|
|
112
|
|
|
26
|
|
|
(17
|
)
|
|
43
|
|
Regular
savings deposits
|
|
|
(135
|
)
|
|
(55
|
)
|
|
(80
|
)
|
|
(16
|
)
|
|
(86
|
)
|
|
70
|
|
Money
market savings deposits
|
|
|
9,247
|
|
|
6,177
|
|
|
3,070
|
|
|
3,908
|
|
|
42
|
|
|
3,866
|
|
Time
deposits
|
|
|
9,176
|
|
|
5,508
|
|
|
3,668
|
|
|
8,185
|
|
|
2,939
|
|
|
5,246
|
|
Total
borrowings
|
|
|
(2,894
|
)
|
|
(4,063
|
)
|
|
1,169
|
|
|
6,257
|
|
|
3,746
|
|
|
2,511
|
|
Total
interest expense
|
|
|
15,523
|
|
|
7,584
|
|
|
7,939
|
|
|
18,360
|
|
|
6,624
|
|
|
11,736
|
|
Net
interest income
|
|
$
|
5,753
|
|
$
|
8,075
|
|
$
|
(2,322
|
)
|
$
|
5,188
|
|
$
|
4,102
|
|
$
|
1,086
|
|
* |
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.
|
Credit
Risk Management
The
Company’s loan and lease portfolio (the “credit portfolio”) is subject to
varying degrees of credit risk. Credit risk is mitigated through portfolio
diversification, limiting exposure to any single customer, industry or
collateral type. The Company maintains an allowance for loan and lease losses
(the “allowance”) to absorb possible losses 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. The allowance represents an estimation made
pursuant to 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 loan and lease losses, which is recorded as a current
period operating expense. The Company’s systematic methodology for assessing the
appropriateness of the allowance includes: (1) the formula allowance reflecting
historical losses, as adjusted, by credit category, and (2) the specific
allowance for risk-rated credits on an individual or portfolio
basis.
The
formula allowance, which 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 in the most recent quarters have the greatest effect. The factors
used to adjust the historical loss experience address various risk
characteristics of the Company’s 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 Company’s credit administration and loan and lease portfolio
management processes, and (7) quality of the Company’s 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
borrower’s overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. These
factors are combined to estimate the probability and severity of inherent
losses. Then a specific allowance is established based on the Company’s
calculation of the potential loss imbedded 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 nonaccrual or 90-day past due status. Each risk rating
category is assigned a credit risk factor based on management’s estimate of the
associated risk, complexity, and size of the individual loans within the
category. 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.
The
amount of the allowance is reviewed monthly by the Senior Loan Committee, and
reviewed and approved quarterly by the Board of Directors.
The
provision for loan and lease losses totaled $2.4 million for the first nine
months of 2007 compared to $2.5 million in the same period of 2006. The Company
experienced net charge-offs of $1.1 million during the first nine months of
2007
compared to net charge-offs of $2,000 during the first nine months of 2006.
The
charge-offs that occurred during the nine months ended September 30, 2007 were
mainly the result of the non-guaranteed portion of two SBA loans in the amount
of $0.8 million. The Bank had established specific reserves for both these
loans
in prior periods.
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, regulatory
agencies, as an integral part of their examination process, and independent
consultants engaged by Sandy Spring Bank, periodically review the credit
portfolio and the allowance. Such review may result in additional provisions
based on these third-party judgments of information available at the time of
each examination. During the first nine months of 2007, there were no changes
in
estimation methods or assumptions that affected the allowance methodology.
The
allowance for loan and lease losses was 1.07% of total loans and leases at
September 30, 2007 and 1.08% at December 31, 2006. The allowance increased
during the first nine months of 2007 by $4.1 million, from $19.5 million at
December 31, 2006, to $23.6 million at September 30, 2007. The increase in
the
allowance during the first nine months of 2007 was due to $2.8 million of
allowances acquired from acquisitions coupled with the increase due to the
provision for loan and lease losses mentioned above which was due primarily
to
growth in the size of the loan portfolio.
