UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Year Ended December 31, 2007
Commission
File Number 0-19065
SANDY
SPRING BANCORP, INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
52-1532952
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
17801
Georgia Avenue, Olney, Maryland
|
|
20832
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: 301-774-6400.
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Name
of each exchange on which registered
|
Common
Stock, par value $1.00 per share
|
|
The
NASDAQ Stock Market, LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o Yes x
No*
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x Yes
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large
accelerated filer o
Accelerated filer x
Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). o Yes
No x
The
aggregate market value of the voting common stock of the registrant held by
nonaffiliates on June 30, 2007, the last day of the registrant’s most recently
completed second fiscal quarter, was approximately $492 million, based on the
closing sales price of $30.95 per share of the registrant's Common Stock on
that
date.
As
of the
close of business on February 19, 2008, 16,380,033 shares of the registrant's
Common Stock were outstanding.
Documents
Incorporated By Reference
Part
III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 23, 2008 (the "Proxy Statement").
*
The
registrant is required to file reports pursuant to Section 13 of the
Act.
SANDY
SPRING BANCORP, INC.
Table
of Contents
Forward-Looking
Statements
|
2
|
Form
10-K Cross Reference Sheet
|
3
|
Sandy
Spring Bancorp, Inc.
|
4
|
About
this Report
|
4
|
Six
Year Summary of Selected Financial Data
|
5
|
Securities
Listing, Prices and Dividends
|
6
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
9
|
Controls
and Procedures
|
24
|
Reports
of Independent Registered Public Accounting Firm
|
25
|
Consolidated
Financial Statements
|
27
|
Notes
to the Consolidated Financial Statements
|
31
|
Other
Material Required by Form 10-K:
|
|
Description
of Business
|
60
|
Risk
Factors
|
68
|
Competition
|
71
|
Employees
|
72
|
Executive
Officers
|
72
|
Properties
|
72
|
Exhibits,
Financial Statements, and Reports on Form 8-K
|
74
|
Signatures
|
76
|
Forward-Looking
Statements
Sandy
Spring Bancorp, Inc. (the “Company”) makes forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Annual Report on Form 10-K that are
subject to risks and uncertainties. These forward-looking statements include:
statements of goals, intentions, 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. These forward-looking statements are
subject to significant uncertainties because they are based upon or are affected
by: management's estimates and projections of future interest rates, market
behavior, and other economic conditions; future laws and regulations; and a
variety of other matters which, by their nature, are subject to significant
uncertainties. Because of these uncertainties, the Company’s actual future
results may differ materially from those indicated. In addition, the Company's
past results of operations do not necessarily indicate its future results.
Please also see the discussion of “Risk Factors” on page 68.
SANDY
SPRING BANCORP, INC.
FORM
10-K CROSS REFERENCE SHEET OF MATERIAL INCORPORATED BY
REFERENCE
The
following table shows the location in this Annual Report on Form 10-K or the
accompanying Proxy Statement of the information required to be disclosed by
the
United States Securities and Exchange Commission (“SEC”) Form 10-K. Where
indicated below, information has been incorporated by reference in this Report
from the Proxy Statement that accompanies it. Other portions of the Proxy
Statement are not included in this Report. This Report is not part of the Proxy
Statement. References are to pages in this report unless otherwise
indicated.
Item
of Form 10-K
|
|
Location
|
PART I
|
|
|
|
|
|
|
|
Item 1.
|
Business
|
|
“Forward-Looking
Statements” on page 2, “Sandy Spring Bancorp, Inc.” and “About this
Report” on page 4, and “Business” on pages 60 through
68.
|
|
|
|
|
Item 1A.
|
Risk
Factors
|
|
“Forward-Looking
Statements” on page 2, “Risk Factors” on pages 68 through
71.
|
|
|
|
|
Item 1B.
|
Unresolved
Staff Comments
|
|
Not
applicable.
|
|
|
|
|
Item 2.
|
Properties
|
|
“Properties”
on pages 72 and 73.
|
|
|
|
|
Item 3.
|
Legal
Proceedings
|
|
Note
19 “Litigation” on page 54.
|
|
|
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
|
Not
applicable. No matter was submitted to a vote of security holders
during
the fourth quarter of 2007.
|
|
|
|
|
PART II
|
|
|
|
|
|
|
|
Item 5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters, and
Issuer
Purchases of Equity Securities
|
|
“Securities
Listing, Prices, and Dividends” on page 6 “Equity Compensation Plans” on
page 8.
|
|
|
|
|
Item 6.
|
Selected
Financial Data
|
|
“Six
Year Summary of Selected Financial Data” on page 5.
|
|
|
|
|
Item 7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
“Forward-Looking
Statements” on page 2 and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” on pages 9 through
24.
|
|
|
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
“Forward-Looking
Statements” on page 2 and “Market Risk Management” on pages 22 through
24.
|
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
|
Pages
27 through 60.
|
|
|
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
Not
applicable.
|
|
|
|
|
Item 9A.
|
Controls
and Procedures
|
|
“Controls
and Procedures” on page 24.
|
|
|
|
|
Item 9B.
|
Other
Information
|
|
Not
applicable.
|
|
|
|
|
PART III
|
|
|
|
|
|
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
|
The
material labeled “Election of Directors Information as to Nominees and
Incumbent Directors,” “Corporate Governance,” “Code of Business Conduct,”
“Compliance with Section 16(a) of the Securities Exchange Act of
1934,”
“Shareholder Proposals and Communications,” and “Report of the Audit
Committee” in the Proxy Statement is incorporated in this Report by
reference. Information regarding executive officers is included
under the
caption “Executive Officers” on page 72 of this Report.
|
|
|
|
|
Item 11.
|
Executive
Compensation
|
|
The
material labeled "Corporate Governance and Other Matters," "Executive
Compensation," and "Compensation Committee Report" in the Proxy
Statement
is incorporated in this Report by reference.
|
|
|
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
|
The
material labeled “Owners of More than 5% of Bancorp’s Common Stock” and,
"Stock Ownership of Directors and Executive Officers" in the Proxy
Statement is incorporated in this Report by reference. Information
regarding securities authorized for issuance under equity compensation
plans is included under “Equity Compensation Plans” on page
8.
|
|
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
|
The
material labeled “Director Independence” and "Transactions and
Relationships with Management" in the Proxy Statement is incorporated
in
this Report by reference.
|
|
|
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
|
The
material labeled Audit and Non-Audit Fees in the Proxy Statement
is
incorporated in this Report by reference.
|
|
|
|
|
PART IV
|
|
|
|
|
|
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
|
“Exhibits,
Financial Statement Schedules” on pages 74 through 75.
|
|
|
|
|
SIGNATURES
|
|
“Signatures”
on page 76. |
Sandy
Spring Bancorp, Inc.
With
$3.0
billion in assets, Sandy Spring Bancorp, Inc. is the holding company for Sandy
Spring Bank and its principal subsidiaries, Sandy Spring Insurance Corporation,
The Equipment Leasing Company, and West Financial Services, Inc. Sandy Spring
Bancorp, Inc. is the second largest publicly traded banking company
headquartered in Maryland. Sandy Spring Bank is a community banking organization
that focuses its lending and other services on businesses and consumers in
the
local market area. Independent and community-oriented, Sandy Spring Bank was
founded in 1868 and offers a broad range of commercial banking, retail banking,
and trust services through 42 community offices in Anne Arundel, Carroll,
Frederick, Howard, Montgomery, and Prince George’s counties in Maryland, and
Fairfax and Loudoun counties in Virginia. Through its subsidiaries, Sandy Spring
Bank also offers a comprehensive menu of leasing, insurance, and investment
management services. Visit www.sandyspringbank.com
to
locate an ATM near you or for more information about Sandy Spring
Bank.
About
This Report
This
report comprises the entire 2007 Form 10-K, other than exhibits, as filed with
the SEC. The 2007 annual report to shareholders, included in this report, and
the proxy materials for the 2008 annual meeting are being distributed together
to shareholders. See page 75 for information regarding how to obtain copies
of
exhibits and additional copies of the Form 10-K.
This
report is provided along with the annual proxy statement for convenience of
use
and to decrease costs, but is not part of the proxy materials.
The
SEC has not approved or disapproved this report or passed upon its accuracy
or
adequacy.
SIX
YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent
interest income
|
|
$
|
186,481
|
|
$
|
159,686
|
|
$
|
129,288
|
|
$
|
117,137
|
|
$
|
120,285
|
|
$
|
129,300
|
|
Interest
expense
|
|
|
76,149
|
|
|
58,687
|
|
|
33,982
|
|
|
34,768
|
|
|
37,432
|
|
|
44,113
|
|
Tax-equivalent
net interest income
|
|
|
110,332
|
|
|
100,999
|
|
|
95,306
|
|
|
82,369
|
|
|
82,853
|
|
|
85,187
|
|
Tax-equivalent
adjustment
|
|
|
5,506
|
|
|
6,243
|
|
|
7,128
|
|
|
8,156
|
|
|
8,237
|
|
|
6,920
|
|
Provision
for loan and lease losses
|
|
|
4,094
|
|
|
2,795
|
|
|
2,600
|
|
|
0
|
|
|
0
|
|
|
2,865
|
|
Net
interest income after provision for loan and lease losses
|
|
|
100,732
|
|
|
91,961
|
|
|
85,578
|
|
|
74,213
|
|
|
74,616
|
|
|
75,402
|
|
Noninterest
income
|
|
|
44,289
|
|
|
38,895
|
|
|
36,909
|
|
|
30,949
|
|
|
33,969
|
|
|
29,953
|
|
Noninterest
expenses
|
|
|
99,788
|
|
|
85,096
|
|
|
77,194
|
|
|
92,474
|
|
|
67,040
|
|
|
63,843
|
|
Income
before taxes
|
|
|
45,233
|
|
|
45,760
|
|
|
45,293
|
|
|
12,688
|
|
|
41,545
|
|
|
41,512
|
|
Income
tax expense (benefit)
|
|
|
12,971
|
|
|
12,889
|
|
|
12,195
|
|
|
(1,679
|
)
|
|
9,479
|
|
|
10,927
|
|
Net
income
|
|
|
32,262
|
|
|
32,871
|
|
|
33,098
|
|
|
14,367
|
|
|
32,066
|
|
|
30,585
|
|
Cash
dividends
|
|
|
14,988
|
|
|
13,028
|
|
|
12,329
|
|
|
11,332
|
|
|
10,725
|
|
|
10,012
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income – basic
|
|
$
|
2.01
|
|
$
|
2.22
|
|
$
|
2.26
|
|
$
|
0.99
|
|
$
|
2.21
|
|
$
|
2.11
|
|
Net
income – diluted
|
|
|
2.01
|
|
|
2.20
|
|
|
2.24
|
|
|
0.98
|
|
|
2.18
|
|
|
2.08
|
|
Dividends
declared
|
|
|
0.92
|
|
|
0.88
|
|
|
0.84
|
|
|
0.78
|
|
|
0.74
|
|
|
0.69
|
|
Book
value (at year end)
|
|
|
19.31
|
|
|
16.04
|
|
|
14.73
|
|
|
13.34
|
|
|
13.35
|
|
|
12.25
|
|
Tangible
book value (at year end) (1)
|
|
|
13.60
|
|
|
14.48
|
|
|
13.09
|
|
|
12.16
|
|
|
12.03
|
|
|
10.76
|
|
Financial
Condition (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,043,953
|
|
$
|
2,610,457
|
|
$
|
2,459,616
|
|
$
|
2,309,343
|
|
$
|
2,334,424
|
|
$
|
2,308,486
|
|
Deposits
|
|
|
2,273,868
|
|
|
1,994,223
|
|
|
1,803,210
|
|
|
1,732,501
|
|
|
1,561,830
|
|
|
1,492,212
|
|
Loans
and leases
|
|
|
2,277,031
|
|
|
1,805,579
|
|
|
1,684,379
|
|
|
1,445,525
|
|
|
1,153,428
|
|
|
1,063,853
|
|
Securities
|
|
|
445,273
|
|
|
540,908
|
|
|
567,432
|
|
|
666,108
|
|
|
998,205
|
|
|
1,046,258
|
|
Borrowings
|
|
|
426,525
|
|
|
351,540
|
|
|
417,378
|
|
|
361,535
|
|
|
563,381
|
|
|
613,714
|
|
Stockholders’
equity
|
|
|
315,640
|
|
|
237,777
|
|
|
217,883
|
|
|
195,083
|
|
|
193,449
|
|
|
178,024
|
|
Financial
Condition (average for the year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
2,935,451
|
|
|
2,563,673
|
|
|
2,352,061
|
|
|
2,406,318
|
|
|
2,344,743
|
|
|
2,161,689
|
|
Deposits
|
|
|
2,253,979
|
|
|
1,866,346
|
|
|
1,771,381
|
|
|
1,652,306
|
|
|
1,541,336
|
|
|
1,412,645
|
|
Loans
and leases
|
|
|
2,113,476
|
|
|
1,788,702
|
|
|
1,544,990
|
|
|
1,292,209
|
|
|
1,103,279
|
|
|
1,056,838
|
|
Securities
|
|
|
495,928
|
|
|
559,350
|
|
|
603,882
|
|
|
906,901
|
|
|
1,059,583
|
|
|
931,192
|
|
Borrowings
|
|
|
361,884
|
|
|
451,251
|
|
|
355,537
|
|
|
536,758
|
|
|
593,684
|
|
|
571,021
|
|
Stockholders’
equity
|
|
|
290,224
|
|
|
229,360
|
|
|
204,142
|
|
|
197,556
|
|
|
185,418
|
|
|
161,903
|
|
Performance
Ratios (for the year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average equity
|
|
|
11.12
|
%
|
|
14.33
|
%
|
|
16.21
|
%
|
|
7.27
|
%
|
|
17.29
|
%
|
|
18.89
|
%
|
Return
on average assets
|
|
|
1.10
|
|
|
1.28
|
|
|
1.41
|
|
|
0.60
|
|
|
1.37
|
|
|
1.42
|
|
Yield
on average interest-earning assets
|
|
|
6.98
|
|
|
6.73
|
|
|
5.95
|
|
|
5.23
|
|
|
5.49
|
|
|
6.39
|
|
Rate
on average interest-bearing liabilities
|
|
|
3.50
|
|
|
3.08
|
|
|
2.02
|
|
|
1.94
|
|
|
2.08
|
|
|
2.59
|
|
Net
interest spread
|
|
|
3.48
|
|
|
3.65
|
|
|
3.93
|
|
|
3.29
|
|
|
3.41
|
|
|
3.80
|
|
Net
interest margin
|
|
|
4.13
|
|
|
4.26
|
|
|
4.39
|
|
|
3.68
|
|
|
3.78
|
|
|
4.21
|
|
Efficiency
ratio – GAAP based (2)
|
|
|
66.92
|
|
|
63.67
|
|
|
61.71
|
|
|
87.93
|
|
|
61.74
|
|
|
58.99
|
|
Efficiency
ratio – traditional (2)
|
|
|
61.92
|
|
|
58.71
|
|
|
58.16
|
|
|
62.86
|
|
|
56.26
|
|
|
54.09
|
|
Dividends
declared per share to diluted net income per share
|
|
|
45.77
|
|
|
40.00
|
|
|
37.50
|
|
|
79.59
|
|
|
33.94
|
|
|
33.17
|
|
Capital
and Credit Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity to average assets
|
|
|
9.89
|
%
|
|
8.95
|
%
|
|
8.68
|
%
|
|
8.21
|
%
|
|
7.91
|
%
|
|
7.49
|
%
|
Total
risk-based capital ratio
|
|
|
11.28
|
|
|
13.62
|
|
|
13.22
|
|
|
13.82
|
|
|
15.51
|
|
|
14.95
|
|
Allowance
for loan losses to loans and leases
|
|
|
1.10
|
|
|
1.08
|
|
|
1.00
|
|
|
1.01
|
|
|
1.29
|
|
|
1.41
|
|
Non-performing
assets to total assets
|
|
|
1.15
|
|
|
0.15
|
|
|
0.06
|
|
|
0.08
|
|
|
0.13
|
|
|
0.12
|
|
Net
charge-offs to average loans and leases
|
|
|
0.06
|
|
|
0.01
|
|
|
0.02
|
|
|
0.02
|
|
|
0.01
|
|
|
0.05
|
|
(1)
|
Total
stockholders' equity, net of goodwill and other intangible assets,
divided
by the number of shares of common stock outstanding at year
end.
|
(2)
|
See
the discussion of the efficiency ratio in the section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations
entitled “Operating Expense
Performance.”
|
SECURITIES
LISTING, PRICES AND DIVIDENDS
Stock
Listing
Common
shares of Sandy Spring Bancorp, Inc. are traded on the NASDAQ Global Select
Market under the symbol SASR.
Transfer
Agent and Registrar
American
Stock Transfer and Trust Company
59
Maiden
Lane
New
York,
New York 10038
Recent
Stock Prices and Dividends
Shareholders
received quarterly cash dividends totaling $15.0 million in 2007 and $13.0
million in 2006. Sandy Spring Bancorp, Inc. (the “Company”) has increased its
dividends per share each year for the past twenty-seven years. Since 2002,
dividends per share have risen at a compound annual growth rate of 6%. The
increase in dividends per share was 5% in 2007.
The
ratio
of dividends per share to diluted net income per share was 46% in 2007, compared
to 40% for 2006. The dividend amount is established by the Board of Directors
each quarter. In making its decision on dividends, the Board considers operating
results, financial condition, capital adequacy, regulatory requirements,
shareholder returns, and other factors.
Shares
issued under the employee stock purchase plan, which commenced on July 1, 2001,
totaled 25,147 in 2007 and 19,439 in 2006, while issuances pursuant to exercises
of stock options and grants of restricted stock were 84,342 and 35,998 in the
respective years. Shares issued under the director stock purchase plan totaled
2,402 shares in 2007 and 2,381 shares in 2006. Shares issued in connection
with
acquisitions totaled 1,577,036 in 2007.
The
Company has a stock repurchase program that permits the repurchase of up to
5%
(approximately 786,000 shares) of its outstanding common stock. Repurchases
are
made in connection with shares expected to be issued under the Company's stock
option, benefit and compensation plans, as well as for other corporate purposes.
A total of 1,332,869 shares have been repurchased since 1997, when stock
repurchases began, through December 31, 2007 under the stock repurchase program.
There were 156,249 shares repurchased in 2007 and 25,000 shares repurchased
in
2006 under the stock repurchase program.
The
number of common shareholders of record was approximately 2,800 as of February
7, 2008.
Quarterly
Stock Information
|
|
2007
|
|
2006
|
|
|
|
Stock Price Range
|
|
Per Share
|
|
Stock Price Range
|
|
Per Share
|
|
Quarter
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
1st
|
|
$
|
32.41
|
|
$
|
38.97
|
|
$
|
0.23
|
|
$
|
34.70
|
|
$
|
37.99
|
|
$
|
0.22
|
|
2nd
|
|
|
30.98
|
|
|
35.94
|
|
|
0.23
|
|
|
33.98
|
|
|
37.54
|
|
|
0.22
|
|
3rd
|
|
|
25.60
|
|
|
32.99
|
|
|
0.23
|
|
|
34.22
|
|
|
37.13
|
|
|
0.22
|
|
4th
|
|
|
26.00
|
|
|
31.57
|
|
|
0.23
|
|
|
34.76
|
|
|
38.82
|
|
|
0.22
|
|
Total
|
|
|
|
|
|
|
|
$
|
0.92
|
|
|
|
|
|
|
|
$
|
0.88
|
|
Issuer
Purchases of Equity Securities
Period
|
|
Total Number of
Shares Purchased (1)
|
|
Average Price
Paid per Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
Maximum Number that
May Yet Be Purchased
Under the Plans or
Programs (2)(3)
|
|
October
2007
|
|
|
39,195
|
|
$
|
28.69
|
|
|
39,195
|
|
|
692,212
|
|
November
2007
|
|
|
62,216
|
|
$
|
28.15
|
|
|
62,216
|
|
|
629,996
|
|
December
2007
|
|
|
0
|
|
|
N/A
|
|
|
0
|
|
|
629,996
|
|
(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 SEC 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.
|
(3) |
Indicates
the number of shares remaining under the plan at the end of the indicated
month.
|
The
following graph and table show the cumulative total return on the Common Stock
of Bancorp over the last five years, compared with the cumulative total return
of a broad stock market index (the Standard and Poor’s 500 Index or “S&P
500”), a narrower index of Mid-Atlantic bank holding company peers with assets
of $1 billion to $3 billion used in prior years ("Old Peer Group"), and a new
index of Mid-Atlantic bank holding company peers with assets of $2 billion
to $7
billion ("New Peer Group"). The decision to select the "New Peer Group" was
made
in keeping with the growth and geographic diversification experienced by the
Company. The cumulative total return on the stock or the index equals the total
increase in value since December 31, 2002, assuming reinvestment of all
dividends paid into the stock or the index. The graph and table were prepared
assuming that $100 was invested on December 31, 2002, in the Common Stock and
the securities included in the indexes.
Total
Return Comparison
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandy
Spring Bancorp, Inc.
|
|
|
$100.0
|
|
|
$121.1
|
|
|
$127.8
|
|
|
$118.5
|
|
|
$132.9
|
|
|
$99.8
|
|
S&P
500 Index
|
|
|
$100.0
|
|
|
$128.7
|
|
|
$142.7
|
|
|
$149.7
|
|
|
$173.3
|
|
|
$182.8
|
|
|
|
|
$100.0
|
|
|
$134.4
|
|
|
$153.8
|
|
|
$151.5
|
|
|
$169.2
|
|
|
$131.0
|
|
"New
Peer Group" Index
|
|
|
$100.0
|
|
|
$129.1
|
|
|
$152.1
|
|
|
$140.0
|
|
|
$150.5
|
|
|
$119.9
|
|
The
"Old
Peer Group" index includes twenty-four publicly-traded bank holding companies,
other than Bancorp, headquartered in the states of Maryland, Virginia,
Pennsylvania, New Jersey, and West Virginia (the Mid-Atlantic Region) with
assets at December 31, 2007, of at least $1 billion and not more than $3
billion. The institutions included in this index are Burke & Herbert Bank
& Trust Company; Cardinal Financial Company; City Holding Company; Center
Bancorp, Inc.; Citizens & Northern Corporation; First Community Bancshares,
Inc.; First Mariner Bancorp; First National Community Bancorp, Inc.; First
United Corporation; FNB Corporation; Interchange Financial Services Corporation;
Gateway Bank & Trust Co.; Lakeland Bancorp, Incorporated; Omega Financial
Corp.; Peapack-Gladstone Financial Corporation; Pennsylvania Commerce Bancorp,
Inc.; Royal Bancshares of Pennsylvania, Inc.; Summit Financial Group, Inc.;
TowneBank; Union Bankshares Corporation; Univest Corporation of Pennsylvania;
Virginia Commerce Bancorp, Inc.; Virginia Financial Group, Inc.; and Yardville
National Bancorp. Returns are weighted according to the issuer’s stock market
capitalization at the beginning of each year shown.
The
"New
Peer Group" index includes twenty-one publicly traded bank holding companies,
other than Bancorp, headquartered in the Mid-Atlantic Region as noted and with
assets of $2 billion to $7 billion. The companies included in this index are:
Carter Bank & Trust (VA); City Holding Company (WV); Pennsylvania Commerce
Bancorp, Inc. (PA); First Bancorp, Inc. (NC); First Community Bancshares, Inc.
(VA); First Charter Corporation (NC); First Commonwealth Financial Corporation
(PA); First Financial Bancorp (OH); F.N.B. Corporation (PA); Harleysville
National Corporation (PA); Lakeland Bancorp, Inc. (NJ); NewBridge Bancorp (NC);
National Penn Bancshares, Inc. (PA); Provident Bankshares Corporation (MD);
Park
National Corporation (OH); Sun Bancorp, Inc. (NJ); S&T Bancorp, Inc. (PA);
TowneBank (VA); Union Bankshares Corporation (VA); Virginia Commerce Bancorp,
Inc. (VA); Wesbanco, Inc. (WV). Returns are weighted according to the issuer’s
stock market capitalization at the beginning of each year shown.
Equity
Compensation Plans
The
following table presents disclosure regarding equity compensation plans in
existence at December 31, 2007, consisting only of the 1992 and 1999 stock
option plans (each expired but with outstanding options that may still be
exercised) and the 2005 Omnibus Stock Plan, each of which was approved by the
shareholders.
Plan category
|
|
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
|
Weighted average exercise
price of outstanding options,
warrants and rights
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
excluding securities reflected
in column
|
|
Equity
compensation plans approved by security holders
|
|
|
996,365
|
|
|
$33.72
|
|
|
1,365,708
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
996,365
|
|
|
$33.72
|
|
|
1,365,708
|
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
Overview
Sandy
Spring Bancorp, Inc. and subsidiaries (the "Company") achieved solid earnings
for the year ended December 31, 2007. Net income for the year ended December
31,
2007, totaled $32.3 million ($2.01 per diluted share), as compared to $32.9
million ($2.20 per diluted share) for the prior year. These results reflect
the
following events:
· |
An
11% increase in net interest income due primarily to continued growth
in
the loan portfolio, which was offset somewhat by a decrease in the
net
interest margin from 4.26% in 2006 to 4.13% in
2007.
|
· |
An
increase in the provision for loan and lease losses to $4.1 million
in
2007 from $2.8 million in 2006 due mainly to growth in the loan portfolio
and a higher level of nonperforming
loans.
|
· |
An
increase of 14% in noninterest income over the prior year due in
large
part to increased service charges on deposit accounts and higher
trust and
investment management fees, offset by a decrease in gains on sales
of
mortgage loans.
|
· |
An
increase of 17% in noninterest expenses compared to the prior year
due
primarily to an increase in salaries and employee benefits, occupancy
expense, equipment expense and amortization of intangible assets
reflecting the acquisitions of Potomac Bank of Virginia and County
National Bank.
|
The
Company maintained steady growth during 2007. Loan balances increased by 26%
over the prior year primarily due to the acquisition of Potomac Bank of Virginia
(“Potomac”) and CN Bancorp, Inc. (“County”) in 2007. Customer funding sources,
which include deposits plus other short-term borrowings from core customers,
increased 13% over 2006. Again, much of this increase was due to the two
acquisitions.
Net
interest income increased by $10.0 million, or 11%, due primarily to growth
in
the loan portfolio and higher loan yields, which were offset, in part, by
increased rates on interest bearing deposits. The net interest margin decreased
from 4.26% for the year 2006 to 4.13% for the year 2007. Noninterest income
increased by 14% to $44.3 million compared to the prior year. This increase
was
due primarily to an increase of $3.2 million in service charges on deposit
accounts and an increase of $0.8 million in trust and investment management
fees, partially offset by a decrease of $0.2 million in gains on sales of
mortgage loans. Expressed as a percentage of net interest income and noninterest
income, noninterest income totaled 30% of total revenue. Noninterest expenses
grew by $14.7
million or 17% versus the prior year primarily due to an increase of $4.7
million in salaries and benefits resulting from the acquisitions of Potomac
and
County, an increase in occupancy and equipment expenses of $3.0 million and
growth of $1.1 million in intangibles amortization as a result of the
acquisitions mentioned above.
Comparing
December 31, 2007 balances to December 31, 2006, total assets increased 17%
to
$3.0 billion. Total deposits grew 14% to $2.3 billion, while total loans and
leases grew to $2.3 billion from $1.8 billion, a 26% increase. During the same
period, stockholders’ equity increased to $315.6 million or 10% of total
assets.
While
non-performing assets grew substantially over the prior year, the Company
continues to believe that its asset quality will prove to be a significant
strength given the current volatile condition of the economy. Non-performing
assets represented 1.15% of total assets at year-end 2007, versus 0.15% at
year-end 2006. The ratio of net charge-offs to average loans and leases was
0.06% in 2007, compared to 0.01% in 2006.
Critical
Accounting Policies
The
Company’s consolidated financial statements are prepared in accordance with
generally accepted accounting principles (“GAAP”) in the United States of
America and follow general practices within the industry in which it operates.
Application of these principles requires management to make estimates,
assumptions, and judgments that affect the amounts reported in the financial
statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements;
accordingly, as this information changes, the financial statements may reflect
different estimates, assumptions, and judgments. Certain policies inherently
have a greater reliance on the use of estimates, assumptions, and judgments
and
as such have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation allowance to be
established, or when an asset or liability must be recorded contingent upon
a
future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility.
The
fair
values and the information used to record valuation adjustments for certain
assets and liabilities are based either on quoted market prices or are provided
by other third-party sources, when readily available.
The
allowance for loan and lease losses is an estimate of the losses that may be
sustained in the loan and lease portfolio. The allowance is based on two basic
principles of accounting: (1) Statement of Financial Accounting Standards
(“SFAS”) No. 5, “Accounting for Contingencies,” which requires that losses be
accrued when they are probable of occurring and estimable, and (2) SFAS No.
114,
“Accounting by Creditors for Impairment of a Loan,” which requires that losses
be accrued when it is probable that the Company will not collect all principal
and interest payments according to the loan’s or lease’s contractual
terms.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses in the loan and lease
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 loans and
leases comprising the portfolio and changes in the financial condition of
borrowers, such as may result from changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
and independent consultants engaged by the Company, periodically review the
loan
and lease portfolio and the allowance. Such review may result in additional
provisions based on their judgments of information available at the time of
each
examination.
The
Company’s allowance for loan and lease losses has two basic components: the
formula allowance reflecting historical losses by loan category, as adjusted
by
several factors whose effects are not reflected in historical loss ratios,
and
specific allowances. Each of these components, and the systematic allowance
methodology used to establish them, are described in detail in Note 1 of the
Notes to the Consolidated Financial Statements. The amount of the allowance
is
reviewed monthly by the Senior Loan Committee, and reviewed and approved
quarterly by the Board of Directors.
The
portion of the allowance that is based upon historical loss factors, as
adjusted, establishes allowances for the major loan categories based upon
adjusted historical loss experience over the prior eight quarters, weighted
so
that losses realized in the most recent quarters have the greatest effect.
The
use of these historical loss factors is intended to reduce the differences
between estimated losses inherent in the loan and lease portfolio and actual
losses. The factors used to adjust the historical loss ratios address changes
in
the risk characteristics of the Company’s loan and lease portfolio that are
related to (1) trends in delinquencies and other non-performing loans, (2)
changes in the risk level of the loan portfolio related to large loans, (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. This component
comprised 79% and 84% of the total allowance at December 31, 2007 and 2006,
respectively.
The
specific allowance is used primarily to establish allowances for risk-rated
credits on an individual or portfolio basis, and accounted for 21% and 16%
of
the total allowance at December 31, 2007 and 2006, respectively. The Company
has
historically had favorable credit quality. The actual occurrence and severity
of
losses involving risk-rated credits can differ substantially from estimates,
and
some risk-rated credits may not be identified.
Table
1 – Consolidated Average Balances, Yields and Rates
(1)
(Dollars
in thousands and tax equivalent)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate(3)
|
|
$
|
586,141
|
|
$
|
37,441
|
|
|
6.39
|
%
|
|
$
|
588,426
|
|
$
|
36,723
|
|
|
6.24
|
%
|
|
$
|
550,129
|
|
$
|
31,628
|
|
|
5.75
|
%
|
Consumer
|
|
|
365,334
|
|
|
25,367
|
|
|
6.94
|
|
|
|
344,316
|
|
|
23,172
|
|
|
6.73
|
|
|
|
323,534
|
|
|
17,856
|
|
|
5.52
|
|
Commercial
loans and leases
|
|
|
1,162,001
|
|
|
90,730
|
|
|
7.81
|
|
|
|
855,960
|
|
|
66,657
|
|
|
7.79
|
|
|
|
671,327
|
|
|
46,151
|
|
|
6.87
|
|
Total
loans and leases
|
|
|
2,113,476
|
|
|
153,538
|
|
|
7.26
|
|
|
|
1,788,702
|
|
|
126,552
|
|
|
7.08
|
|
|
|
1,544,990
|
|
|
95,635
|
|
|
6.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
279,881
|
|
|
14,603
|
|
|
5.22
|
|
|
|
310,740
|
|
|
14,710
|
|
|
4.73
|
|
|
|
309,769
|
|
|
12,875
|
|
|
4.16
|
|
Nontaxable
|
|
|
216,047
|
|
|
15,060
|
|
|
6.97
|
|
|
|
248,610
|
|
|
17,220
|
|
|
6.93
|
|
|
|
294,113
|
|
|
19,996
|
|
|
6.80
|
|
Total
securities
|
|
|
495,928
|
|
|
29,663
|
|
|
5.98
|
|
|
|
559,350
|
|
|
31,930
|
|
|
5.71
|
|
|
|
603,882
|
|
|
32,871
|
|
|
5.44
|
|
Interest-bearing
deposits with banks
|
|
|
21,600
|
|
|
1,123
|
|
|
5.20
|
|
|
|
2,501
|
|
|
123
|
|
|
4.92
|
|
|
|
2,095
|
|
|
63
|
|
|
3.01
|
|
Federal
funds sold
|
|
|
42,305
|
|
|
2,157
|
|
|
5.10
|
|
|
|
21,145
|
|
|
1,081
|
|
|
5.12
|
|
|
|
22,082
|
|
|
719
|
|
|
3.26
|
|
Total
earning assets
|
|
$
|
2,673,309
|
|
|
186,481
|
|
|
6.98
|
%
|
|
$
|
2,371,698
|
|
|
159,686
|
|
|
6.73
|
%
|
|
$
|
2,173,049
|
|
|
129,288
|
|
|
5.95
|
%
|
Less:
allowances for loan and lease losses
|
|
|
(22,771
|
)
|
|
|
|
|
|
|
|
|
(18,584
|
)
|
|
|
|
|
|
|
|
|
(15,492
|
)
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
54,294
|
|
|
|
|
|
|
|
|
|
46,741
|
|
|
|
|
|
|
|
|
|
46,682
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
52,604
|
|
|
|
|
|
|
|
|
|
45,980
|
|
|
|
|
|
|
|
|
|
44,945
|
|
|
|
|
|
|
|
Other
assets
|
|
|
178,015
|
|
|
|
|
|
|
|
|
|
117,838
|
|
|
|
|
|
|
|
|
|
102,877
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,935,451
|
|
|
|
|
|
|
|
|
$
|
2,563,673
|
|
|
|
|
|
|
|
|
$
|
2,352,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
236,940
|
|
$
|
808
|
|
|
0.34
|
%
|
|
$
|
226,699
|
|
$
|
657
|
|
|
0.29
|
%
|
|
$
|
237,511
|
|
$
|
640
|
|
|
0.27
|
%
|
Regular
savings deposits
|
|
|
165,134
|
|
|
535
|
|
|
0.32
|
|
|
|
182,610
|
|
|
687
|
|
|
0.38
|
|
|
|
216,951
|
|
|
801
|
|
|
0.37
|
|
Money
market savings deposits
|
|
|
643,047
|
|
|
23,809
|
|
|
3.70
|
|
|
|
409,578
|
|
|
12,655
|
|
|
3.09
|
|
|
|
376,090
|
|
|
6,268
|
|
|
1.67
|
|
Time
deposits
|
|
|
768,005
|
|
|
34,764
|
|
|
4.53
|
|
|
|
631,712
|
|
|
25,335
|
|
|
4.01
|
|
|
|
498,774
|
|
|
13,773
|
|
|
2.76
|
|
Total
interest-bearing deposits
|
|
|
1,813,126
|
|
|
59,916
|
|
|
3.30
|
|
|
|
1,450,599
|
|
|
39,334
|
|
|
2.71
|
|
|
|
1,329,326
|
|
|
21,482
|
|
|
1.62
|
|
Short-term
borrowings
|
|
|
319,418
|
|
|
13,673
|
|
|
4.28
|
|
|
|
414,274
|
|
|
17,049
|
|
|
4.12
|
|
|
|
295,462
|
|
|
9,638
|
|
|
3.26
|
|
Long-term
borrowings
|
|
|
42,466
|
|
|
2,560
|
|
|
6.03
|
|
|
|
36,977
|
|
|
2,304
|
|
|
6.23
|
|
|
|
60,075
|
|
|
2,862
|
|
|
4.76
|
|
Total
interest-bearing liabilities
|
|
|
2,175,010
|
|
|
76,149
|
|
|
3.50
|
|
|
|
1,901,850
|
|
|
58,687
|
|
|
3.08
|
|
|
|
1,684,863
|
|
|
33,982
|
|
|
2.02
|
|
Net
interest income and spread
|
|
|
|
|
$
|
110,332
|
|
|
3.48
|
%
|
|
|
|
|
$
|
100,999
|
|
|
3.65
|
%
|
|
|
|
|
$
|
95,306
|
|
|
3.93
|
%
|
Noninterest-bearing
demand deposits
|
|
|
440,853
|
|
|
|
|
|
|
|
|
|
415,747
|
|
|
|
|
|
|
|
|
|
442,055
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
29,364
|
|
|
|
|
|
|
|
|
|
16,716
|
|
|
|
|
|
|
|
|
|
21,001
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
290,224
|
|
|
|
|
|
|
|
|
|
229,360
|
|
|
|
|
|
|
|
|
|
204,142
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,935,451
|
|
|
|
|
|
|
|
|
$
|
2,563,673
|
|
|
|
|
|
|
|
|
$
|
2,352,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income/earning
assets
|
|
|
|
|
|
|
|
|
6.98
|
%
|
|
|
|
|
|
|
|
|
6.73
|
%
|
|
|
|
|
|
|
|
|
5.95
|
%
|
Interest
expense/earning
assets
|
|
|
|
|
|
|
|
|
2.85
|
|
|
|
|
|
|
|
|
|
2.47
|
|
|
|
|
|
|
|
|
|
1.56
|
|
Net
interest margin
|
|
|
|
|
|
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
4.26
|
%
|
|
|
|
|
|
|
|
|
4.39
|
%
|
(1) |
Interest
income includes the effects of taxable-equivalent adjustments
(reduced by
the nondeductible portion of interest expense) using the appropriate
marginal federal income tax rate of 35.00% and, where applicable,
the
marginal state income tax rate of 6.55% (or a combined marginal
federal
and state rate of 39.26%) for 2007 and a marginal state income
tax rate of
7.00% (or a combined federal and state rate of 39.55%) for 2006
and 2005,
to increase tax-exempt interest income to a taxable-equivalent
basis. The
taxable-equivalent adjustment amounts utilized in the above table
to
compute yields totaled to $5.5 million in 2007, $6.2 million
in 2006, and
$7.1 million in 2005.
|
(2)
|
Non-accrual
loans are included in the average
balances.
|
(3) |
Includes
residential mortgage loans held for sale. Home equity loans and lines
are
classified as consumer loans.
|
Net
Interest Income
The
largest source of the Company’s operating revenue is net interest income, which
is the difference between the interest earned on interest-earning assets and
the
interest paid on interest-bearing liabilities.
Net
interest income for 2007 was $104.8 million, representing an increase of $10.0
million or 11% from 2006. Comparing 2006 to 2005, net interest income increased
7% to $94.8 million.
For
purposes of this discussion and analysis, the interest earned on tax-exempt
investment securities has been adjusted to an amount comparable to interest
subject to normal income taxes. The result is referred to as tax-equivalent
interest income and tax-equivalent net interest income.
The
tabular analysis of net interest income performance (entitled "Table 1 -
Consolidated Average Balances, Yields and Rates") shows a decrease in net
interest margin for 2007 of 13 basis points, or 3% when compared to 2006.
Comparing the years 2007 and 2006 shown in Table 1, average earning assets
increased by 13%. Table 2 shows the extent to which interest income, interest
expense and net interest income were affected by rate changes and volume
changes. The decrease in tax-equivalent net interest margin in 2007 resulted
primarily from the growth in the cost of interest bearing deposits reflecting
the intense competition for deposits in the Company’s markets and a flat yield
curve environment. While average noninterest bearing deposits increased in
2007,
due primarily to the acquisitions mentioned above, the percentage of noninterest
bearing deposits to total deposits decreased to 20% in 2007 compared to 22%
in
2006 and 25% in 2005. The decrease in the tax-equivalent net interest margin
in
2006 resulted mainly from a decrease in the average balance of noninterest
bearing deposits combined with a higher yield on interest bearing deposits
due
to the existing flat yield curve. Tax-equivalent net interest income increased
by 9% in 2007 (to $110.3 million in 2007 from $101.0 million in 2006) and
increased 6% in 2006 (from $95.3 million in 2005). Pressure on the net interest
margin in recent years has been an industry-wide trend and a significant
challenge for management. It has led to greater sophistication in margin
management and heightened emphasis on noninterest revenues. During 2007, margin
compression continued as a result of a flat yield curve environment and intense
competition for deposits among banks and other providers of financial services.
The
Company is continuing its emphasis on producing consistent earnings results
from
its core loan, deposit and noninterest income businesses.