Nonperforming
loans and leases increased by $21.7 million to $25.4 million at September 30,
2007 from $3.7 million at December 31, 2006, while nonperforming assets
increased by $21.9 million for the same period to $25.8 million at September
30,
2007. These increases were due primarily to two loans totaling $15.6 million
which are well secured and on which management does not expect a loss. Expressed
as a percentage of total assets, nonperforming assets increased to 0.87% at
September 30, 2007 from 0.15% at December 31, 2006. The allowance for loan
and
lease losses represented 93% of nonperforming loans and leases at September
30,
2007, compared to coverage of 522% at December 31, 2006. Significant variation
in this coverage ratio may occur from period to period because the amount of
nonperforming loans and leases depends largely on the condition of a small
number of individual credits and borrowers relative to the total loan and lease
portfolio. Other real estate owned was $0.4 million at September 30, 2007 and
$0.2 million at December 31, 2006. The balance of impaired loans and leases
was
$16.9 million at September 30, 2007, with specific reserves against those loans
of $0.2 million, compared to $0.3 million at December 31, 2006, with specific
reserves of $118,000.
Table
6
— Analysis
of
Credit Risk
(Dollars
in thousands)
Activity
in the allowance for credit losses is shown below:
|
|
Nine
Months Ended
September
30, 2007
|
|
Twelve
Months Ended
December
31, 2006
|
|
Balance,
January 1
|
|
$
|
19,492
|
|
$
|
16,886
|
|
Allowance
acquired from acquisitions
|
|
|
2,798
|
|
|
0
|
|
Provision
for loan and lease losses
|
|
|
2,369
|
|
|
2,795
|
|
|
|
|
|
|
|
|
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0
|
|
|
0
|
|
Commercial
loans and leases
|
|
|
(1,083
|
)
|
|
(230
|
)
|
Consumer
|
|
|
(147
|
)
|
|
(85
|
)
|
Total
charge-offs
|
|
|
(1,230
|
)
|
|
(315
|
)
|
Loan
recoveries:
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0
|
|
|
0
|
|
Commercial
loans and leases
|
|
|
110
|
|
|
89
|
|
Consumer
|
|
|
28
|
|
|
37
|
|
Total
recoveries
|
|
|
138
|
|
|
126
|
|
Net
recoveries (charge-offs)
|
|
|
(1,092
|
)
|
|
(189
|
)
|
Balance,
period end
|
|
$
|
23,567
|
|
$
|
19,492
|
|
Net
recoveries (charge-offs) to average loans and leases
(annual basis)
|
|
|
0.07
|
%
|
|
0.01
|
%
|
Allowance
to total loans and leases
|
|
|
1.07
|
%
|
|
1.08
|
%
|
The
following table presents nonperforming assets at the dates
indicated:
|
|
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
Non-accrual
loans and leases
|
|
$
|
17,362
|
|
$
|
1,910
|
|
Loans
and leases 90 days or more past due
|
|
|
8,009
|
|
|
1,823
|
|
Total
nonperforming loans and leases*
|
|
|
25,371
|
|
|
3,733
|
|
|
|
|
|
|
|
|
|
Other
real estate owned, net
|
|
|
431
|
|
|
182
|
|
Total
nonperforming assets
|
|
$
|
25,802
|
|
$
|
3,915
|
|
Nonperforming
assets to total assets
|
|
|
0.87
|
%
|
|
0.15
|
%
|
*
Those
performing credits considered potential problem credits (which the Company
classifies as substandard), as defined and identified by management, amounted
to
approximately $2.7 million at September 30, 2007, compared to $10.1 million
at
December 31, 2006. These are credits where known information about the
borrowers' possible credit problems causes management to have doubts as to
their
ability to comply with the present repayment terms. This could result in their
reclassification as nonperforming credits in the future, but 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 management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact future operating results,
liquidity or capital resources, or represent material credits where known
information about the borrowers' possible credit problems causes management
to
have doubts as to the borrowers' ability to comply with the loan repayment
terms.
Noninterest
Income and Expenses
Total
noninterest income was $32.9 million for the nine month period ended September
30, 2007, a 14% or $4.1 million increase from the same period of 2006. The
increase in noninterest income for the first nine months of 2007 was due
primarily to an increase of $2.2 million or 39% in service charges on deposit
accounts due primarily to higher overdraft fees. In addition, income from bank
owned life insurance increased $0.4 million or 23% due to higher rates and
insurance policies added from the Potomac and County acquisitions. Visa check
fees increased $0.3 million or 16%, reflecting continued growth in electronic
transactions. Fees on sales of investment products increased $0.2 million or
9%
due mainly to higher sales of mutual funds while trust and investment management
fees increased $0.5 million or 8% due mainly to growth in assets under
management. Insurance agency commissions grew by 6% or $0.3 million as a result
of higher contingency fees and commissions on physician’s liability
insurance.
Total
noninterest expenses were $74.5 million for the nine month period ended
September 30, 2007, an 18% or $11.6 million increase from the same period in
2006. Most of the rise in noninterest expenses during the first nine months
of
2007 occurred in salaries and employee benefits which increased $4.0 million
or
11% during the nine months ended September 30, 2007 mainly as the result of
the
acquisitions of Potomac in February, 2007 and County in May, 2007. Occupancy
and
equipment expenses increased $2.4 million or 23% due higher rent expenses and
the two acquisitions. Outside data services grew by $0.4 million or 16%. Other
noninterest expenses increased during the nine months ended September 30, 2007
by $4.5 million or 57%. This increase was primarily due to $1.5 million in
merger costs incurred due to the acquisitions together with a $1 million
increase in consulting and other professional fees. Intangibles amortization
also increased by $0.7 million or 33% due to the two acquisitions. Average
full-time equivalent employees increased to 707 during the first nine months
of
2007, from 626 during the same period in 2006, a 13% increase, due primarily
to
the Potomac and County acquisitions. The ratio of net income per average
full-time-equivalent employee after completion of the first nine months of
the
year was $34,000 in 2007 and $39,000 in 2006.
Income
Taxes
The
effective tax rate decreased to 28.7% for the nine month period ended September
30, 2007, from 28.9% for the prior year period. This decrease was primarily
due
to the acquisition in February 2007 of Potomac Bank which is not subject to
state income taxes.
C.
RESULTS OF OPERATIONS - THIRD QUARTER 2007 AND 2006
Third
quarter net income of $8.2 million ($0.50 per share-diluted) in 2007 was $0.1
million or 1% above net income of $8.1 million ($0.55 per share-diluted) shown
for the same quarter of 2006. Annualized returns on average equity for these
periods were 10.55% in 2007 versus 13.93% in 2006.
Net
interest income grew by $3.1 million or 13%, to $27.2 million for the three
months ended September 30, 2007, while total noninterest income grew $1.5
million or 16% for the period. However, this growth was more than offset by
a
$4.2 million or 19% increase in noninterest expense.
The
increase in net interest income was the result of continued growth in the loan
portfolio and higher loan and investment securities yields which were largely
offset by increased rates on interest-bearing deposits and an increased use
of
time deposits to fund loan growth. These factors produced a net interest margin
decrease of 9 basis points to 4.16% for the three months ended September 30,
2007, from 4.25% for the same period of 2006, and the net interest spread
decreased by 12 basis points.
The
provision for loan and lease losses totaled $0.8 million in the third quarter
of
2007 compared to $0.6 million in the third quarter of 2006 due primarily to
growth in the loan portfolio.
Third
quarter noninterest income was $11.1 million in 2007, representing a 16% or
$1.5
million increase from the same period in 2006. The increase in noninterest
income for the quarter ended September 30, 2007 was due primarily to an increase
of $1.1 million or 58% increase in service charges on deposit accounts due
primarily to higher overdraft fees. In addition, Visa check fees increased
$0.1
million or 21% due to continued growth in electronic transactions while income
from bank owned life insurance increased $0.1 million or 22% due to higher
rates
and insurance policies added from the Potomac and County acquisitions. Trust
and
investment management fees increased $0.2 million or 9% due mainly to growth
in
assets under management. These increases were somewhat offset by a $0.1 million
or 8% decrease in insurance agency commissions due primarily to lower premium
volume on commercial lines.