Table
2 – 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
|
|
$
|
26,986
|
|
$
|
23,515
|
|
$
|
3,471
|
|
$
|
30,916
|
|
$
|
16,217
|
|
$
|
14,699
|
|
Securities
|
|
|
(2,267
|
)
|
|
(3,742
|
)
|
|
1,475
|
|
|
(941
|
)
|
|
(2,495
|
)
|
|
1,554
|
|
Other
investments
|
|
|
2,076
|
|
|
2,067
|
|
|
9
|
|
|
423
|
|
|
(18
|
)
|
|
441
|
|
Total
interest income
|
|
|
26,795
|
|
|
21,840
|
|
|
4,955
|
|
|
30,398
|
|
|
13,704
|
|
|
16,694
|
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
151
|
|
|
30
|
|
|
121
|
|
|
17
|
|
|
(30
|
)
|
|
47
|
|
Regular
savings deposits
|
|
|
(152
|
)
|
|
(62
|
)
|
|
(90
|
)
|
|
(114
|
)
|
|
(129
|
)
|
|
15
|
|
Money
market savings deposits
|
|
|
11,154
|
|
|
8,276
|
|
|
2,878
|
|
|
6,387
|
|
|
603
|
|
|
5,784
|
|
Time
deposits
|
|
|
9,429
|
|
|
5,906
|
|
|
3,523
|
|
|
11,562
|
|
|
4,287
|
|
|
7,275
|
|
Total
borrowings
|
|
|
(3,120
|
)
|
|
(3,976
|
)
|
|
856
|
|
|
6,853
|
|
|
3,772
|
|
|
3,081
|
|
Total
interest expense
|
|
|
17,462
|
|
|
10,174
|
|
|
7,288
|
|
|
24,705
|
|
|
8,503
|
|
|
16,202
|
|
Net
interest income
|
|
$
|
9,333
|
|
$
|
11,666
|
|
$
|
(2,333
|
)
|
$
|
5,693
|
|
$
|
5,201
|
|
$
|
492
|
|
*
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.
Interest
Income
The
Company's interest income increased by $27.5 million or 18% in 2007, compared
to
2006, preceded by an increase of $31.3 million or 26% over 2005. On a
tax-equivalent basis, the respective changes were an increase of 17% in 2007,
and an increase of 24% in 2006. Table 2 shows that, in 2007, the increase in
interest income resulted primarily from the higher growth in average earning
assets over interest bearing liabilities which was somewhat offset by a
narrowing net interest margin.
During
2007, average loans and leases, yielding 7.26% versus 7.08% a year earlier,
grew
18% to $2.1 billion, due mainly to a 36% increase in average commercial loans
and leases. Average residential real estate loans decreased slightly
(attributable to construction lending), average consumer loans increased 6%
due
to higher home equity loans and lines, while the increase in average commercial
loans and leases reflected growth in all categories of such loans. In 2007,
average loans and leases comprised 79% of average earning assets, compared
to
ratios of 75% in 2006 and 71% in 2005. Average total securities, yielding 5.98%
in 2007 versus 5.71% last year, declined 11% to $495.9 million. Non-taxable
securities declined in 2007 by 15% compared to 2006. Average total securities
comprised 19% of average earning assets in 2007, compared to 24% in 2006 and
28%
in 2005. These results were consistent with the Company’s strategic plan to
migrate an increasing share of its assets from investment securities to its
commercial loan portfolio.
Interest
Expense
Interest
expense increased by 30% or $17.5 million in 2007, compared to 2006, as a result
of growth in interest-bearing deposits coupled with a 42 basis point rise in
the
average rate paid on deposits and borrowings (increasing to 3.50% from 3.08%).
Deposit
and borrowing activity during 2007 was driven primarily by the flat yield curve
rate environment which brought about an extremely competitive market for
deposits as market interest rates on deposits remained relatively high through
most of the year. Also contributing to this situation was the market volatility
experienced in the second half of the year as other banks competing for deposits
in the Company’s markets increased rates offered on deposits to maintain their
liquidity. The flat yield curve together with this intensely competitive market
for deposits caused the Company to pay somewhat higher rates on interest bearing
deposits in order to maintain its market share of such deposits. This resulted
in an increase in average rates in several categories of interest-bearing
liabilities. Average borrowings decreased $89.3 million or 20% compared to
2006.
In
2006,
interest expense increased principally due to a 106 basis point increase in
the
average rate paid on deposits and borrowings, due in large part, to the flat
yield curve environment and a very competitive market for deposits.
Interest
Rate Performance
The
net
interest margin decreased by 13 basis points in 2007, as compared to a decrease
in net interest spread of 17 basis points. The difference between these two
indicators of interest rate performance is attributable primarily to an increase
in the benefit of funding average earning assets from interest-free sources,
which is reflected in the net interest margin. During 2007, the Company
experienced a greater relative increase in the funding rate compared to the
yield on earning assets, resulting in a decrease in the net interest margin
and
spread.
In
2006
versus 2005, a greater relative increase in the funding rate compared to the
yield on earning assets resulted in a decrease in the net interest margin and
spread.
Noninterest
Income
Total
noninterest income was $44.3 million in 2007, a $5.4 million or 14% increase
from 2006. The primary reasons for the increase in noninterest income for 2007,
as compared to 2006 were a $3.2 million increase in service charges on deposit
accounts, due primarily to higher overdraft fees and a $0.8 million increase
in
trust and investment management fees due to growth in assets under management.
In addition, the Company experienced increases in income from bank owned life
insurance of $0.5 million, Visa check fees of $0.4 million and other income
of
$0.5 million. These increases were partially offset by a decrease in gains
on
sales of mortgage loans of $0.2 million. Comparing 2006 to 2005, noninterest
income increased $2.0 million or 5%. This increase was mainly due to an increase
in trust and investment management fees which resulted from the acquisition
of
West Financial Services late in 2005 and an increase in insurance agency
commissions due, in part, to the acquisition of Neff & Associates in January
2006.
There
were virtually no securities gains in 2007 or 2006 while the Company recognized
net gains of $3.3 million in 2005. During 2005, sales of available-for-sale
securities generated $4.0 million in gains and $0.7 million in
losses.
Service
charges on deposits totaled $11.1 million in 2007, an increase of $3.2 million
or 41% due primarily to higher overdraft fees. Visa check fees increased to
$2.8
million from $2.4 million, an increase of $0.4 million or 17% over 2006 due
largely to an increased volume of electronic transactions.
Trust
and
investment management fee income amounted to $9.6 million in 2007, an increase
of $0.8 million or 9% over 2006, reflecting increased assets under management.
During 2007, investment management fees in West Financial Services increased
to
$4.6 million, an increase of $0.5 million or 11% over 2006 due to a revised
fee
structure and growth in assets under management. Trust services fees increased
to $5.0 million, an increase of $0.3 million or 8% over the prior year due
mainly to a 12% increase in assets under management. Trust and investment
management fees of $8.8 million for 2006 represented an increase of $3.8 million
or 75% over 2005. This increase was due primarily to the acquisition of West
Financial Services in the fourth quarter of 2005. Fees on sales of investment
products remained virtually level in 2007 compared to 2006 and increased by
$0.9
million or 40% in 2006 compared to 2005. The lack of growth in 2007 was due
primarily to current uncertain economic conditions and eroding consumer
confidence while the increase in 2006 reflects the emphasis on sales of mutual
funds that pay trailer fees, thus providing an annuitized stream of revenue,
instead of one-time fees payable at the time of sale. Total assets under
management for West Financial Services, trust and investment services increased
$163.4 million or 10% to $1.8 billion at December 31, 2007.
Insurance
agency commissions increased by $0.1 million or 2% in 2007 compared to 2006
after an increase of $1.2 million or 22% in 2006 compared to 2005. The increase
in 2006 was due to the acquisition of Neff & Associates in January 2006
together with higher commissions on commercial lines.
Gains
on
mortgage sales decreased by $0.2 million or 8% in 2007 compared to 2006, after
a
decrease of 21% in 2006 compared to 2005. The Company achieved gains of $2.7
million on sales of $286.4 million in 2007 compared to $3.0 million on sales
of
$296.9 million in 2006 and gains of $3.8 million on sales of $326.0 million
in
2005.
Income
from bank owned life insurance reflected an increase of $0.5 million or 20%
in
2007 compared to 2006 and an increase of $0.1 million or 4% from 2006 to 2005.
The increase in 2007 was due primarily to higher rates and insurance policies
added from the two acquisitions. The Company invests in bank owned life
insurance products in order to better manage the cost of employee benefit plans.
Investments totaled $70.0 million at December 31, 2007 and were well diversified
by carrier in accordance with defined policies and practices. The average
tax-equivalent yield on these insurance contract assets was 7.02% for
2007.
Noninterest
Expenses
Noninterest
expenses increased $14.7 million or 17% in 2007, compared to 2006. The increase
in expenses in 2007 was primarily due to a 9% increase in salaries and employee
benefits and a 47% increase in other noninterest expenses. Comparing 2006 to
2005, noninterest expenses increased $7.9 million or 10% due to a $3.5 million
or 7% increase in salaries and employees benefits.
Salaries
and employee benefits, the largest component of noninterest expenses, increased
$4.7 million or 9% in 2007, primarily due to the acquisition of Potomac and
County. This increase was somewhat offset by a $0.5 million reduction due to
the
elimination of an executive medical benefit plan. Salaries and employee benefits
increased $3.5 million or 7% in 2006 due largely to an increase in salaries
of
$3.3 million or 9%. This was due to the acquisition of West Financial Services
in the fourth quarter of 2005 and Neff & Associates in January 2006 as well
as a larger staff. Average full-time equivalent employees reached 709 in 2007,
representing an increase of 13% from 626 in 2006, which was 6% above the 591
full-time equivalent employees in 2005.
In
2007,
occupancy expense increased $1.9 million or 22%. This increase was due to rent
increases on existing properties and the addition of acquired branches. The
rate
of increase was $0.4 million or 5% in 2006 over 2005 due to the opening of
two
new branches in 2006. Equipment expenses increased $1.1 million or 20% in 2007
compared to 2006. This increase was due to mainly to the acquisitions. Marketing
expense decreased by $0.3 million or 13% in 2007 following an increase of $1.4
million or 111% in 2006. The decrease in 2007 was due mainly to the Company’s
efforts to better control its noninterest expenses in 2007 while the increase
in
2006 was part of the Company’s decision to increase brand awareness within the
markets that the Company serves.
Expenses
for outside data services increased $0.8 million or 24% in 2007 compared to
2006
due to the overall growth of the loan and deposit portfolios and the ten new
branches added from the acquisitions of County and Potomac. Outside data
services increased $.3 million or 9% in 2006 compared to 2005 due to growth
in
the loan and deposit portfolios.
Other
noninterest expenses of $17.4 million was $5.5 million or 46% above the $11.9
million recorded for 2006. This increase was due primarily to merger expenses
of
$1.5 million. Higher consulting and professional fees, franchise taxes and
an
expense accrual for possible Visa, Inc. litigation costs also contributed to
this increase. Other noninterest expenses increased $1.5 million or 14% in
2006
compared to 2005 due mainly to an increase in consulting and professional
fees.
Amortization
of intangible assets increased $1.1 million or 38% over 2006 as a result of
the
two acquisitions. The Company’s intangible assets are being amortized over
relatively short amortization periods averaging approximately five years at
December 31, 2007. Intangible assets arising from branch acquisitions were
not
classified as goodwill and continue to be amortized since the acquisitions
did
not meet the definition for business combinations.
In
October 2007, Sandy Spring Bank, as a member of Visa U.S.A. Inc. (“Visa
U.S.A.”), received shares of restricted stock in Visa, Inc. (“Visa”) as a result
of its participation in the global restructuring of Visa U.S.A., Visa Canada
Association, and Visa International Service Association in preparation for
an
initial public offering. On November 7, Visa announced that it had reached
a
settlement with American Express related to an antitrust lawsuit. Sandy Spring
Bank and other Visa U.S.A. member banks are obligated to share in potential
losses resulting from this and certain other litigation. In consideration of
the
announced American Express settlement, Sandy Spring Bank’s proportionate
membership share of Visa U.S.A., and accounting guidance provided by the SEC,
the Company has recorded a liability and corresponding expense in the fourth
quarter of $0.2 million with respect to the American Express and certain other
litigation with Visa U.S.A. The Company has not reflected in its financial
statements any value for its membership interest in Visa as a result of the
Visa
reorganization. Upon completion of the anticipated IPO, the fair value of such
interest will be realized based on the value of shares utilized to establish
the
escrow account (limited to the obligation recorded) and shares redeemed for
cash. The Company expects the value of these shares to exceed the aggregate
amount of this charge.
Operating
Expense Performance
Management
views the efficiency ratio as an important measure of expense performance and
cost management. The ratio expresses the level of noninterest expenses as a
percentage of total revenue (net interest income plus total noninterest income).
This is a GAAP financial measure. Lower ratios indicate improved
productivity.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure of operating expense control and efficiency of
operations. Management believes that its traditional ratio better focuses
attention on the operating performance of the Company over time than does a
GAAP
based ratio, and is highly useful in comparing period-to-period operating
performance of the Company’s core business operations. It is used by management
as part of its assessment of its performance in managing noninterest expenses.
However, this measure is supplemental, and is not a substitute for an analysis
of performance based on GAAP measures. The reader is cautioned that the
traditional efficiency ratio used by the Company may not be comparable to GAAP
or non-GAAP efficiency ratios reported by other financial
institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of net
interest income plus noninterest income. Noninterest expenses used in the
calculation of the traditional, non-GAAP efficiency ratio exclude the goodwill
impairment loss in 2004, the amortization of intangibles, and non-recurring
expenses. Income for the traditional ratio is increased for the favorable effect
of tax-exempt income (see Table 1), and excludes securities gains and losses,
which vary widely from period to period without appreciably affecting operating
expenses, and non-recurring gains. The measure is different from the GAAP based
efficiency ratio, which also is presented in this report. The GAAP based measure
is calculated using noninterest expense and income amounts as shown on the
face
of the Consolidated Statements of Income. The GAAP and traditional based
efficiency ratios are reconciled in Table 3. As shown in Table 3, both
efficiency ratios, GAAP based and traditional, increased in 2007. This increase
was mainly the result of the rise in noninterest expenses in 2007 over 2006
coupled with the decrease in the net interest margin from 4.26% in 2006 to
4.13%
in 2007.
Table
3 – GAAP based and traditional efficiency ratios
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Noninterest
expenses – GAAP based
|
|
$
|
99,788
|
|
$
|
85,096
|
|
$
|
77,194
|
|
$
|
92,474
|
|
$
|
67,040
|
|
Net
interest income plus noninterest income – GAAP based
|
|
|
149,115
|
|
|
133,651
|
|
|
125,087
|
|
|
105,162
|
|
|
108,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – GAAP based
|
|
|
66.92
|
%
|
|
63.67
|
%
|
|
61.71
|
%
|
|
87.93
|
%
|
|
61.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses – GAAP based
|
|
$
|
99,788
|
|
$
|
85,096
|
|
$
|
77,194
|
|
$
|
92,474
|
|
$
|
67,040
|
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
4,080
|
|
|
2,967
|
|
|
2,198
|
|
|
1,950
|
|
|
2,480
|
|
Goodwill
impairment loss
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,265
|
|
|
0
|
|
FHLB
prepayment penalties
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
18,363
|
|
|
0
|
|
Noninterest
expenses – traditional ratio
|
|
$
|
95,708
|
|
$
|
82,129
|
|
$
|
74,996
|
|
$
|
70,896
|
|
$
|
64,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income – GAAP
based
|
|
|
149,115
|
|
|
133,651
|
|
|
125,087
|
|
|
105,162
|
|
|
108,585
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
5,506
|
|
|
6,243
|
|
|
7,128
|
|
|
8,156
|
|
|
8,237
|
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
43
|
|
|
1
|
|
|
3,262
|
|
|
540
|
|
|
996
|
|
Income
from early termination of
a sublease
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,077
|
|
Net
interest income plus noninterest Income – traditional
ratio
|
|
$
|
154,578
|
|
$
|
139,893
|
|
$
|
128,953
|
|
$
|
112,778
|
|
$
|
114,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – traditional
|
|
|
61.92
|
%
|
|
58.71
|
%
|
|
58.16
|
%
|
|
62.86
|
%
|
|
56.26
|
%
|
Provision
for Income Taxes
The
Company had an income tax expense of $13.0 million in 2007, compared with an
income tax expense of $12.9 million in 2006 and $12.2 million in 2005. The
resulting effective tax rates were 29% for 2007, 28% for 2006, and 27% for
2005.
Balance
Sheet Analysis
The
Company's total assets increased $433.5 million to $3.0 billion at December
31,
2007. Earning assets increased $342.8 million to $2.8 billion at December 31,
2007. These increases were mainly the result of the two acquisitions completed
in 2007.
Loans
and Leases
Residential
real estate loans, comprised of residential construction and permanent
residential mortgage loans, increased $81.0 million or 15%, during 2007 to
$623.3 million at December 31, 2007. Residential construction loans, a specialty
of the Company for many years, increased to $167.0 million in 2007, an increase
of $15.6 million or 10%. Permanent residential mortgages, most of which are
1-4
family, increased by $65.4 million or 17%, to $456.3 million.
Over
the
years, the Company’s commercial loan clients have come to represent a diverse
cross-section of small to mid-size local businesses, whose owners and employees
are often established Bank customers. The Company’s long-standing community
roots and extensive experience in this market segment make it a natural growth
area, while building and expanding such banking relationships are natural
results of the Company’s increased emphasis on client relationship management.
The Company believes that its acquisitions during the past year reflect a
natural extension of this philosophy.
Consistent
with this strategy, the Company has targeted growth in the commercial loan
portfolio as a central tenet of its long-term strategic plan. This involves
a
planned migration of assets from the investment portfolio to the commercial
loan
portfolio and emphasis on growth in related deposit accounts and other services
such as investment management and insurance services.
Commercial
loans and leases increased by $358.9 million or 39% during 2007, to $1.3 billion
at December 31, 2007. Included in this category are commercial real estate
loans, commercial construction loans, equipment leases and other commercial
loans. The two acquisitions accounted for approximately 64% of the
year-over-year commercial loan growth. Excluding the acquisitions, the
commercial loan and lease portfolio increased 14% over the prior year.
In
general, the Company's commercial real estate loans consist of owner occupied
properties where an established banking relationship exists or, to a lesser
extent, involve investment properties for warehouse, retail, and office space
with a history of occupancy and cash flow. Commercial mortgages rose $153.1
million or 30% during 2007, to $662.8 million at year-end. Commercial
construction loans grew $70.2 million or 37% during the year, to $262.8 million
at December 31, 2007. The Company lends for commercial construction in markets
it knows and understands, works selectively with local, top-quality builders
and
developers, and requires substantial equity from its borrowers. Other commercial
loans increased $133.9 million or 74% during 2007 to $316.1 million at year-end.
The increases noted above were primarily due to the Potomac and County
acquisitions.
The
Company's equipment leasing business provides leases for essential commercial
equipment used by small to medium sized businesses. Equipment leasing is
conducted through vendor relations and direct solicitation to end-users located
primarily in states along the east coast from New Jersey to Florida. The typical
lease is “small ticket” by industry standards, averaging less than $100
thousand, with individual leases generally not exceeding $500 thousand. The
Company’s equipment leasing business saw growth during 2007. The leasing
portfolio grew $1.6 million or 5% in 2007, to $35.7 million at year-end.
Consumer
lending continues to be very important to the Company’s full-service, community
banking business. This category of loans includes primarily home equity loans
and lines of credit. The consumer loan portfolio increased 9% or $31.5 million,
to $376.3 million at December 31, 2007. This growth was driven largely by an
increase of $37.0 million or 14% in home equity lines and loans during 2007
to
$308.5 million at year-end. This increase was primarily a result of the
acquisitions and the Company’s continuing strategy to place more emphasis on
this product as part of a multi-product client relationship.
Table
4 – Analysis of Loans and Leases
This
table presents the trends in the composition of the loan and lease portfolio
over the previous five years.
|
|
December
31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
456,305
|
|
$
|
390,852
|
|
$
|
413,324
|
|
$
|
371,924
|
|
$
|
331,129
|
|
Residential
construction
|
|
|
166,981
|
|
|
151,399
|
|
|
155,379
|
|
|
137,880
|
|
|
88,500
|
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
662,837
|
|
|
509,726
|
|
|
415,983
|
|
|
386,911
|
|
|
323,099
|
|
Commercial
construction
|
|
|
262,840
|
|
|
192,547
|
|
|
178,764
|
|
|
88,974
|
|
|
51,518
|
|
Leases
|
|
|
35,722
|
|
|
34,079
|
|
|
23,644
|
|
|
15,618
|
|
|
16,031
|
|
Other
commercial
|
|
|
316,051
|
|
|
182,159
|
|
|
162,036
|
|
|
135,116
|
|
|
100,290
|
|
Consumer
|
|
|
376,295
|
|
|
344,817
|
|
|
335,249
|
|
|
309,102
|
|
|
242,861
|
|
Total
loans and leases
|
|
$
|
2,277,031
|
|
$
|
1,805,579
|
|
$
|
1,684,379
|
|
$
|
1,445,525
|
|
$
|
1,153,428
|
|
Table
5 – Loan Maturities and Interest Rate Sensitivity
|
|
At December 31, 2007
Remaining Maturities of Selected Credits in Years
|
|
(In
thousands)
|
|
1
or less
|
|
Over
1-5
|
|
Over
5
|
|
Total
|
|
Residential
construction loans
|
|
$
|
72,122
|
|
$
|
94,843
|
|
$
|
16
|
|
$
|
166,981
|
|
Commercial
construction loans
|
|
|
262,840
|
|
|
0
|
|
|
0
|
|
|
262,840
|
|
Commercial
loans not secured by real estate
|
|
|
217,295
|
|
|
87,397
|
|
|
11,359
|
|
|
316,051
|
|
Total
|
|
$
|
552,257
|
|
$
|
182,240
|
|
$
|
11,375
|
|
$
|
745,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
Terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$
|
38,434
|
|
$
|
76,356
|
|
$
|
11,359
|
|
$
|
126,149
|
|
Variable
or adjustable
|
|
|
513,823
|
|
|
105,884
|
|
|
16
|
|
|
619,723
|
|
Total
|
|
$
|
552,257
|
|
$
|
182,240
|
|
$
|
11,375
|
|
$
|
745,872
|
|
Securities
The
investment portfolio, consisting of available-for-sale, held-to-maturity and
other equity securities, decreased 18% or $95.6 million to $445.3 million at
December 31, 2007, from $540.9 million at December 31, 2006. The investment
portfolio declined due to the maturity of securities, which provided liquidity
needed to fund loan growth in 2007.
As
investments mature or are called, the proceeds will be reinvested to further
reduce duration and interest rate risk by reducing the heavy concentration
in
municipal bonds and pledged agency securities into shorter duration agencies
or
MBS, whichever exhibits higher yields at a value price. These strategies will
be
executed with consideration given to interest rate trends and the structure
of
the yield curve with constant due diligence of economic projections and
analysis.
Table
6 – Analysis of Securities
The
composition of securities at December 31 for each of the latest three years
was:
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Available-for-Sale:
(1)
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
2,973
|
|
$
|
597
|
|
$
|
594
|
|
U.S.
Agencies and Corporations
|
|
|
139,310
|
|
|
243,089
|
|
|
242,339
|
|
State
and municipal
|
|
|
2,761
|
|
|
2,390
|
|
|
2,414
|
|
Mortgage-backed
(2)
|
|
|
32,356
|
|
|
1,577
|
|
|
1,721
|
|
Corporate
debt
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Trust
preferred
|
|
|
9,051
|
|
|
8,992
|
|
|
9,303
|
|
Marketable
equity securities
|
|
|
350
|
|
|
200
|
|
|
200
|
|
Total
|
|
|
186,801
|
|
|
256,845
|
|
|
256,571
|
|
Held-to-Maturity
and Other Equity
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
34,419
|
|
|
34,408
|
|
|
34,398
|
|
State
and municipal
|
|
|
199,427
|
|
|
232,936
|
|
|
261,250
|
|
Mortgage-backed
(2)
|
|
|
860
|
|
|
0
|
|
|
0
|
|
Other
equity securities
|
|
|
23,766
|
|
|
16,719
|
|
|
15,213
|
|
Total
|
|
|
258,472
|
|
|
284,063
|
|
|
310,861
|
|
Total
securities (3)
|
|
$
|
445,273
|
|
$
|
540,908
|
|
$
|
567,432
|
|
(1) |
At
estimated fair value.
|
(2) |
Issued
by a U. S. Government Agency or secured by U.S. Government Agency
collateral.
|
(3) |
The
outstanding balance of no single issuer, except for U.S. Government
Agency
securities, exceeded ten percent of stockholders' equity at December
31,
2007, 2006 or 2005.
|
Maturities
and weighted average yields for debt securities available for sale and held
to
maturity at December 31, 2007 are presented in Table 7. Amounts appear in the
table at amortized cost, without market value adjustments, by stated maturity
adjusted for estimated calls.
Table
7 – Maturity Table for Debt Securities at December 31,
2007
|
|
Years
to Maturity
|
|
|
|
Within
1
|
|
|
Over
1
Through
5
|
|
|
Over
5
Through
10
|
|
|
Over
10
|
|
|
|
|
|
|
(In
thousands)
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Total
|
|
Yield
|
|
Debt
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
2,953
|
|
|
4.78
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
2,953
|
|
|
4.78
|
%
|
U.
S. Agencies and Corporations
|
|
|
136,821
|
|
|
4.64
|
|
|
|
2,236
|
|
|
5.51
|
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
|
|
139,057
|
|
|
4.66
|
|
State
and municipal (2)
|
|
|
0
|
|
|
0.00
|
|
|
|
2,063
|
|
|
7.42
|
|
|
|
597
|
|
|
6.01
|
|
|
|
0
|
|
|
0.00
|
|
|
|
2,660
|
|
|
7.10
|
|
Mortgage-backed
|
|
|
3,074
|
|
|
5.56
|
|
|
|
23,908
|
|
|
5.08
|
|
|
|
5,178
|
|
|
5.74
|
|
|
|
0
|
|
|
0.00
|
|
|
|
32,160
|
|
|
5.23
|
|
Corporate
debt
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
Trust
preferred
|
|
|
3,104
|
|
|
9.41
|
|
|
|
4,783
|
|
|
9.23
|
|
|
|
0
|
|
|
0.00
|
|
|
|
0
|
|
|
0.00
|
|
|
|
7,887
|
|
|
9.30
|
|
Total
|
|
$
|
145,952
|
|
|
4.77
|
%
|
|
$
|
32,990
|
|
|
5.86
|
%
|
|
$
|
5,775
|
|
|
5.77
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
184,717
|
|
|
4.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Agencies and Corporations
|
|
$
|
34,419
|
|
|
4.86
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
0
|
|
|
0.00
|
%
|
|
$
|
34,419
|
|
|
4.86
|
%
|
State
and municipal
|
|
|
45,551
|
|
|
6.93
|
|
|
|
136,356
|
|
|
7.04
|
|
|
|
11,155
|
|
|
6.64
|
|
|
|
6,365
|
|
|
7.29
|
|
|
|
199,427
|
|
|
7.00
|
|
Mortgage-backed
|
|
|
0
|
|
|
0.00
|
|
|
|
258
|
|
|
8.98
|
|
|
|
602
|
|
|
8.30
|
|
|
|
0
|
|
|
|
|
|
|
860
|
|
|
8.51
|
|
Total
|
|
$
|
79,970
|
|
|
6.04
|
%
|
|
$
|
136,614
|
|
|
7.04
|
%
|
|
$
|
11,757
|
|
|
6.73
|
%
|
|
$
|
6,365
|
|
|
7.29
|
%
|
|
$
|
234,706
|
|
|
6.69
|
%
|
(1) |
At
cost, adjusted for amortization and accretion of purchase premiums
and
discounts, respectively.
|
(2)
|
Yields
on state and municipal securities have been calculated on a tax-equivalent
basis using the applicable federal income tax rate of
35%.
|
Other
Earning Assets
Residential
mortgage loans held for sale decreased $3.5 million to $7.1 million as of
December 31, 2007 from $10.6 million as of December 31, 2006. Originations
and
sales of these loans and the resulting gains on sales decreased during 2007
due
to relatively high short-term interest rates and volatile market conditions
during much of the second half of the year.
The
aggregate of federal funds sold and interest-bearing deposits with banks
decreased $29.5 million to $22.4 million in 2007.
Bank
owned life insurance increased $9.9 million or 16% to $69.9 million as of
December 31, 2007 due to the increase in cash surrender value of the underlying
policies and policies acquired with the acquisitions.
Deposits
and Borrowings
Total
deposits were $2.3 billion at December 31, 2007, increasing $279.6 million
or
14% from $2.0 billion at December 31, 2006. Year-end balances for
noninterest-bearing demand deposits, increased $39.4 million or 10% over the
prior year. For the same period, interest-bearing deposits grew $240.2 million
or 15%, attributable in large part to an increase in money market savings,
which
increased 40% (up $208.5 million). In addition, demand deposits increased 9%
(up
$21.0 million) and certificates of deposit increased by 2% (up $16.8 million).
These increases were somewhat offset by a decline in regular savings of 4%
(down
$6.1 million). When deposits are combined with short-term borrowings from core
customers, such growth in customer funding sources totaled 13% over the prior
year. Most of the growth in deposits mentioned above was due to the two
acquisitions in 2007. Excluding the acquisitions, deposits grew 1% over 2006.
Total
borrowings increased by $75.0 million or 21% during 2007, to $426.5 million
at
December 31, 2007, primarily to fund loan growth.
Capital
Management
Management
monitors historical and projected earnings, dividends and asset growth, as
well
as risks associated with the various types of on- and off-balance sheet assets
and liabilities, in order to determine appropriate capital levels. During 2007,
total stockholders' equity increased 33% or $77.8 million to $315.6 million
at
December 31, 2007, from $237.8 million at December 31, 2006.
External
capital formation, resulting from stock issued for acquisitions, exercises
of
stock options, vesting of restricted stock and from stock issuances under the
employee and director stock purchase plans totaled $60.7 million during 2007.
Share repurchases amounted to $4.4 million over the same period, for a net
increase in stockholders’ equity from these sources of $56.3 million. The ratio
of average equity to average assets was 9.89% for 2007, as compared to 8.95%
for
2006 and 8.68% for 2005. In addition, internal capital generation (net income
less dividends) totaled $17.3 million for the year.
Stockholders’
equity was also affected by an increase of $3.0 million in accumulated other
comprehensive income (comprised of net unrealized gains and losses on
available-for-sale securities after tax effects and an adjustment to reflect
the
curtailment of the Company’s defined benefit pension plan, net of tax effect)
from ($4.0 million) at December 31, 2006 to ($1.1 million) at December 31,
2007.
Bank
holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. These
guidelines are commonly known as Risk-Based Capital guidelines. On December
31,
2007, the Company exceeded all applicable capital requirements,
with
a
total risk-based capital ratio of 11.28%, a Tier 1 risk-based capital ratio
of
10.28%, and a leverage ratio of 8.87%. Tier 1 capital of $258.5 million and
total qualifying capital of $283.6 million each included $35.0 million in trust
preferred securities as permitted under Federal Reserve Guidelines (see “Note
11—Long-term Borrowings” of the Notes to the Consolidated Financial Statements).
Trust preferred securities are considered regulatory capital for purposes of
determining the Company’s Tier 1 capital ratio. As of December 31, 2007, the
Bank met the criteria for classification as a "well-capitalized" institution
under the prompt corrective action rules of the Federal Deposit Insurance Act.
Designation as a well-capitalized institution under these regulations is not
a
recommendation or endorsement of the Company or the Bank by federal bank
regulators. Additional information regarding regulatory capital ratios is
included in “Note 22—Regulatory Matters” of the Notes to the Consolidated
Financial Statements.
Credit
Risk Management
The
Company’s loan and lease portfolio is subject to varying degrees of credit risk.
Credit risk is mitigated through portfolio diversification, which limits
exposure to any single customer, industry or collateral type. The Company
maintains an allowance for loan and lease losses (the “allowance”) to absorb
estimated losses in the loan and lease portfolio. The allowance is based on
consistent, continuous review and evaluation of the loan and lease portfolio,
along with ongoing, quarterly assessments of the probable losses in that
portfolio. The methodology for assessing the appropriateness of the allowance
includes: (1) the formula allowance reflecting historical losses, as adjusted,
by credit category, and (2) the specific allowance for risk-rated credits on
an
individual or portfolio basis. This systematic allowance methodology is further
described in the section entitled “Critical Accounting Policies” and in “Note 1
- Significant Accounting Policies” of the Notes to the Consolidated Financial
Statements. The amount of the allowance is reviewed monthly by the Senior Loan
Committee, and reviewed and approved quarterly by the board of
directors.
The
allowance is increased by provisions for loan and lease losses, which are
charged to expense. Charge-offs of loan and lease amounts determined by
management to be uncollectible or impaired decrease the allowance, while
recoveries of previous charge-offs are added back to the allowance. The Company
makes provisions for loan and lease losses in amounts necessary to maintain
the
allowance at an appropriate level, as established by use of the allowance
methodology. Provisions amounted to $4.1 million in 2007, $2.8 million in 2006
and $2.6 million in 2005. Net charge-offs of $1.3 million, $0.2 million and
$0.4
million, were recorded in 2007, 2006 and 2005, respectively. The ratio of net
charge-offs to average loans and leases was 0.06% in 2007, 0.01% in 2006 and
0.02% in 2005. At December 31, 2007, the allowance for loan and lease losses
was
$25.1 million, or 1.10% of total loans and leases, compared to $19.5 million,
or
1.08% of total loans and leases, at December 31, 2006.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses in the loan and lease
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, federal
and
state regulatory agencies, as an integral part of their examination process,
and
independent consultants engaged by the Bank, periodically review the loan and
lease portfolio and the allowance. Such reviews may result in adjustments to
the
provision based upon their judgments of information available at the time of
each examination.
Table
8
presents a five-year history for the allocation of the allowance, reflecting
consistent use of the methodology outlined above, along with the credit mix
(year-end loan and lease balances by category as a percent of total loans and
leases). The allowance is allocated in the following table to various loan
and
lease categories based on the methodology used to estimate loan losses; however,
the allocation does not restrict the usage of the allowance for any specific
loan or lease category.
Table
8 – Allowance for Loan and Lease Losses
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
|
|
% of
Loans
and
|
|
|
|
% of
Loans
and
|
|
|
|
% of
Loans
and
|
|
|
|
% of
Loans
and
|
|
|
|
% of
Loans
and
|
|
(In
thousands)
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
3,807
|
|
|
20
|
%
|
$
|
2,411
|
|
|
22
|
%
|
$
|
2,896
|
|
|
24
|
%
|
$
|
2,571
|
|
|
26
|
%
|
$
|
2,733
|
|
|
29
|
%
|
Residential
construction
|
|
|
1,639
|
|
|
7
|
|
|
1,616
|
|
|
8
|
|
|
1,754
|
|
|
9
|
|
|
1,520
|
|
|
10
|
|
|
681
|
|
|
8
|
|
Total
|
|
|
5,446
|
|
|
27
|
|
|
4,027
|
|
|
30
|
|
|
4,650
|
|
|
33
|
|
|
4,091
|
|
|
36
|
|
|
3,414
|
|
|
37
|
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
7,854
|
|
|
29
|
|
|
5,461
|
|
|
28
|
|
|
4,119
|
|
|
25
|
|
|
4,722
|
|
|
27
|
|
|
5,437
|
|
|
25
|
|
Commercial
construction
|
|
|
4,092
|
|
|
12
|
|
|
2,197
|
|
|
11
|
|
|
2,152
|
|
|
11
|
|
|
834
|
|
|
6
|
|
|
553
|
|
|
4
|
|
Other
commercial
|
|
|
5,317
|
|
|
14
|
|
|
4,857
|
|
|
10
|
|
|
2,587
|
|
|
10
|
|
|
1,918
|
|
|
9
|
|
|
2,338
|
|
|
12
|
|
Subtotal
|
|
|
17,263
|
|
|
55
|
|
|
12,515
|
|
|
49
|
|
|
8,858
|
|
|
46
|
|
|
7,474
|
|
|
42
|
|
|
8,328
|
|
|
41
|
|
Leases
|
|
|
525
|
|
|
2
|
|
|
364
|
|
|
2
|
|
|
298
|
|
|
1
|
|
|
128
|
|
|
1
|
|
|
283
|
|
|
1
|
|
Total
|
|
|
17,788
|
|
|
57
|
|
|
12,879
|
|
|
51
|
|
|
9,156
|
|
|
47
|
|
|
7,602
|
|
|
43
|
|
|
8,611
|
|
|
42
|
|
Consumer
|
|
|
1,858
|
|
|
16
|
|
|
2,586
|
|
|
19
|
|
|
3,080
|
|
|
20
|
|
|
2,961
|
|
|
21
|
|
|
2,029
|
|
|
21
|
|
Unallocated
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
0
|
|
|
|
|
|
826
|
|
|
|
|
Total
allowance
|
|
$
|
25,092
|
|
|
|
|
$
|
19,492
|
|
|
|
|
$
|
16,886
|
|
|
|
|
$
|
14,654
|
|
|
|
|
$
|
14,880
|
|
|
|
|
During
2007, there were no changes in estimation methods or assumptions that affected
the allowance methodology. Significant variation can occur over time in the
methodology’s assessment of the adequacy of the allowance as a result of the
credit performance of a small number of borrowers. The unallocated allowance
at
year-end 2007, when measured against the total allowance, was 0%, as it was
in
2006.
The
total allowance at December 31, 2007, was within the desirable range under
the
Company’s policy guidelines derived from the allowance methodology.
The
allowance increased by $5.6 million or 29% during 2007, which was the amount
of
the provision for 2007 coupled with the allowance acquired from acquisitions
less the net charge-offs for the year. The required allowance for commercial
real estate and other commercial loans increased by $4.7 million, reflective
of
the significant growth in loan balances as a result of the Company’s emphasis on
commercial lending and recent acquisitions. The required allowance for consumer
and residential loans increased $0.7 million during the year, mainly due to
an
increase in residential mortgage loans.
At
December 31, 2007, total non-performing loans and leases were $34.4 million,
or
1.51% of total loans and leases, compared to $3.7 million, or 0.21% of total
loans and leases, at December 31, 2006. The increase in non-performing loans
and
leases was due primarily to two commercial construction loans totaling $18.9
million which management believes are adequately reserved and four commercial
real estate loans totaling $5.8 million which are well secured by collateral.
The allowance represented 73% of non-performing loans and leases at December
31,
2007, compared to coverage of 522% a year earlier. Significant variation in
the
coverage ratio may occur from year to year because the amount of non-performing
loans and leases depends largely on the condition of a small number of
individual credits and borrowers relative to the total loan and lease portfolio.
Other real estate owned totaled $0.5 million at December 31, 2007 and was $0.2
at December 31, 2006.
The
balance of impaired loans was $21.9 million at December 31, 2007, with reserves
of $0.9 million against those loans, compared to $0.3 million at December 31,
2006, with reserves of $0.1 million.
The
Company's borrowers are concentrated in six counties in Maryland and two
counties in Virginia. Commercial and residential mortgages, including home
equity loans and lines, represented 63% of total loans and leases at December
31, 2007, compared to 65% at December 31, 2006. Historically, the Company has
experienced low loss levels with respect to such loans through various economic
cycles and conditions. Risk inherent in this loan concentration is mitigated
by
the nature of real estate collateral, the Company’s substantial experience in
most of the markets served, and its lending practices.
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; 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
December 31, 2007, the Company had a total of $40.7 million in residential
real
estate loans and $2.2 million in consumer loans with a loan to value ratio
(“LTV”) greater than 90%. The Company also had an additional $91.3 million in
residential lot loans owned by individuals with an LTV greater than 75%.
Commercial loans, with an LTV greater than 75% to 85%, depending on the type
of
property, totaled $49.9 million at December 31, 2007. The Company had
interest-only loans totaling $100.1 million in its loan portfolio at December
31, 2007. In addition, virtually all of the Company’s equity lines of credit,
$217.9 million at December 31, 2007, which were included in the consumer loan
portfolio, were made on an interest-only basis. The aggregate of all loans
with
these terms was $502.1 million at December 31, 2007 which represented 22% of
total loans and leases outstanding at that date. The Company is of the opinion
that its loan underwriting procedures are structured to adequately mitigate
any
additional risk that the above types of loans might present.