Third
quarter noninterest expenses increased $4.2 million or 19% to $25.9 million
in
2007 from $21.7 million in 2006. Salaries and employee benefits increased $2.0
million, or 16%, during the quarter ended September 30, 2007 mainly as the
result of the acquisitions of Potomac in February, 2007 and County in May,
2007.
Occupancy and equipment expenses increased $1.0 million, or 29%, due primarily
to increased rent expenses and the two acquisitions. Other noninterest expenses
increased $1.6 million or 58% primarily due to $0.3 million in merger costs
incurred due to the acquisition of Potomac and County and increased consulting
and professional fees. Intangibles amortization also increased by $0.4 million
or 51% in the third quarter of 2007 compared to the same period in 2006 due
to
the two acquisitions.
The
third
quarter effective tax rate increased to 30.0%, from the 29.2% recorded in the
third quarter of 2006. This increase was primarily due to a decline in the
tax
advantaged investment portfolio.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See
“Financial Condition - Market Risk and Interest Rate Sensitivity” in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, above, which is incorporated herein by reference. Management has
determined that no additional disclosures are necessary to assess changes in
information about market risk that have occurred since December 31,
2006.
Item
4. CONTROLS AND PROCEDURES
The
Company’s management, under the supervision and with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of
the last day of the period covered by this report, the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as
defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on
that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were effective. There were
no significant changes in the Company’s internal controls over financial
reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during
the quarter ended September 30, 2007, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II -
OTHER INFORMATION
Item
1A.
RISK FACTORS
There
have been no material changes in the risk factors as disclosed in the 2006
Annual Report on Form 10-K.
Item
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table provides information on the Company’s purchases of its common
stock during the three months ended September 30, 2007.
Issuer
Purchases of Equity Securities (1)
Period
|
|
(a)
Total Number of Shares Purchased
|
|
(b)
Average Price Paid per Share
|
|
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
|
(d)
Maximum Number that May Yet Be Purchased Under the Plans or Programs
(2)(3)
|
|
July
2007
|
|
|
0
|
|
|
NA
|
|
|
0
|
|
|
786,245
|
|
August
2007
|
|
|
53,933
|
|
$
|
27.44
|
|
|
53,933
|
|
|
732,312
|
|
September
2007
|
|
|
905
|
|
$
|
29.00
|
|
|
905
|
|
|
731,407
|
|
(1)
Includes purchases of the Company’s stock made by or on behalf of the Company or
any affiliated purchasers of the Company as defined in Securities and Exchange
Commission Rule 10b-18.
(2)
On
March 28, 2007, the Company’s board of directors approved a continuation of the
stock repurchase program that permits the repurchase of up to 5%, or 786,245
shares, of its outstanding common stock. The current program continued a similar
plan that expired on March 31, 2007. Repurchases under the program may be made
on the open market and in privately negotiated transactions from time to time
until March 31, 2009, or earlier termination of the program by the Board. The
repurchases are made in connection with shares expected to be issued under
the
Company’s various benefit plans, as well as for other corporate purposes. At
September 30, 2007, a total of 731,407 shares remained under the
plan.
(3)
Indicates the number of shares remaining under the plan at the end of the
indicated month.
Item
6.
EXHIBITS
Exhibit
31(a) and (b) Rule
13a-14(a) / 15d-14(a) Certifications
Exhibit
32 (a) and (b) 18
U.S.C.
Section 1350 Certifications
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
SANDY
SPRING BANCORP, INC.
(Registrant)
|
|
|
|
|
|
|
|
By:
/S/ HUNTER R. HOLLAR |
|
|
|
Hunter
R. Hollar
President
and Chief Executive Officer
Date:
November 6, 2007
|
|
|
|
|
|
|
|
By:
/S/ PHILIP J. MANTUA |
|
|
|
Philip
J. Mantua
Executive
Vice President and Chief Financial Officer
Date:
November 6, 2007
|
|
|
|