Table
9 – Summary of Loan and Lease Loss Experience
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Balance
of loan and lease loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance,
January 1,
|
|
$
|
19,492
|
|
|
$
|
16,886
|
|
|
$
|
14,654
|
|
|
$
|
14,880
|
|
|
$
|
15,036
|
|
Provision
for loan and lease losses
|
|
|
4,094
|
|
|
|
2,795
|
|
|
|
2,600
|
|
|
|
0
|
|
|
|
0
|
|
Allowance
acquired from acquisitions
|
|
|
2,798
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Loan
and lease charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(109
|
)
|
|
|
(148
|
)
|
Commercial
loans and leases
|
|
|
(1,103
|
)
|
|
|
(230
|
)
|
|
|
(491
|
)
|
|
|
(173
|
)
|
|
|
(122
|
)
|
Consumer
|
|
|
(341
|
)
|
|
|
(85
|
)
|
|
|
(44
|
)
|
|
|
(214
|
)
|
|
|
(87
|
)
|
Total
charge-offs
|
|
|
(1,444
|
)
|
|
|
(315
|
)
|
|
|
(535
|
)
|
|
|
(496
|
)
|
|
|
(357
|
)
|
Loan
and lease recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
12
|
|
|
|
0
|
|
|
|
64
|
|
|
|
54
|
|
|
|
126
|
|
Commercial
loans and leases
|
|
|
110
|
|
|
|
89
|
|
|
|
89
|
|
|
|
169
|
|
|
|
63
|
|
Consumer
|
|
|
30
|
|
|
|
37
|
|
|
|
14
|
|
|
|
47
|
|
|
|
12
|
|
Total
recoveries
|
|
|
152
|
|
|
|
126
|
|
|
|
167
|
|
|
|
270
|
|
|
|
201
|
|
Net
charge-offs
|
|
|
(1,292
|
)
|
|
|
(189
|
)
|
|
|
(368
|
)
|
|
|
(226
|
)
|
|
|
(156
|
)
|
Balance
of loan and lease allowance, December 31
|
|
$
|
25,092
|
|
|
$
|
19,492
|
|
|
$
|
16,886
|
|
|
$
|
14,654
|
|
|
$
|
14,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans and leases
|
|
|
0.06
|
%
|
|
|
0.01
|
%
|
|
|
0.02
|
%
|
|
|
0.02
|
%
|
|
|
0.01
|
%
|
Allowance
to total loans and leases
|
|
|
1.10
|
%
|
|
|
1.08
|
%
|
|
|
1.00
|
%
|
|
|
1.01
|
%
|
|
|
1.29
|
%
|
Table
10 – Analysis of Credit Risk
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
Non-accrual
loans and leases (1)
|
|
$
|
23,040
|
|
$
|
1,910
|
|
$
|
437
|
|
$
|
746
|
|
$
|
522
|
|
Loans
and leases 90 days past due
|
|
|
11,362
|
|
|
1,823
|
|
|
958
|
|
|
1,043
|
|
|
2,333
|
|
Restructured
loans and leases
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Total
non-performing loans and leases (2)
|
|
|
34,402
|
|
|
3,733
|
|
|
1,395
|
|
|
1,789
|
|
|
2,855
|
|
Other
real estate owned, net
|
|
|
461
|
|
|
182
|
|
|
0
|
|
|
0
|
|
|
77
|
|
Total
non-performing assets
|
|
$
|
34,863
|
|
$
|
3,915
|
|
$
|
1,395
|
|
$
|
1,789
|
|
$
|
2,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans and leases to total loans and leases
|
|
|
1.51
|
%
|
|
0.21
|
%
|
|
0.08
|
%
|
|
0.12
|
%
|
|
0.25
|
%
|
Allowance
for loan and lease losses to non-performing loans and leases
|
|
|
73
|
%
|
|
522
|
%
|
|
1,210
|
%
|
|
819
|
%
|
|
521
|
%
|
Non-performing
assets to total assets
|
|
|
1.15
|
%
|
|
0.15
|
%
|
|
0.06
|
%
|
|
0.08
|
%
|
|
0.13
|
%
|
(1) |
Gross
interest income that would have been recorded in 2007 if non-accrual
loans
and leases shown above had been current and in accordance with their
original terms was $1.1 million, while interest actually recorded
on such
loans was $0. Please see Note 1 of the Notes to Consolidated Financial
Statements for a description of the Company’s policy for placing loans on
non-accrual status.
|
(2) |
Performing
loans considered potential problem loans, as defined and identified
by
management, amounted to $3.0 million at December 31, 2007. Although
these
are loans where known information about the borrowers' possible credit
problems causes management to have doubts as to the borrowers' ability
to
comply with the loan repayment terms, most are well collateralized
and are
not believed to present significant risk of loss. Loans classified
for
regulatory purposes not included in either non-performing or potential
problem loans consist only of "other loans especially mentioned"
and do
not, in management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact future operating
results, liquidity or capital resources, or represent material credits
where known information about the borrowers' possible credit problems
causes management to have doubts as to the borrowers' ability to
comply
with the loan repayment terms.
|
Market
Risk Management
The
Company's net income is largely dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the extent that
interest-bearing liabilities mature or re-price on a different basis than
interest-earning assets. When interest-bearing liabilities mature or re-price
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 re-price more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in
the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders' equity.
The
Company’s interest rate 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
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 or “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.
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. 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.
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.
Table
11 - 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
|
% |
December
2007
|
|
|
-14.82
|
|
|
-10.47
|
|
|
-6.12
|
|
|
-1.91
|
|
|
-0.68
|
|
|
-1.01
|
|
|
-2.84
|
|
|
N/A
|
|
December
2006
|
|
|
-13.67
|
|
|
-10.94
|
|
|
-7.68
|
|
|
-3.12
|
|
|
0.37
|
|
|
-2.27
|
|
|
-5.37
|
|
|
-9.87
|
|
As
shown
above, measures of net interest income at risk decreased from December 31,
2006
at all interest rate shock levels except the +400 bp and -100bp levels. All
measures remained well within prescribed policy limits. Although assumed to
be
unlikely, our largest exposure is at the +400 bp level, with a measure of
-14.82%. This is also within our prescribed policy limit of 25%. The sensitivity
of net interest income indicated by this analysis is consistent with
management’s decision to position the balance sheet in anticipation of the
declining interest rate cycle expected over the coming year.
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.
Table
12 - 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
|
%
|
12.5
|
%
|
22.5
|
%
|
30
|
%
|
40
|
% |
December
2007
|
|
|
-15.40
|
|
|
-9.09
|
|
|
-1.44
|
|
|
3.14
|
|
|
-3.57
|
|
|
-9.01
|
|
|
-13.26
|
|
|
N/A
|
|
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 decreased over year-end 2006
in
all interest rate shock levels. The major contributor to the decreased risk
position was the increase in core deposits resulting from the Potomac and County
acquisitions. The economic value of equity exposure at +200 bp is now -1.44%
compared to -7.18% at year-end 2006, and is well within the policy limit of
22.5%, as are measures at all other shock levels.
Liquidity
Liquidity
is measured by a financial institution's ability to raise funds through loan
and
lease repayments, maturing investments, deposit growth, borrowed funds, capital
and the sale of highly marketable assets such as investment securities and
residential mortgage loans. The Company's liquidity position, considering both
internal and external sources available, exceeded anticipated short-term and
long-term needs at December 31, 2007. Management considers core deposits,
defined to include all deposits other than time deposits of $100 thousand or
more, to be a relatively stable funding source. Core deposits equaled 72% of
total earning assets at December 31, 2007.
In
addition, loan and lease payments, maturities, calls and pay downs of
securities, deposit growth and earnings contribute a flow of funds available
to
meet liquidity requirements. In assessing liquidity, management considers
operating requirements, the seasonality of deposit flows, investment, loan
and
deposit maturities and calls, expected funding of loans and deposit withdrawals,
and the market values of available-for-sale investments, so that sufficient
funds are available on short notice to meet obligations as they arise and to
ensure that the Company is able to pursue new business
opportunities.
Liquidity
is measured using an approach designed to take into account, in addition to
factors already discussed above, the Company’s growth and mortgage banking
activities. Also considered are changes in the liquidity of the investment
portfolio due to fluctuations in interest rates. Under 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 from thirty (30) to one hundred eighty (180) days.
The
measurement is based upon the projection of funds sold or purchased position,
along with ratios and trends developed to measure dependence on purchased funds
and core growth. Resulting projections as of December 31, 2007, show short-term
investments exceeding short-term borrowings by $49.0 million over the subsequent
180 days. This projected excess of liquidity versus requirements provides the
Company with flexibility in how it funds loans and other earning assets.
The
Company also has external sources of funds, which can be drawn upon when
required. The main source of external liquidity is an available line of credit
for $887.3 million with the Federal Home Loan Bank of Atlanta, of which $649.2
million was available for borrowing based on pledged collateral, with $293.5
million borrowed against it as of December 31, 2007. Other external sources
of
liquidity available to the Company in the form of lines of credit granted by
the
Federal Reserve and correspondent banks totaled $140.8 million at December
31,
2007, against which there were no outstanding borrowings. In addition, the
Company had an unsecured line of credit with a correspondent bank of $20.0
million as of December 31, 2007. Based upon its liquidity analysis, including
external sources of liquidity available, management believes the liquidity
position is appropriate at December 31, 2007.
The
Company's time deposits of $100 thousand or more represented 12.65% of total
deposits at December 31, 2007, and are shown by maturity in the table
below.
|
|
Months
to Maturity
|
|
|
|
3
or
|
|
Over
3
|
|
Over
6
|
|
Over
|
|
|
|
(In
thousands)
|
|
Less
|
|
to
6
|
|
To
12
|
|
12
|
|
TOTAL
|
|
Time
deposits—$100 thousand or more
|
|
$
|
51,114
|
|
$
|
123,122
|
|
$
|
85,015
|
|
$
|
28,474
|
|
$
|
287,725
|
|
The
Company has various contractual obligations that affect its cash flows and
liquidity. For information regarding material contractual obligations, please
see “Market Risk Management” above, “Contractual Obligations” below, and “Note
7-Premises and Equipment,” “Note 11-Long-term Borrowings,” “Note 14-Pension,
Profit Sharing and Other Employee Benefit Plans,” “Note 18-Financial Instruments
with Off-balance Sheet Risk and Derivatives,” and “Note 20-Fair Value of
Financial Instruments” of the Notes to the Consolidated Financial
Statements.
Off-Balance
Sheet Arrangements
With
the
exception of the Company’s obligations in connection with its trust preferred
securities, irrevocable letters of credit, and loan commitments, the Company
has
no off-balance sheet arrangements that have or are reasonably likely to have
a
current or future effect on the Company’s financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources, that is material to investors.
The
trust preferred securities were issued by Sandy Spring Capital Trust II (the
“Trust”), a subsidiary of the Company created for the purpose of issuing the
trust preferred securities and purchasing the Company’s junior subordinated
debentures, which are its sole assets. These long-term borrowings bear a
maturity date of October 7, 2034, which may be shortened, subject to conditions,
to a date no earlier than October 7, 2009. The Company owns all of the Trust’s
outstanding securities. The Company and the Trust believe that, taken together,
the Company’s obligations under the junior subordinated debentures, the
Indenture, the Trust Agreement, and the Guarantee entered into in connection
with the issuance of the trust preferred securities and the debentures, in
the
aggregate constitute a full, irrevocable and unconditional guarantee of the
Trust’s obligations. For additional information on off-balance sheet
arrangements, please see “Note 18-Financial Instruments with Off-balance Sheet
Risk and Derivatives” and “Note 11-Long-term Borrowings” of the Notes to the
Consolidated Financial Statements, and “Capital Management” and
“Securities”.
Contractual
Obligations
The
Company enters into contractual obligations in the normal course of business.
Among these obligations are long-term FHLB advances, operating leases related
to
branch and administrative facilities, a long-term contract with a data
processing provider and purchase contracts related to construction of new branch
offices. Payments required under these obligations, are set forth in the table
below as of December 31, 2007.
|
|
Payment
Due by Period
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
More
than
|
|
(In
thousands)
|
|
Total
|
|
1
year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$
|
17,553
|
|
$
|
0
|
|
$
|
6,794
|
|
$
|
700
|
|
$
|
10,059
|
|
Operating
lease obligations
|
|
|
32,649
|
|
|
4,712
|
|
|
9,799
|
|
|
8,207
|
|
|
9,931
|
|
Purchase
obligations (1)
|
|
|
5,213
|
|
|
2,941
|
|
|
2,272
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
55,415
|
|
$
|
7,653
|
|
$
|
18,865
|
|
$
|
8,907
|
|
$
|
19,990
|
|
(1)
|
Represents
payments required under contract, based on average monthly charges
for
2007 and assuming a growth rate of 3%, with the Company’s current data
processing service provider that expires in September 2009.
|
CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As
required by SEC rules, the Company’s management evaluated the effectiveness of
the Company’s disclosure controls and procedures as of December 31, 2007. The
Company’s chief executive officer and chief financial officer participated in
the evaluation. Based on this evaluation, the Company’s chief executive officer
and chief financial officer concluded that the Company’s disclosure controls and
procedures were effective as of December 31, 2007.
Internal
Control Over Financial Reporting
Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. As required by SEC rules, the
Company’s management evaluated the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. The Company’s chief
executive officer and chief financial officer participated in the evaluation,
which was based upon the criteria for effective internal control over financial
reporting included in the “Internal Control-Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this
evaluation, the Company’s chief executive officer and chief financial officer
concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2007.
The
attestation report by the Company’s independent registered public accounting
firm, McGladrey & Pullen, LLP, on the Company’s internal control over
financial reporting begins on the following page.
Fourth
Quarter 2007 Changes In Internal Controls Over Financial
Reporting
No
change
occurred during the fourth quarter of 2007 that has materially affected, or
is
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
To
the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We
have
audited Sandy Spring Bancorp, Inc. and Subsidiaries’ (the “Company”) internal
control over financial reporting as of December 31, 2007, based on the criteria
established in Internal Control-Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission (“COSO”). Sandy Spring
Bancorp, Inc. and Subsidiaries’ management is responsible for maintaining
effective internal control over financial reporting and for its assessment
of
the effectiveness of internal control over financial reporting included in
the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal controls over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, Sandy Spring Bancorp, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2007 based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”).
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of December
31, 2007 and 2006, and the related consolidated statements of income, changes
in
stockholders’ equity and cash flows for
each
of the three years in the period ended December 31, 2007 of Sandy Spring
Bancorp, Inc. and Subsidiaries and our report dated February 29, 2008 expressed
an unqualified opinion thereon.
Frederick,
Maryland
February
29, 2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We
have
audited the accompanying consolidated balance sheets of Sandy Spring Bancorp,
Inc. and Subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2007. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provided a reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sandy Spring Bancorp, Inc.
and Subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2007 in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, in 2006 Sandy
Spring Bancorp, Inc. and Subsidiaries adopted Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment,” Statement of Financial Accounting
Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” and Staff Accounting Bulletin No. 108, “Considering the
Effects of Prior Year Misstatements in the Current Year Financial Statements.”
We
have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sandy Spring Bancorp, Inc. and Subsidiaries’
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
our report dated February 29, 2008 expressed an unqualified opinion on the
effectiveness of Sandy Spring Bancorp, Inc. and Subsidiaries internal control
over financial reporting.
Frederick,
Maryland
February
29, 2008
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
63,432
|
|
$
|
54,945
|
|
Federal
funds sold
|
|
|
22,055
|
|
|
48,978
|
|
Cash
and cash equivalents
|
|
|
85,487
|
|
|
103,923
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits with banks
|
|
|
365
|
|
|
2,974
|
|
Residential
mortgage loans held for sale
|
|
|
7,089
|
|
|
10,595
|
|
Investments
available for sale (at fair value)
|
|
|
186,801
|
|
|
256,845
|
|
Investments
held to maturity –
fair value
of $240,995 (2007)
and
$273,206 (2006)
|
|
|
234,706
|
|
|
267,344
|
|
Other
equity securities
|
|
|
23,766
|
|
|
16,719
|
|
|
|
|
|
|
|
|
|
Total
loans and leases
|
|
|
2,277,031
|
|
|
1,805,579
|
|
Less:
allowance for loan and lease losses
|
|
|
(25,092
|
)
|
|
(19,492
|
)
|
Net
loans and leases
|
|
|
2,251,939
|
|
|
1,786,087
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
54,457
|
|
|
47,756
|
|
Accrued
interest receivable
|
|
|
14,955
|
|
|
15,200
|
|
Goodwill
|
|
|
76,585
|
|
|
12,494
|
|
Other
intangible assets, net
|
|
|
16,630
|
|
|
10,653
|
|
Other
assets
|
|
|
91,173
|
|
|
79,867
|
|
Total
assets
|
|
$
|
3,043,953
|
|
$
|
2,610,457
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
434,053
|
|
$
|
394,662
|
|
Interest-bearing
deposits
|
|
|
1,839,815
|
|
|
1,599,561
|
|
Total
deposits
|
|
|
2,273,868
|
|
|
1,994,223
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
373,972
|
|
|
314,732
|
|
Other
long-term borrowings
|
|
|
17,553
|
|
|
1,808
|
|
Subordinated
debentures
|
|
|
35,000
|
|
|
35,000
|
|
Accrued
interest payable and other liabilities
|
|
|
27,920
|
|
|
26,917
|
|
Total
liabilities
|
|
|
2,728,313
|
|
|
2,372,680
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 2, 7, 10, 11, 18 and 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
Common
stock-par value $1.00; shares authorized 50,000,000; shares issued
and
outstanding 16,349,317 (2007) and 14,826,805 (2006)
|
|
|
16,349
|
|
|
14,827
|
|
Additional
paid in capital
|
|
|
83,970
|
|
|
27,869
|
|
Retained
earnings
|
|
|
216,376
|
|
|
199,102
|
|
Accumulated
other comprehensive income (loss)
|
|
|
(1,055
|
)
|
|
(4,021
|
)
|
Total
stockholders’ equity
|
|
|
315,640
|
|
|
237,777
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
3,043,953
|
|
$
|
2,610,457
|
|
See
Notes to Consolidated Financial Statements.
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
152,723
|
|
$
|
125,813
|
|
$
|
94,562
|
|
Interest
on loans held for sale
|
|
|
815
|
|
|
739
|
|
|
1,073
|
|
Interest
on deposits with banks
|
|
|
1,123
|
|
|
123
|
|
|
63
|
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
13,989
|
|
|
14,132
|
|
|
12,327
|
|
Exempt
from federal income taxes
|
|
|
10,168
|
|
|
11,555
|
|
|
13,416
|
|
Interest
on federal funds sold
|
|
|
2,157
|
|
|
1,081
|
|
|
719
|
|
Total
interest income
|
|
|
180,975
|
|
|
153,443
|
|
|
122,160
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
59,916
|
|
|
39,334
|
|
|
21,482
|
|
Interest
on short-term borrowings
|
|
|
13,673
|
|
|
17,049
|
|
|
9,638
|
|
Interest
on long-term borrowings
|
|
|
2,560
|
|
|
2,304
|
|
|
2,862
|
|
Total
interest expense
|
|
|
76,149
|
|
|
58,687
|
|
|
33,982
|
|
Net
interest income
|
|
|
104,826
|
|
|
94,756
|
|
|
88,178
|
|
Provision
for loan and lease losses
|
|
|
4,094
|
|
|
2,795
|
|
|
2,600
|
|
Net
interest income after provision
for loan and lease losses
|
|
|
100,732
|
|
|
91,961
|
|
|
85,578
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
43
|
|
|
1
|
|
|
3,262
|
|
Service
charges on deposit accounts
|
|
|
11,148
|
|
|
7,903
|
|
|
7,688
|
|
Gains
on sales of mortgage loans
|
|
|
2,739
|
|
|
2,978
|
|
|
3,757
|
|
Fees
on sales of investment products
|
|
|
2,989
|
|
|
2,960
|
|
|
2,109
|
|
Trust
and investment management fees
|
|
|
9,588
|
|
|
8,762
|
|
|
5,006
|
|
Insurance
agency commissions
|
|
|
6,625
|
|
|
6,477
|
|
|
5,309
|
|
Income
from bank owned life insurance
|
|
|
2,829
|
|
|
2,350
|
|
|
2,259
|
|
Visa
check fees
|
|
|
2,784
|
|
|
2,381
|
|
|
2,167
|
|
Other
income
|
|
|
5,544
|
|
|
5,083
|
|
|
5,352
|
|
Total
noninterest income
|
|
|
44,289
|
|
|
38,895
|
|
|
36,909
|
|
Noninterest
expenses:
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
55,207
|
|
|
50,518
|
|
|
47,013
|
|
Occupancy
expense of premises
|
|
|
10,360
|
|
|
8,493
|
|
|
8,053
|
|
Equipment
expenses
|
|
|
6,563
|
|
|
5,476
|
|
|
5,410
|
|
Marketing
|
|
|
2,237
|
|
|
2,583
|
|
|
1,225
|
|
Outside
data services
|
|
|
3,967
|
|
|
3,203
|
|
|
2,940
|
|
Amortization
of intangible assets
|
|
|
4,080
|
|
|
2,967
|
|
|
2,198
|
|
Other
expenses
|
|
|
17,374
|
|
|
11,856
|
|
|
10,355
|
|
Total
noninterest expenses
|
|
|
99,788
|
|
|
85,096
|
|
|
77,194
|
|
Income
before income taxes
|
|
|
45,233
|
|
|
45,760
|
|
|
45,293
|
|
Income
tax expense
|
|
|
12,971
|
|
|
12,889
|
|
|
12,195
|
|
Net
income
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
|
Basic
net income per share
|
|
$
|
2.01
|
|
$
|
2.22
|
|
$
|
2.26
|
|
Diluted
net income per share
|
|
$
|
2.01
|
|
$
|
2.20
|
|
$
|
2.24
|
|
Dividends
declared per share
|
|
$
|
0.92
|
|
$
|
0.88
|
|
$
|
0.84
|
|
See
Notes to Consolidated Financials Statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10,648
|
|
|
8,859
|
|
|
6,836
|
|
Provision
for loan and lease losses
|
|
|
4,094
|
|
|
2,795
|
|
|
2,600
|
|
Stock
option expense
|
|
|
1,128
|
|
|
624
|
|
|
0
|
|
Deferred
income taxes (benefits)
|
|
|
(2,721
|
)
|
|
(986
|
)
|
|
(2,755
|
)
|
Origination
of loans held for sale
|
|
|
(280,152
|
)
|
|
(294,027
|
)
|
|
(316,494
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
286,398
|
|
|
296,916
|
|
|
326,022
|
|
Gains
on sales of loans
|
|
|
(2,739
|
)
|
|
(2,978
|
)
|
|
(3,757
|
)
|
Securities
gains
|
|
|
(43
|
)
|
|
(1
|
)
|
|
(3,262
|
)
|
Gains
on sales of premises and equipment
|
|
|
(289
|
)
|
|
0
|
|
|
(21
|
)
|
Net
decrease (increase) in accrued interest receivable
|
|
|
2,020
|
|
|
(2,056
|
)
|
|
(1,470
|
)
|
Net
(increase) decrease in other assets
|
|
|
(4,931
|
)
|
|
(3,913
|
)
|
|
854
|
|
Net
increase (decrease) in accrued interest payable and other liabilities
|
|
|
(2,913
|
)
|
|
5,485
|
|
|
(354
|
)
|
Other-net
|
|
|
1,078
|
|
|
(530
|
)
|
|
1,078
|
|
Net
cash provided by operating activities
|
|
|
43,840
|
|
|
43,059
|
|
|
42,375
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in interest-bearing deposits with
banks
|
|
|
2,609
|
|
|
(2,223
|
)
|
|
(141
|
)
|
Purchases
of other equity securities
|
|
|
(4,548
|
)
|
|
(1,506
|
)
|
|
(1,301
|
)
|
Purchases
of investments available for sale
|
|
|
(83,440
|
)
|
|
(94,984
|
)
|
|
(107,244
|
)
|
Proceeds
from sales of investments available for sale
|
|
|
0
|
|
|
0
|
|
|
124,311
|
|
Proceeds
from maturities, calls and principal payments of investments held
to
maturity
|
|
|
36,038
|
|
|
27,936
|
|
|
9,137
|
|
Proceeds
from maturities, calls and principal payments of investments available
for
sale
|
|
|
208,555
|
|
|
95,396
|
|
|
70,978
|
|
Proceeds
from sales of other real estate owned
|
|
|
(179
|
)
|
|
0
|
|
|
108
|
|
Proceeds
from sales of premises and equipment
|
|
|
650
|
|
|
0
|
|
|
0
|
|
Net
increase in loans and leases receivable
|
|
|
(176,880
|
)
|
|
(187,389
|
)
|
|
(238,927
|
)
|
Purchase
of loans and leases
|
|
|
0
|
|
|
(2,148
|
)
|
|
0
|
|
Proceeds
from sale of loans and leases
|
|
|
0
|
|
|
68,087
|
|
|
0
|
|
Acquisition
of business activity, net
|
|
|
(15,729
|
)
|
|
(1,900
|
)
|
|
(890
|
)
|
Expenditures
for premises and equipment
|
|
|
(4,780
|
)
|
|
(6,674
|
)
|
|
(8,442
|
)
|
Net
cash (used in) investing activities
|
|
|
(37,704
|
)
|
|
(105,405
|
)
|
|
(152,411
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase n deposits
|
|
|
(57,031
|
)
|
|
191,013
|
|
|
70,709
|
|
Net
increase (decrease) in short-term borrowings
|
|
|
39,932
|
|
|
(65,838
|
)
|
|
80,843
|
|
Net
increase (decrease) in long-term borrowings
|
|
|
9,936
|
|
|
0
|
|
|
(25,000
|
)
|
Common
stock purchased and retired
|
|
|
(4,354
|
)
|
|
(866
|
)
|
|
(1,437
|
)
|
Proceeds
from issuance of common stock
|
|
|
1,823
|
|
|
1,424
|
|
|
1,498
|
|
Tax
benefit from stock options exercised
|
|
|
110
|
|
|
121
|
|
|
0
|
|
Dividends
paid
|
|
|
(14,988
|
)
|
|
(13,028
|
)
|
|
(12,329
|
)
|
Net
cash provided by (used in) by financing activities
|
|
|
(24,572
|
)
|
|
112,826
|
|
|
114,284
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(18,436
|
)
|
|
50,480
|
|
|
4,248
|
|
Cash
and cash equivalents at beginning of year
|
|
|
103,923
|
|
|
53,443
|
|
|
49,195
|
|
Cash
and cash equivalents at end of year
|
|
$
|
85,487
|
|
$
|
103,923
|
|
$
|
53,443
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
|
|
|
|
Interest
payments
|
|
$
|
76,000
|
|
$
|
57,535
|
|
$
|
33,638
|
|
Income
tax payments
|
|
|
14,149
|
|
|
10,400
|
|
|
13,070
|
|
Non-cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Transfers
from loans to other real estate owned
|
|
$
|
90
|
|
$
|
182
|
|
$
|
73
|
|
Reclassification
of borrowings from long-term to short-term
|
|
|
808
|
|
|
350
|
|
|
67,450
|
|
Details
of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
417,434
|
|
$
|
297
|
|
$
|
939
|
|
Fair
value of liabilities assumed
|
|
|
(365,709
|
)
|
|
(287
|
)
|
|
(1,275
|
)
|
Stock
issued for acquisition
|
|
|
(58,916
|
)
|
|
0
|
|
|
(5,043
|
)
|
Purchase
price in excess of net assets acquired
|
|
|
62,600
|
|
|
1,890
|
|
|
6,269
|
|
Cash
paid for acquisitions
|
|
|
55,409
|
|
|
1,900
|
|
|
890
|
|
Cash
and cash equivalents acquired with acquisitions
|
|
|
39,680
|
|
|
0
|
|
|
0
|
|
Acquisition
of business activity, net
|
|
$
|
15,729
|
|
$
|
1,900
|
|
$
|
890
|
|
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 Comprehensive Income(Loss)
|
|
Total
Stockholders’ Equity
|
|
Balances
at December 31, 2004
|
|
$
|
14,629
|
|
$
|
21,522
|
|
$
|
156,315
|
|
$
|
2,617
|
|
$
|
195,083
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
33,098
|
|
|
|
|
|
33,098
|
|
Other
comprehensive income (loss), net of tax effects of $2,044 (unrealized
losses on securities of $1,993, adjusted for a reclassification
adjustment
for gains of $3,262)
|
|
|
|
|
|
|
|
|
|
|
|
(3,211
|
)
|
|
(3,211
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,887
|
|
Cash
dividends-$0.84 per share
|
|
|
|
|
|
|
|
|
(12,329
|
)
|
|
|
|
|
(12,329
|
)
|
Stock
repurchases-45,500 shares
|
|
|
(46
|
)
|
|
(1,391
|
)
|
|
|
|
|
|
|
|
(1,437
|
)
|
Common
stock issued pursuant to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan-42,478 shares
|
|
|
42
|
|
|
950
|
|
|
|
|
|
|
|
|
992
|
|
Employee
stock purchase plan-21,272 shares
|
|
|
21
|
|
|
567
|
|
|
|
|
|
|
|
|
588
|
|
Director
Stock Purchase Plan-1,693 shares
|
|
|
2
|
|
|
54
|
|
|
|
|
|
|
|
|
56
|
|
Acquisition
of West Financial Services, Inc.
145,534
shares
|
|
|
146
|
|
|
4,897
|
|
|
|
|
|
|
|
|
5,043
|
|
Balances
at December 31, 2005, as previously reported
|
|
|
14,794
|
|
|
26,599
|
|
|
177,084
|
|
|
(594
|
)
|
|
217,883
|
|
Adjustment
to reflect adoption of SAB 108 effective January
1, 2006
|
|
|
|
|
|
|
|
|
2,175
|
|
|
|
|
|
2,175
|
|
Balance
as of January 1, 2006 following adoption of SAB 108
|
|
|
14,794
|
|
|
26,599
|
|
|
179,259
|
|
|
(594
|
)
|
|
220,058
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
32,871
|
|
|
|
|
|
32,871
|
|
Other
comprehensive income (loss), net of tax effects of $243 (unrealized
gains
on securities of $619, adjusted for a reclassification adjustment
for
gains of $1)
|
|
|
|
|
|
|
|
|
|
|
|
375
|
|
|
375
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,246
|
|
Cash
dividends - $0.88 per share
|
|
|
|
|
|
|
|
|
(13,028
|
)
|
|
|
|
|
(13,028
|
)
|
Stock
Compensation expense
|
|
|
|
|
|
624
|
|
|
|
|
|
|
|
|
624
|
|
Stock
repurchases - 25,000 shares
|
|
|
(25
|
)
|
|
(841
|
)
|
|
|
|
|
|
|
|
(866
|
)
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan - 35,998 shares
|
|
|
36
|
|
|
824
|
|
|
|
|
|
|
|
|
860
|
|
Employee
stock purchase plan - 19,439 shares
|
|
|
19
|
|
|
582
|
|
|
|
|
|
|
|
|
601
|
|
Director
Stock Purchase Plan - 2,381 shares
|
|
|
3
|
|
|
81
|
|
|
|
|
|
|
|
|
84
|
|
Adjustment
to initially apply FASB Statement No. 158, net of tax effects
of $2,487
|
|
|
|
|
|
|
|
|
|
|
|
(3,802
|
)
|
|
(3,802
|
)
|
Balances
at December 31, 2006
|
|
|
14,827
|
|
|
27,869
|
|
|
199,102
|
|
|
(4,021
|
)
|
|
237,777
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
32,262
|
|
|
|
|
|
32,262
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities of $2,141, adjusted for a reclassification
adjustment
for gains of $43, net of tax effects of $837
|
|
|
|
|
|
|
|
|
|
|
|
1,261
|
|
|
1,261
|
|
Change
in funded status of defined benefit pension, net of tax effects
of
$1,095
|
|
|
|
|
|
|
|
|
|
|
|
1,705
|
|
|
1,705
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,228
|
|
Cash
dividends - $0.92 per share
|
|
|
|
|
|
|
|
|
(14,988
|
)
|
|
|
|
|
(14,988
|
)
|
Stock
compensation expense
|
|
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
1,128
|
|
Stock
repurchases - 156,249 shares
|
|
|
(156
|
)
|
|
(4,198
|
)
|
|
|
|
|
|
|
|
(4,354
|
)
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Potomac Bank - 886,989 shares
|
|
|
887
|
|
|
32,190
|
|
|
|
|
|
|
|
|
33,077
|
|
Acquisition
of CN Bancorp, Inc - 690,047 shares
|
|
|
690
|
|
|
25,149
|
|
|
|
|
|
|
|
|
25,839
|
|
Stock
option plan - 68,098 shares (78,264 shares issued
less 10,166 shares retired)
|
|
|
68
|
|
|
1,095
|
|
|
|
|
|
|
|
|
1,163
|
|
Director
Stock Purchase Plan - 2,402 shares
|
|
|
2
|
|
|
75
|
|
|
|
|
|
|
|
|
77
|
|
Employee
Stock Purchase Plan - 25,147 shares
|
|
|
25
|
|
|
662
|
|
|
|
|
|
|
|
|
687
|
|
Restricted
Stock - 6,078 shares
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Balances
at December 31, 2007
|
|
$
|
16,349
|
|
$
|
83,970
|
|
$
|
216,376
|
|
$
|
(1,055
|
)
|
$
|
315,640
|
|
See
Notes to Consolidated Financial Statements.
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 –
Significant Accounting Policies
The
accounting and reporting policies of the Company, which include Sandy Spring
Bancorp, Inc. and its wholly-owned subsidiary, Sandy Spring Bank (the "Bank"),
together with the Bank’s subsidiaries, Sandy Spring Insurance Corporation, The
Equipment Leasing Company, and West Financial Services, Inc., conform to
accounting principles generally accepted in the United States and to general
practice within the financial services industry.
Nature
of Operations
Through
its subsidiary bank, the Company conducts a full-service commercial banking,
mortgage banking and trust business. Services to individuals and businesses
include accepting deposits, extending real estate, consumer and commercial
loans
and lines of credit, equipment leasing, general insurance, personal trust,
and
investment and wealth management services. The Company operates in the six
Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery,
and
Prince George's, and in Fairfax and Loudoun counties in Virginia. The Company
offers investment and wealth management services through the Bank’s subsidiary,
West Financial Services Inc., located in McLean, Virginia. Insurance products
are available to clients through Chesapeake Insurance Group, Wolfe &
Reichelt, and Neff & Associates, which are agencies of Sandy Spring
Insurance Corporation. The Equipment Leasing Company provides leasing for
primarily technology-based equipment for retail businesses.
Policy
for Consolidation
The
consolidated financial statements include the accounts of Sandy Spring Bancorp,
Inc. and the Bank. Consolidation has resulted in the elimination of all
significant inter-company balances and transactions. The financial statements
of
Sandy Spring Bancorp, Inc. (Parent Only) include its investment in the Bank
under the equity method of accounting.
Use
of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Assets
Under Management
Assets
held for others under fiduciary and agency relationships are not included in
the
accompanying balance sheets since they are not assets of the Company or its
subsidiaries. Trust department income and investment management fees are
presented on an accrual basis.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash and
due
from banks and federal funds sold (items with an original maturity of three
months or less).
Residential
Mortgage Loans Held for Sale
The
Company engages in sales of residential mortgage loans originated by the Bank.
Loans held for sale are carried at the lower of aggregate cost or fair value.
Fair value is derived from secondary market quotations for similar instruments.
Gains and losses on sales of these loans are recorded as a component of
noninterest income in the Consolidated Statements of Income. The Company's
current practice is to sell such loans on a servicing released
basis.
During
2006, the Company sold $68.6 million in residential mortgage loans from its
loan
portfolio on a servicing retained basis. The Company has recorded an intangible
asset for the value of such servicing totaling $0.4 million and $0.6 million
at
December 31, 2007 and 2006, respectively.
Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. Purchased servicing rights are
capitalized at the cost to acquire the rights. For sales of mortgage loans,
a
portion of the cost of originating the loan is allocated to the servicing right
based on relative fair value. Fair value is based on market prices for
comparable mortgage servicing contracts, when available, or alternatively,
is
based on a valuation model that calculates the present value of estimated future
net servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the
cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of
the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant characteristics, such as interest
rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less
than
the capitalized amount for the tranches. If the Company later determines that
all or a portion of the impairment no longer exists for a particular tranche,
a
reduction of the allowance may be recorded as an increase to income. Capitalized
servicing rights are reported in other assets and are amortized into noninterest
income in proportion to, and over the period of, the estimated future net
servicing income of the underlying financial assets.
Servicing
fee income is recorded for fees earned for servicing loans. The fees are based
on a contractual percentage of the outstanding principal and are recorded as
income when earned. The amortization of mortgage servicing rights is netted
against loan servicing fee income.
Derivative
Financial Instruments
Derivative
Loan Commitments
Mortgage
loan commitments are referred to as derivative loan commitments if the loan
that
will result from exercise of the commitment will be held for sale upon funding.
Loan commitments that are derivatives are recognized at fair value on the
consolidated balance sheet in other assets or other liabilities with changes
in
their fair values recorded in net gain on sale of loans.
The
Company records a zero value for the loan commitment at inception (at the time
the commitment is issued to a borrower (“the time of rate lock”), consistent
with EITF 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and
Contracts Involved in Energy Trading and Risk Management
Activities,
and SEC
Staff Accounting Bulletin No. 105, Application
of Accounting Principles to Loan Commitments,
and,
accordingly, does not recognize the value of the expected normal servicing
rights until the underlying loan is sold. Subsequent to inception, changes
in
the fair value of the loan commitment are recognized based on changes in the
fair value of the underlying mortgage loan due to interest rate changes, changes
in the probability the derivative loan commitment will be exercised, and the
passage of time. In estimating fair value, the Company assigns a probability
to
a loan commitment based on an expectation that it will be exercised and the
loan
will be funded.
Forward
Loan Sale Commitments
The
Company carefully evaluates all loan sales agreements to determine whether
they
meet the definition of a derivative under SFAS No. 133 as facts and
circumstances may differ significantly. If agreements qualify, to protect
against the price risk inherent in derivative loan commitments, the Company
utilizes both “mandatory delivery” and “best efforts” forward loan sale
commitments to mitigate the risk of potential decreases in the values of loans
that would result from the exercise of the derivative loan commitments.
Mandatory delivery contracts are accounted for as derivative instruments.
Generally, the Company’s best efforts contracts also meet the definition of
derivative instruments after the loan to the borrower has closed. Accordingly,
forward loan sale commitments that economically hedge the closed loan inventory
are recognized at fair value on the consolidated balance sheet in other assets
and other liabilities with changes in their fair values recorded in net gain
on
sale of loans. The Company estimates the fair value of its forward loan sales
commitments using a methodology similar to that used for derivative loan
commitments.
Interest
Rate Swap Agreements
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. The swaps are reported
at
fair value in other assets or other liabilities. The accounting for changes
in
the fair value of a swap depends on whether it has been designated and qualifies
as part of a hedging relationship. The Company's swaps qualify as derivatives,
but are not designated as hedging instruments, thus any gain or loss resulting
from changes in the fair value is recognized in current net income. Further
discussion of the Company's financial derivatives is set forth in Footnote
18 to
the consolidated financial statements.
Investments
Held to Maturity and Other Equity Securities
Investments
held to maturity are those securities which the Company has the ability and
positive intent to hold until maturity. Securities so classified at the time
of
purchase are recorded at cost. The carrying values of securities held to
maturity are adjusted for premium amortization to the earlier of the maturity
or
expected call date and discount accretion to the maturity date. Related interest
and dividends are included in interest income. Declines in the fair value of
individual held-to-maturity securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. Factors affecting the determination of whether an other-than-temporary
impairment has occurred include a downgrading of the security by the rating
agency, a significant deterioration in the financial condition of the issuer,
or
that management would not have the ability to hold a security for a period
of
time sufficient to allow for any anticipated recovery in fair value. Other
equity securities represent Federal Reserve Bank, Federal Home Loan Bank of
Atlanta stock and Atlantic Central Banker’s Bank stock which are considered
restricted as to marketability and are recorded at cost.
Investments
Available for Sale
Marketable
equity securities and debt securities not classified as held to maturity or
trading are classified as available for sale. Securities available for sale
are
acquired as part of the Company's asset/liability management strategy and may
be
sold in response to changes in interest rates, loan demand, changes in
prepayment risk and other factors. Securities available for sale are carried
at
fair value, with unrealized gains or losses based on the difference between
amortized cost and fair value, reported net of deferred tax, as accumulated
other comprehensive income (loss), a separate component of stockholders' equity.
The carrying values of securities available for sale are adjusted for premium
amortization to the earlier of the maturity or expected call date and discount
accretion to the maturity date. Realized gains and losses, using the specific
identification method, are included as a separate component of noninterest
income. Related interest and dividends are included in interest income. Declines
in the fair value of individual available-for-sale securities below their cost
that are other than temporary result in write-downs of the individual securities
to their fair value. Factors affecting the determination of whether an
other-than-temporary impairment has occurred include a downgrading of the
security by a rating agency, a significant deterioration in the financial
condition of the issuer, or that management would not have the intent and
ability to hold a security for a period of time sufficient to allow for any
anticipated recovery in fair value.
Loans
and Leases
Loans
are
stated at their principal balance outstanding net of any deferred fees and
costs. Interest income on loans is accrued at the contractual rate based on
the
principal outstanding. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method. Lease financing assets, all of which are direct
financing leases, include aggregate lease rentals, net of related unearned
income. Leasing income is recognized on a basis that achieves a constant
periodic rate of return on the outstanding lease financing balances over the
lease terms. The Company generally places loans and leases, except for consumer
loans, on non-accrual when any portion of the principal or interest is ninety
days past due and collateral is insufficient to discharge the debt in full.
Interest accrual may also be discontinued earlier if, in management's opinion,
collection is unlikely. Generally, consumer installment loans are not placed
on
non-accrual, but are charged off when they are five months past due. All
interest accrued but not collected for loans that are placed on non-accrual
or
charged-off is reversed against interest income. Interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual status. Loans are returned to accrual status when all
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Loans
are
considered impaired when, based on current information, it is probable that
the
Company will not collect all principal and interest payments according to
contractual terms. Generally, loans are considered impaired once principal
and
interest payments are past due and they are placed on non-accrual. Management
also considers the financial condition of the borrower, cash flows of the loan
and the value of the related collateral. Impaired loans do not include large
groups of smaller balance homogeneous credits such as residential real estate,
consumer installment loans, and commercial leases, which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are
not
considered impaired during periods of "minimal delay" in payment (usually ninety
days or less) provided eventual collection of all amounts due is expected.
The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company measures impairment on such loans by reference to the
fair value of the collateral. Income on impaired loans is recognized similar
to
the method followed on nonaccrual loans.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses (“allowance”) represents an amount which, in
management's judgment, is adequate to absorb estimated losses on outstanding
loans and leases. The allowance represents an estimation made pursuant to
Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for
Contingencies,” and 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 loan and lease 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
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 is based upon historical loss factors, as adjusted, and
establishes allowances for the major loan categories based upon adjusted
historical loss experience over the prior eight quarters, weighted so that
losses realized in the most recent quarters have the greatest effect. The
factors used to adjust the historical loss experience address various risk
characteristics of the Company’s loan 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 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 potential
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 non-accrual 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.
Premises
and Equipment
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization, computed using the straight-line method. Premises and equipment
are depreciated over the useful lives of the assets, which generally range
from
3 to 10 years for furniture, fixtures and equipment, 3 to 5 years for computer
software and hardware, and 10 to 40 years for buildings and building
improvements. Leasehold improvements are amortized over the terms of the
respective leases or the estimated useful lives of the improvements, whichever
is shorter. The costs of major renewals and betterments are capitalized, while
the costs of ordinary maintenance and repairs are included in noninterest
expense.
Other
Real Estate Owned (OREO)
OREO,
which is included in other assets in the consolidated balance sheets, is
comprised of properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at fair value less estimated costs of
disposal, on the date acquired. Losses arising at the time of acquisition of
such properties are charged against the allowance for loan and lease losses.
Subsequent write-downs that may be required are added to a valuation reserve.
Gains and losses realized from the sale of OREO, as well as valuation
adjustments, are included in noninterest income. Expenses of operation are
included in noninterest expense.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of
the
net assets acquired. Other intangible assets represent purchased assets that
also lack physical substance but can be distinguished from goodwill because
of
contractual or other legal rights or because the asset is capable of being
sold
or exchanged either on its own or in combination with a related contract, asset,
or liability. Under the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill
and Other Intangible Assets”,
goodwill is not amortized over an estimated life, but rather is tested at least
annually for impairment. Prior to adoption of SFAS No. 142, the Company’s
goodwill was amortized on a straight-line basis over varying periods not
exceeding 10 years.
Intangible
assets that have finite lives are amortized over their estimated useful lives
and also continue to be subject to impairment testing. All of the Company’s
other intangible assets have finite lives and are being amortized on a
straight-line basis over varying periods that initially did not exceed 15 years.
Note
8
includes a summary of the Company’s goodwill and other intangible assets. The
unidentifiable Intangible Assets Resulting from Branch Acquisitions resulted
from two transactions: the purchase of a commercial bank in 1996 and the
purchase of seven commercial bank branches in a single transaction in 1999.
No
goodwill was recorded as a result of these branch acquisitions. SFAS No. 147,
“Acquisitions
of Certain Financial Institutions”
addresses unidentifiable intangible assets resulting from acquisitions of entire
or less-than-whole financial institutions where the fair value of liabilities
assumed exceeds the fair value of tangible and identifiable intangible assets
acquired. The Statement provides for the recognition of goodwill where the
transaction in which an unidentifiable intangible asset arose was a business
combination. The transitional provisions of SFAS No. 147 allow for the
reclassification of unidentifiable intangible assets that meet certain criteria
to goodwill and the restatement of earnings for any amortization of the
reclassified goodwill that occurred since SFAS No. 142 was adopted. After
completing its analysis of the transactions identified above, the Company
determined that neither met the definition of a business for purposes of SFAS
No. 147 under EITF 98-3, “Determining
Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or
of a
Business.”
Accordingly, the Company has continued to amortize these unidentifiable
intangible assets without change in method.
Valuation
of Long-Lived Assets
The
Company accounts for the valuation of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.”
SFAS
No. 144 requires that long-lived assets and certain identifiable intangible
assets be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of the long-lived asset is measured by a comparison of the
carrying amount of the asset to future undiscounted net cash flows expected
to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the estimated fair value of the assets. Assets
to
be disposed of are reportable at the lower of the carrying amount or the fair
value, less costs to sell.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets
has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage
of
that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Insurance
Commissions and Fees
Commission
revenue is recognized the date the customer is billed. The Company also receives
contingent commissions from insurance companies as additional incentive for
achieving specified premium volume goals and/or the loss experience of the
insurance placed by the Company. Contingent commissions from insurance companies
are recognized when determinable, which is generally when such commissions
are
received.
Advertising
Costs
Advertising
costs are expensed as incurred and included in noninterest
expenses.
Earnings
per Common Share
Basic
earnings per share is derived by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding, and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share is derived by dividing net income
by
the weighted-average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options as well as any adjustment to income that
would result from the assumed issuance. The number of potential shares issued
pursuant to the stock option plans was determined using the treasury stock
method.
Income
Taxes
Income
tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Deferred income tax assets
and
liabilities are determined using the liability method. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax bases of assets
and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
Adopted
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised), “Share-Based Payment”
(“SFAS 123(R)”). SFAS 123(R) replaces SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”), and supersedes APB Opinion No. 25, “Accounting for
Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires compensation costs
related to share-based payment transactions to be recognized in the financial
statements over the period that an employee provides services in exchange for
the award. Compensation cost is measured based on the fair value of the equity
or liability instruments issued. The Company adopted SFAS 123R effective January
1, 2006, using the modified prospective method. Under the modified prospective
method, the Company records compensation cost for new and modified awards,
measured using the fair value of the award on the grant dates, over the related
vesting period of such awards prospectively. Compensation cost related to any
non-vested portion of awards outstanding as of that date, if any, would be
based
on the grant-date fair value as calculated under the original provisions of
SFAS
No. 123 since the Company was not required to re-measure any non-vested
awards.
Effective
January 1, 2006, the Company adopted the provisions of SFAS 123(R) thereby
expensing employee stock-based compensation using the fair value method
prospectively for all awards granted, modified, settled, or vesting on or after
January 1, 2006. The fair value at date of grant of the stock option is
estimated using a binomial pricing model. Prior to January 1, 2006, the Company,
as permitted under SFAS 123, applied the intrinsic value recognition and
measurement principles of APB 25, and related interpretations in accounting
for
its stock-based compensation plans. Therefore, no stock-based employee
compensation cost was reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant.
In
May
2005, the FASB issued Statement No. 154, (“SFAS No. 154”),
“Accounting
Changes and Error Corrections -A Replacement of APB Opinion No. 20 and FASB
Statement No. 3.”
Among
other things, SFAS No. 154 requires that a voluntary change in accounting
principle be applied retroactively with all prior period financial statements
presented on the new accounting principle, unless it is impractical to do so.
SFAS No. 154 also provides that (1) a change in method of depreciating
or amortizing a long-lived nonfinancial asset be accounted for as a change
in
estimate (prospectively) that was effected by a change in accounting principle,
and (2) correction of errors in previously issued financial statements
should be termed a “restatement”. The new standard was effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005. The adoption of this Statement did not have a material
impact on the Company’s financial position, results of operations or cash
flows.
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 is effective for all financial
instruments acquired, issued, or subject to re-measurement 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 is 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 accounting for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with SFAS No. 109. FIN 48
prescribes a recognition threshold and measurement standard for the financial
statement recognition and measurement of an income tax position taken or
expected to be taken in a tax return. In addition, the Statement provides
guidance on derecognition, 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 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 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 is for fiscal years beginning
after December 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
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 a company that sponsors a postretirement benefit plan to
fully recognize, as an asset or liability, the over-funded or under-funded
status of its benefit plan in its balance sheet. The funded status is measured
as the difference between the fair value of the plan’s assets and its benefit
obligation (projected benefit obligation for pension plans and accumulated
postretirement benefit obligation for other postretirement benefit plans).
In
years prior to 2006, the funded status of such plans was reported in the notes
to the financial statements. This provision is effective for public companies
for fiscal years ending after December 15, 2006. In addition, SFAS No. 158
also
requires a company to measure its plan assets and benefit obligations as of
its
year-end balance sheet date. Currently, a company is permitted to choose a
measurement date up to three months prior to its year-end to measure the plan
assets and obligations. This provision is now effective for all companies for
fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158
as
of December 31, 2006. At December 31, 2006, the projected benefit obligation
of
its defined benefit pension plan exceeded the fair value of plan assets by
$1.9
million and such amount is included in “Accrued interest payable and other
liabilities” in the Consolidated Balance Sheet as of that date. Due primarily to
a plan curtailment effective December 31, 2007, the fair value of plan assets
exceeded the projected benefit obligation of the defined benefit plan by $0.9
million at December 31, 2007. Accordingly, such amount is included in ”Other
Assets” in the Consolidated Balance Sheet as of December 31, 2007. The required
disclosures related to the Company’s defined benefit pension plan are included
in Note 14 to the Consolidated Financial Statements.
The
Company has adopted SEC Staff Accounting Bulletin No. 108 (SAB 108),
“Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.”
SAB
108 states that registrants must quantify the impact of correcting all
misstatements, including both the carryover (iron curtain method) and reversing
(rollover method) effects of prior-year misstatements on the current-year
financial statements, and by evaluating the misstatements quantified under
each
method in light of quantitative and qualitative factors. In adopting the
requirements of SAB 108, the Company adjusted Net Deferred Tax Assets, disclosed
in Note 15, and included in Other Assets in the consolidated financial
statements, which had been understated by $2.2 million as of January 1, 2006.
Such understatement resulted from the over accrual
of income tax expense in years prior to 2002, which were previously evaluated
as
being immaterial under the rollover method.
The Company has reported the cumulative effect of the initial application of
SAB
108 by adjusting retained earnings as of January 1, 2006 with a credit of $2.2
million. The adjustment of the quarterly consolidated financial results for
2006
was accomplished by adjusting the applicable financial statement line items
when
such information was next presented. Reports previously filed with the SEC
will
not be amended.
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 in an orderly transaction between market participants in the market
in
which the reporting entity transacts. 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. This Statement is effective for fiscal years beginning after
November 15, 2007, with earlier adoption permitted. In February 2008, the FASB
issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective
Date of FASB Statement No.157”.
This
FSP defers the effective date of SFAS No.157 for nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at
fair
value in the financial statements on a recurring basis (at least annually),
to
years beginning after November 15, 2008, and interim periods within those fiscal
years. 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, “Employers’
Accounting for Postretirement Benefits Other Than Pensions”
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 $20.9 million as of December
31,
2007 and will record a liability and a corresponding reduction of retained
earnings of $1.6 million on January 1, 2008 to reflect the effect of this
consensus.
In
March
2007, the FASB ratified the consensus of the EITF and released Issue 06-10,
“Accounting
for Deferred Compensation and Postretirement Benefit Aspects of Collateral
Assignment Split-Dollar Life Insurance Arrangements”.
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 December 31, 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 companies to elect to follow fair value accounting for certain
financial assets and liabilities in an effort to mitigate volatility in earnings
without having to apply complex hedge accounting provisions. The Statement
also
establishes presentation and disclosure requirements designed to facilitate
comparison 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.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”
(“SFAS
141(R)”). This Statement replaces SFAS No. 141, “Business
Combinations”
(“SFAS
141”). SFAS No.141(R), among other things, establishes principles and
requirements for how the acquirer in a business combination (i) recognizes
and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquired business,
(ii) recognizes and measures the goodwill acquired in the business combination
or a gain from a bargain purchase, and (iii) determines what information to
disclose to enable users of the financial statements to evaluate the nature
and
financial effects of the business combination. The Company is required to adopt
SFAS No. 141(R) for all business combinations for which the acquisition date
is
on or after January 1, 2009. Earlier adoption is prohibited. The Statement
will
change the Company’s accounting treatment for business combinations on a
prospective basis.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling
Interests in Consolidated Financial Statements-an amendment of ARB No.
51.”
This
Statement establishes accounting and reporting standards for noncontrolling
interests in a subsidiary and for the deconsolidation of a subsidiary. Minority
interests will be recharacterized as noncontrolling interests and classified
as
a component of equity. The Statement also establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary and
requires expanded disclosures. This Statement is effective for fiscal years,
and
interim periods within those fiscal years, beginning on or after December 15,
2008 with earlier adoption prohibited. 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.
Reclassifications
Certain
amounts in the accompanying consolidated financial statements have been
reclassified to conform with the 2007 presentation.
Note
2 – Acquisitions
In
October 2005, the Company completed the acquisition of West Financial Services,
Inc. (“WFS”) located in McLean, Virginia, an asset management and financial
planning company with approximately $576 million in assets under management
at
the date of the acquisition. Under the terms of the acquisition agreement,
the
Company purchased WFS with a combination of stock and cash totaling
approximately $5.9 million. Additional contingent payments may be made and
recorded in 2008 based on the financial results attained by WFS.
In
the
transaction, $0.9 million of assets were acquired, primarily accounts
receivable, and $1.3 million of liabilities were assumed, primarily operating
payables. The acquisition, including a 2007 contingent payment of $1.4 million,
resulted in the recognition of $5.1 million of goodwill, which will not be
amortized, and $4.6 million of identified intangible assets which will be
amortized on a straight-line basis over periods ranging from 4 to 10 years.
This
acquisition was considered immaterial and, accordingly, no pro forma results
of
operations are provided for the pre-acquisition periods.
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 was 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
it’s wholly owned subsidiary, County National Bank (“County”). County 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 CNB, individually and in the aggregate, are
considered immaterial for purposes of the pro forma disclosures required by
SFAS
No. 141, “Business
Combinations.”
Note
3 – Cash and Due from Banks
Regulation
D of the Federal Reserve Act requires that banks maintain reserve balances
with
the Federal Reserve Bank based principally on the type and amount of their
deposits. At its option, the Company maintains additional balances to compensate
for clearing and safekeeping services. The average balance maintained in 2007
was $2.1 million and in 2006 was $2.3 million.
Note
4 – Investments Available for Sale
The
amortized cost and estimated fair values of investments available for sale
at
December 31 are as follows:
|
|
2007
|
|
2006
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$
|
2,953
|
|
$
|
20
|
|
$
|
0
|
|
$
|
2,973
|
|
$
|
600
|
|
$
|
0
|
|
$
|
(3
|
)
|
$
|
597
|
|
U.S.
Agencies and Corporations
|
|
|
139,057
|
|
|
352
|
|
|
(99
|
)
|
|
139,310
|
|
|
244,688
|
|
|
32
|
|
|
(1,631
|
)
|
|
243,089
|
|
State
and municipal
|
|
|
2,660
|
|
|
101
|
|
|
0
|
|
|
2,761
|
|
|
2,303
|
|
|
87
|
|
|
0
|
|
|
2,390
|
|
Mortgage-backed
|
|
|
32,160
|
|
|
243
|
|
|
(47
|
)
|
|
32,356
|
|
|
1,533
|
|
|
48
|
|
|
(4
|
)
|
|
1,577
|
|
Trust
preferred
|
|
|
7,887
|
|
|
1,164
|
|
|
0
|
|
|
9,051
|
|
|
7,885
|
|
|
1,107
|
|
|
0
|
|
|
8,992
|
|
Total
debt securities
|
|
|
184,717
|
|
|
1,880
|
|
|
(146
|
)
|
|
186,451
|
|
|
257,009
|
|
|
1,274
|
|
|
(1,638
|
)
|
|
256,645
|
|
Marketable
equity securities
|
|
|
350
|
|
|
0
|
|
|
0
|
|
|
350
|
|
|
200
|
|
|
0
|
|
|
0
|
|
|
200
|
|
Total
investments available for sale
|
|
$
|
185,067
|
|
$
|
1,880
|
|
$
|
(146
|
)
|
$
|
186,801
|
|
$
|
257,209
|
|
$
|
1,274
|
|
$
|
(1,638
|
)
|
$
|
256,845
|
|
Gross
unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss position
at December 31, 2007 and 2006 are as follows:
(In thousands)
|
|
|
|
|
|
Continuous unrealized losses existing
for:
|
|
|
|
Available for sale as of December
31, 2007
|
|
Number
Of
securities
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
2
|
|
$
|
20,925
|
|
$
|
0
|
|
$
|
99
|
|
$
|
99
|
|
Mortgage-backed
|
|
|
14
|
|
|
12,554
|
|
|
43
|
|
|
4
|
|
|
47
|
|
|
|
|
16
|
|
$
|
33,479
|
|
$
|
43
|
|
$
|
103
|
|
$
|
146
|
|
(In thousands)
|
|
|
|
|
|
Continuous unrealized losses existing for:
|
|
|
|
Available for sale as of December
31,
2006
|
|
Number
of
securities
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
26
|
|
$
|
194,521
|
|
$
|
57
|
|
$
|
1,574
|
|
$
|
1,631
|
|
U.S.
Treasury
|
|
|
1
|
|
|
597
|
|
|
0
|
|
|
3
|
|
|
3
|
|
Mortgage-backed
|
|
|
5
|
|
|
300
|
|
|
0
|
|
|
4
|
|
|
4
|
|
|
|
|
32
|
|
$
|
195,418
|
|
$
|
57
|
|
$
|
1,581
|
|
$
|
1,638
|
|
Approximately
100% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of December 31, 2007 and 2006 are rated AAA.
The securities representing the unrealized losses in the available-for-sale
portfolio as of December 31, 2007 and 2006 all have modest duration risk (1.14
years in 2007 and 2006), low credit risk, and minimal loss (approximately .43%
in 2007 and .83% in 2006) when compared to book value. The unrealized losses
that exist are the result of changes in market 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.
The
amortized cost, and estimated fair values, of debt securities available for
sale
at December 31 by contractual maturity are shown below. The Company has
allocated mortgage-backed securities into the four maturity groupings shown
using the expected average life of the individual securities based upon
statistics provided by independent third party industry sources. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
|
|
2007
|
|
2006
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Due
in one year or less
|
|
$
|
145,952
|
|
$
|
146,531
|
|
$
|
236,789
|
|
$
|
235,667
|
|
Due
after one year through five years
|
|
|
32,990
|
|
|
34,095
|
|
|
19,216
|
|
|
19,943
|
|
Due
after five years through ten years
|
|
|
5,775
|
|
|
5,825
|
|
|
351
|
|
|
357
|
|
Due
after ten years
|
|
|
0
|
|
|
0
|
|
|
653
|
|
|
678
|
|
Total
debt securities available for sale
|
|
$
|
184,717
|
|
$
|
186,451
|
|
$
|
257,009
|
|
$
|
256,645
|
|
Sales
of
investments available for sale during 2007, 2006 and 2005 resulted in the
following:
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Proceeds
|
|
$
|
0
|
|
$
|
0
|
|
$
|
124,311
|
|
Gross
gains
|
|
|
0
|
|
|
0
|
|
|
3,968
|
|
Gross
losses
|
|
|
0
|
|
|
0
|
|
|
706
|
|
At
December 31, 2007 and 2006, investments available for sale with a book value
of
$173.9 million and $237.3 million, respectively, were pledged as collateral
for
certain government deposits and for other purposes as required or permitted
by
law. The outstanding balance of no single issuer, except for U.S. Agencies
and
Corporations securities, exceeded ten percent of stockholders' equity at
December 31, 2007 and 2006.
Note
5 –
Investments Held to Maturity and Other Equity Securities
The
amortized cost and estimated fair values of investments held to maturity at
December 31 are as follows:
|
|
2007
|
|
2006
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Estimated
Fair Value
|
|
Amortized
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Estimated
Fair Value
|
|
U.S.
Agencies and Corporations
|
|
$
|
34,419
|
|
$
|
74
|
|
$
|
0
|
|
$
|
34,493
|
|
$
|
34,408
|
|
$
|
0
|
|
$
|
(787
|
)
|
$
|
33,621
|
|
Mortgage-backed
|
|
|
860
|
|
|
14
|
|
|
0
|
|
|
874
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
State
and municipal
|
|
|
199,427
|
|
|
6,233
|
|
|
(32
|
)
|
|
205,628
|
|
|
232,936
|
|
|
6,731
|
|
|
(82
|
)
|
|
239,585
|
|
Total
investments held to maturity
|
|
$
|
234,706
|
|
$
|
6,321
|
|
$
|
(32
|
)
|
$
|
240,995
|
|
$
|
267,344
|
|
$
|
6,731
|
|
$
|
(869
|
)
|
$
|
273,206
|
|
Gross
unrealized losses and fair value by length of time that the individual
held-to-maturity securities have been in a continuous unrealized loss position
at December 31, 2007 and 2006 are as follows:
(In
thousands)
|
|
|
|
|
|
Continuous unrealized losses existing
for:
|
|
|
|
Held
to Maturity as of
December
31, 2007
|
|
Number
of
securities
|
|
Fair Value
|
|
Less
than 12 months
|
|
More
than 12 months
|
|
Total
Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
7
|
|
$
|
3,340
|
|
$
|
1
|
|
$
|
31
|
|
$
|
32
|
|
|
|
|
7
|
|
$
|
3,340
|
|
$
|
1
|
|
$
|
31
|
|
$
|
32
|
|
(In thousands)
|
|
|
|
|
|
Continuous unrealized losses existing for:
|
|
|
|
Held to Maturity as of
December 31, 2006
|
|
Number
of
securities
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
4
|
|
$
|
33,621
|
|
$
|
0
|
|
$
|
787
|
|
$
|
787
|
|
State
and municipal
|
|
|
16
|
|
|
14,247
|
|
|
6
|
|
|
76
|
|
|
82
|
|
|
|
|
20
|
|
$
|
47,868
|
|
$
|
6
|
|
$
|
863
|
|
$
|
869
|
|
Approximately
92% and 96% of the bonds carried in the held-to-maturity investment portfolio
experiencing continuous unrealized losses as of December 31, 2007 and 2006,
respectively, are rated AAA and 8% and 4% as of December 31, 2007 and 2006
respectively, are rated AA1. The securities representing the unrealized losses
in the held-to-maturity portfolio all have modest duration risk (4.69 years
in
2007 and 4.46 years in 2006), low credit risk, and minimal losses (approximately
1% in 2007 and 2% in 2006) when compared to book value. The unrealized losses
that exist are the result of changes in market 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.
The
amortized cost and estimated fair values of debt securities held to maturity
at
December 31 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call
or prepay obligations with or without call or prepayment penalties.
|
|
2007
|
|
2006
|
|
(In
thousands)
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Amortized
Cost
|
|
Estimated
Fair
Value
|
|
Due
in one year or less
|
|
$
|
79,970
|
|
$
|
80,493
|
|
$
|
76,800
|
|
$
|
76,316
|
|
Due
after one year through five years
|
|
|
136,614
|
|
|
141,547
|
|
|
146,014
|
|
|
150,408
|
|
Due
after five years through ten years
|
|
|
11,757
|
|
|
12,108
|
|
|
38,234
|
|
|
39,782
|
|
Due
after ten years
|
|
|
6,365
|
|
|
6,847
|
|
|
6,296
|
|
|
6,700
|
|
Total
debt securities held to maturity
|
|
$
|
234,706
|
|
$
|
240,995
|
|
$
|
267,344
|
|
$
|
273,206
|
|
At
December 31, 2007 and 2006, investments held to maturity with a book value
of
$166.3 million and $128.8 million, respectively, were pledged as collateral
for
certain government deposits and for other purposes as required or permitted
by
law. The outstanding balance of no single issuer, except for U.S. Agency and
Corporations securities, exceeded ten percent of stockholders' equity at
December 31, 2007 or 2006.
Other
equity securities at December 31 are as follows:
(In
thousands)
|
|
2007
|
|
2006
|
|
Federal
Reserve Bank stock
|
|
$
|
5,033
|
|
$
|
2,027
|
|
Federal
Home Loan Bank of Atlanta stock
|
|
|
18,658
|
|
|
14,692
|
|
Atlantic
Central Bank stock
|
|
|
75
|
|
|
0
|
|
Total
|
|
$
|
23,766
|
|
$
|
16,719
|
|
Note
6 –
Loans and Leases
Major
categories at December 31 are presented below:
(In
thousands)
|
|
2007
|
|
2006
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$
|
456,305
|
|
$
|
390,852
|
|
Residential
construction
|
|
|
166,981
|
|
|
151,399
|
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
662,837
|
|
|
509,726
|
|
Commercial
construction
|
|
|
262,840
|
|
|
192,547
|
|
Leases
|
|
|
35,722
|
|
|
34,079
|
|
Other
commercial
|
|
|
316,051
|
|
|
182,159
|
|
Consumer
|
|
|
376,295
|
|
|
344,817
|
|
Total
loans and leases
|
|
|
2,277,031
|
|
|
1,805,579
|
|
Less:
allowance for loan and lease losses
|
|
|
(25,092
|
)
|
|
(19,492
|
)
|
Net
loans and leases
|
|
$
|
2,251,939
|
|
$
|
1,786,087
|
|
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; 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
December 31, 2007, the Company had a total of $40.7 million in residential
real
estate loans and $2.2 million in consumer loans with a loan to value ratio
(“LTV”) greater than 90%. The Company also had an additional $91.3 million in
residential lot loans owned by individuals with an LTV greater than 75%.
Commercial loans, with an LTV greater than 75% to 85%, depending on the type
of
property, totaled $49.9 million at December 31, 2007. The Company had
interest-only loans totaling $100.1 million in its loan portfolio at December
31, 2007. In addition, virtually all of the Company’s equity lines of credit,
$217.9 million at December 31, 2007, which were included in the consumer loan
portfolio, were made on an interest-only basis. The aggregate of all loans
with
these terms was $502.1 million at December 31, 2007 which represented 22% of
total loans and leases outstanding at that date. The Company is of the opinion
that its loan underwriting procedures are structured to adequately mitigate
any
additional risk that the above types of loans might present.
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Balance
at beginning of year
|
|
$
|
19,492
|
|
$
|
16,886
|
|
$
|
14,654
|
|
Allowance
acquired with acquisition of other institutions
|
|
|
2,798
|
|
|
0
|
|
|
0
|
|
Provision
for loan and lease losses
|
|
|
4,094
|
|
|
2,795
|
|
|
2,600
|
|
Loan
and lease charge-offs
|
|
|
(1,444
|
)
|
|
(315
|
)
|
|
(535
|
)
|
Loan
and lease recoveries
|
|
|
152
|
|
|
126
|
|
|
167
|
|
Net
charge-offs
|
|
|
(1,292
|
)
|
|
(189
|
)
|
|
(368
|
)
|
Balance
at year end
|
|
$
|
25,092
|
|
$
|
19,492
|
|
$
|
16,886
|
|
Information
regarding impaired loans at December 31, and for the respective years then
ended, is as follows:
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Impaired
loans with a valuation allowance
|
|
$
|
5,710
|
|
$
|
286
|
|
$
|
200
|
|
Impaired
loans without a valuation allowance
|
|
|
16,174
|
|
|
0
|
|
|
209
|
|
Total
impaired loans
|
|
$
|
21,884
|
|
$
|
286
|
|
$
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses related to impaired loans
|
|
$
|
936
|
|
$
|
118
|
|
$
|
31
|
|
Allowance
for loan and lease losses related to other than impaired loans
|
|
|
24,156
|
|
|
19,374
|
|
|
16,855
|
|
Total
allowance for loan and lease losses
|
|
$
|
25,092
|
|
$
|
19,492
|
|
$
|
16,886
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
impaired loans for the year
|
|
$
|
14,496
|
|
$
|
250
|
|
$
|
656
|
|
Interest
income on impaired loans recognized on a cash basis
|
|
$
|
0
|
|
$
|
0
|
|
$
|
0
|
|
Non-accrual
loans and leases including the impaired loans reflected in the preceding table,
totaled $23.0 million and $1.9 million at December 31, 2007 and 2006
respectively. Gross interest income that would have been recorded in 2007 if
non-accrual loans and leases had been current and, in accordance with their
original terms, was $1.1 million, while interest actually recorded on such
loans
was $0. The Company’s policy is to continue accrual of interest on loans over 90
days delinquent unless the specific circumstances of the loan dictate otherwise.
In those cases, such loans are then classified as non-accrual loans. At December
31, 2007 such loans 90 days past due and still accruing interest totaled $11.3
million.
Other
real estate owned totaled $0.5 million at December 31, 2007 and $0.2 million
at
December 31, 2006.
Note
7 –
Premises and Equipment
Premises
and equipment at December 31 consist of:
(In
thousands)
|
|
2007
|
|
2006
|
|
Land
|
|
$
|
9,954
|
|
$
|
8,356
|
|
Buildings
and leasehold improvements
|
|
|
56,582
|
|
|
49,897
|
|
Equipment
|
|
|
33,839
|
|
|
27,687
|
|
Total
premises and equipment
|
|
|
100,375
|
|
|
85,940
|
|
Less:
accumulated depreciation and amortization
|
|
|
(45,918
|
)
|
|
(38,184
|
)
|
Net
premises and equipment
|
|
$
|
54,457
|
|
$
|
47,756
|
|
Depreciation
and amortization expense for premises and equipment amounted to $4.9 million
for
2007, $4.2 million for 2006 and $4.6 million for 2005. There were no contractual
commitments at December 31, 2007 to construct branch facilities.
Total
rental expense (net of rental income) of premises and equipment for the three
years ended December 31 was $5.7 million (2007), $4.5 million (2006) and $4.1
million (2005). Lease commitments entered into by the Company bear initial
terms
varying from 3 to 15 years, or they are 20-year ground leases, and are
associated with premises.
|
|
Operating
|
|
(In
thousands)
|
|
Leases
|
|
2008
|
|
$
|
4,712
|
|
2009
|
|
|
4,902
|
|
2010
|
|
|
4,897
|
|
2011
|
|
|
4,470
|
|
2012
|
|
|
3,737
|
|
Thereafter
|
|
|
9,931
|
|
Total
minimum lease payments
|
|
$
|
32,649
|
|
Note
8 –
Goodwill and Other Intangible Assets
Goodwill
is tested for impairment annually or more frequently if events or circumstances
indicate a possible impairment. Under the provisions of SFAS No. 144, the
acquired intangible assets apart from goodwill are reviewed for impairment
annually and are being amortized over their remaining estimated
lives.
The
significant components of goodwill and acquired intangible assets are as
follows:
(Dollars in thousands)
|
|
Goodwill
|
|
Unidentifiable
Intangible Assets
Resulting From
Branch Acquisitions
|
|
Other
Identifiable
Intangibles
|
|
Core Deposit
Intangible
Assets
|
|
Total
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
13,603
|
|
$
|
17,854
|
|
$
|
7,959
|
|
$
|
0
|
|
$
|
39,416
|
|
Purchase
price adjustment
|
|
|
1,491
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,491
|
|
Acquired
during the year
|
|
|
62,600
|
|
|
0
|
|
|
342
|
|
|
9,716
|
|
|
72,658
|
|
Accumulated
amortization
|
|
|
(1,109
|
)
|
|
(14,809
|
)
|
|
(3,408
|
)
|
|
(1,024
|
)
|
|
(20,350
|
)
|
Net
carrying amount
|
|
$
|
76,585
|
|
$
|
3,045
|
|
$
|
4,893
|
|
$
|
8,692
|
|
$
|
93,215
|
|
Weighted
average remaining life
|
|
|
|
|
|
1.7
|
|
|
5.9
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
13,151
|
|
$
|
17,854
|
|
$
|
6,557
|
|
$
|
0
|
|
$
|
37,562
|
|
Purchase
price adjustment
|
|
|
(8
|
)
|
|
0
|
|
|
(38
|
)
|
|
0
|
|
|
(46
|
)
|
Acquired
during the year
|
|
|
460
|
|
|
0
|
|
|
1,440
|
|
|
0
|
|
|
1,900
|
|
Accumulated
amortization
|
|
|
(1,109
|
)
|
|
(13,069
|
)
|
|
(2,091
|
)
|
|
0
|
|
|
(16,269
|
)
|
Net
carrying amount
|
|
$
|
12,494
|
|
$
|
4,785
|
|
$
|
5,868
|
|
$
|
0
|
|
$
|
23,147
|
|
Weighted
average remaining life
|
|
|
|
|
|
2.7
|
|
|
5.1
|
|
|
|
|
|
|
|
The
changes in the carrying amount of goodwill by reportable segment for the twelve
months ended December 31, 2007 and 2006 are as follows:
(Dollars
in thousands)
|
|
Community
Banking
|
|
Insurance
|
|
Leasing
|
|
Investment
Management
|
|
Total
|
|
Balance
January 1, 2006
|
|
$
|
130
|
|
$
|
4,265
|
|
$
|
4,159
|
|
$
|
3,488
|
|
$
|
12,042
|
|
Purchase
price adjustment
|
|
|
0
|
|
|
(102
|
)
|
|
0
|
|
|
94
|
|
|
(8
|
)
|
Acquired
during the year
|
|
|
0
|
|
|
460
|
|
|
0
|
|
|
0
|
|
|
460
|
|
Balance
December 31, 2006
|
|
|
130
|
|
|
4,623
|
|
|
4,159
|
|
|
3,582
|
|
|
12,494
|
|
Purchase
price adjustment
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
1,491
|
|
|
1,491
|
|
Acquired
during the year
|
|
|
62,600
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
62,600
|
|
Balance
December 31, 2007
|
|
$
|
62,730
|
|
$
|
4,623
|
|
$
|
4,159
|
|
$
|
5,073
|
|
$
|
76,585
|
|
Future
estimated annual amortization expense is presented below:
(In
thousands)
Year
|
|
Amount
|
|
2008
|
|
$
|
4,439
|
|
2009
|
|
|
3,654
|
|
2010
|
|
|
1,959
|
|
2011
|
|
|
1,845
|
|
2012
|
|
|
1,845
|
|
Later
years
|
|
|
2,888
|
|
Note
9 –
Deposits
Deposits
outstanding at December 31 consist of:
(In
thousands)
|
|
2007
|
|
2006
|
|
Noninterest-bearing
deposits
|
|
$
|
434,053
|
|
$
|
394,662
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
Demand
|
|
|
254,878
|
|
|
233,841
|
|
Money
market savings
|
|
|
726,647
|
|
|
518,146
|
|
Regular
savings
|
|
|
153,964
|
|
|
160,035
|
|
Time
deposits of less than $100,000
|
|
|
416,601
|
|
|
406,910
|
|
Time
deposits of $100,000 or more
|
|
|
287,725
|
|
|
280,629
|
|
Total
interest-bearing deposits
|
|
|
1,839,815
|
|
|
1,599,561
|
|
Total
deposits
|
|
$
|
2,273,868
|
|
$
|
1,994,223
|
|
Interest
expense on time deposits of $100 thousand or more amounted to $14.8 million,
$11.1 million and $6.6 million for 2007, 2006, and 2005,
respectively.
The
following is a maturity schedule for time deposits maturing within years ending
December 31:
(In
thousands)
Year
|
|
Amount
|
|
2008
|
|
$
|
626,867
|
|
2009
|
|
|
54,668
|
|
2010
|
|
|
13,797
|
|
2011
|
|
|
3,731
|
|
2012
|
|
|
5,263
|
|
Total
|
|
$
|
704,326
|
|
Note
10 –
Short-term Borrowings
Information
relating to short-term borrowings is as follows for the years ended December
31:
|
|
2007
|
|
2006
|
|
2005
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
At
Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$
|
275,957
|
|
|
4.25
|
%
|
$
|
215,350
|
|
|
4.35
|
%
|
$
|
192,450
|
|
|
3.98
|
%
|
Retail
repurchase agreements
|
|
|
98,015
|
|
|
3.00
|
|
|
99,382
|
|
|
4.25
|
|
|
170,769
|
|
|
3.45
|
|
Other
short-term borrowings
|
|
|
0
|
|
|
0.00
|
|
|
0
|
|
|
0.00
|
|
|
17,000
|
|
|
4.31
|
|
Total
|
|
$
|
373,972
|
|
|
3.92
|
|
$
|
314,732
|
|
|
4.32
|
%
|
$
|
380,219
|
|
|
3.76
|
%
|
Average
for the Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$
|
209,974
|
|
|
4.47
|
%
|
$
|
237,145
|
|
|
4.10
|
%
|
$
|
121,813
|
|
|
3.87
|
%
|
Retail
repurchase agreements
|
|
|
109,353
|
|
|
3.92
|
|
|
174,150
|
|
|
4.11
|
|
|
146,887
|
|
|
2.54
|
|
Other
short-term borrowings
|
|
|
92
|
|
|
5.58
|
|
|
2,979
|
|
|
5.34
|
|
|
26,761
|
|
|
4.15
|
|
Maximum
Month-end Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$
|
275,957
|
|
|
|
|
$
|
252,350
|
|
|
|
|
$
|
192,450
|
|
|
|
|
Retail
repurchase agreements
|
|
|
122,130
|
|
|
|
|
|
236,427
|
|
|
|
|
|
186,760
|
|
|
|
|
Other
short-term borrowings
|
|
|
0
|
|
|
|
|
|
5,300
|
|
|
|
|
|
27,000
|
|
|
|
|
The
Company has an available line of credit for $887.3 million with the Federal
Home
Loan Bank of Atlanta (the "FHLB") under which its borrowings are limited to
$649.2 million based on pledged collateral at interest rates based upon current
market conditions, of which $293.5 million was outstanding at December 31,
2007.
At December 31, 2006, such line of credit totaled $779.1 million under which
$543.9 million was available based on pledged collateral of which $217.2 million
was outstanding. Both short-term and long-term FHLB advances are fully
collateralized by pledges of loans and U.S. Agency securities. The Company
has
pledged, under a blanket lien, qualifying residential mortgage loans amounting
to $282.6 million, commercial loans amounting to $639.6 million, and home equity
lines of credit (“HELOC”) amounting to $287.2 million at December 31, 2007
as collateral
under the borrowing agreement with the FHLB. At December 31, 2006 the Company
had pledged collateral of qualifying mortgage loans of $262.0 million and HELOC
loans amounting to $251.4 million under the above borrowing agreement. The
Company also had lines of credit available from the Federal Reserve and
correspondent banks of $140.8 million at December 31, 2007, and $136.6 million
at December 31, 2006, collateralized by state and municipal securities. In
addition, the Company had an unsecured line of credit with a correspondent
bank
of $20.0 million at December 31, 2007 and 2006. There were no borrowings
outstanding against this unsecured line at December 31, 2007 or
2006.
Note
11 –
Long-term Borrowings
The
Company formed Sandy Spring Capital Trust II (“Capital Trust”) to facilitate
completion of a pooled placement issuance of $35.0 million of trust preferred
securities on August 10, 2004. Subordinated debentures on the accompanying
balance sheets reflect the subordinated debt instruments the Company issued
to
Capital Trust and bear a 6.35% rate of interest until July 7, 2009 at which
time
the interest rate becomes a variable rate, adjusted quarterly, equal to 225
basis points over the three month Libor. These obligations of the Company are
subordinated to all other debt except other trust preferred subordinated, to
which it may have equal subordination. The borrowing has a maturity date of
October 7, 2034, and may be called by the Company no earlier than October 7,
2009.
The
Company had other long-term borrowings at December 31 as follows:
(In
thousands)
|
|
2007
|
|
2006
|
|
FHLB
4.13% Advance due 2013
|
|
$
|
1,458
|
|
$
|
1,808
|
|
FHLB
3.36% Advance due 2009
|
|
|
10,000
|
|
|
0
|
|
FHLB
4.34% Advance due 2010
|
|
|
2,094
|
|
|
0
|
|
FHLB
5.16% Advance due 2010
|
|
|
4,001
|
|
|
0
|
|
Total
other long-term borrowings
|
|
$
|
17,553
|
|
$
|
1,808
|
|
The
4.13%, 4.34% and 5.16% advances are principal reducing with payments of
approximately $30 thousand, $65 thousand and $83 thousand, respectively, all
paid monthly. Expected maturities may differ from contractual maturities because
the Company may elect to prepay obligations.
The
following is a maturity schedule for long-term borrowings within the years
ending December 31:
|
|
Maturities
|
|
Year
|
|
(in
thousands)
|
|
2008
|
|
$
|
0
|
|
2009
|
|
|
968
|
|
2010
|
|
|
5,826
|
|
2011
|
|
|
350
|
|
2012
|
|
|
350
|
|
Future
Years
|
|
|
10,059
|
|
Total
|
|
$
|
17,553
|
|
Note
12 –
Stockholders’ Equity
The
Company’s Articles of Incorporation authorize 50,000,000 shares of capital stock
(par value $1.00 per share). Issued shares have been classified as common stock.
The Articles of Incorporation provide that remaining unissued shares may later
be designated as either common or preferred stock.
The
Company has a director stock purchase plan (the “Director Plan”) which commenced
on May 1, 2004. Under the Director Plan, members of the Board of Directors
may
elect to use a portion (minimum 50%) of their annual retainer fee to purchase
shares of Company stock. The Company has reserved 15,000 authorized but unissued
shares of common stock for purchase under the plan. Purchases are made at the
fair market value of the stock on the purchase date. At December 31, 2007,
there
were 7,404 shares available for issuance under the plan.
The
Company has an employee stock purchase plan (the “Purchase Plan”) which
commenced on July 1, 2001, with consecutive monthly offering periods thereafter.
The Company has reserved 450,000 authorized but unissued shares of common stock
for purchase under the plan. Shares are purchased at 85% of the fair market
value on the exercise date through monthly payroll deductions of not less than
1% or more than 10% of cash compensation paid in the month. The Purchase Plan
is
administered by a committee of at least three directors appointed by the Board
of Directors. At December 31, 2007, there were 328,341 shares available for
issuance under this plan.
In
2007,
the Company’s Board of Directors renewed a Stock Repurchase Plan by authorizing
the repurchase of up to 5% or approximately 786,000 shares of the Company's
outstanding common stock, par value $1.00 per share, in connection with shares
expected to be issued under the Company's stock option and employee benefit
plans, and for other corporate purposes. The share repurchases are expected
to
be made primarily on the open market periodically until March 31, 2009, or
earlier termination of the repurchase program by the board. Repurchases will
be
made at the discretion of management based upon market, business, legal,
accounting and other factors. The Company purchased the equivalent of 70,500
shares of its common stock under a prior share repurchase program, which expired
on March 31, 2007. No shares were repurchased under that plan during 2007.
The
Company has purchased 156,249 shares under the current share repurchase program
through December 31, 2007.
The
Company has an Investors Choice Plan (the “Plan”), which is sponsored and
administered by the American Stock Transfer and Trust Company (“AST”) as
independent agent, which enables current shareholders as well as first-time
buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly
through AST at low commissions. Participants may reinvest cash dividends and
make periodic supplemental cash payments to purchase additional shares. Share
purchases pursuant to the Plan are made in the open market. The Plan also allows
participants to deposit their stock certificates with AST for safekeeping or
sale.
Bank
and
holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At December
31, 2007, the Bank could have paid additional dividends of $14.6 million to
its
parent company without regulatory approval. In conjunction with the Company’s
long-term borrowing from Capital Trust, the Bank issued a note to Bancorp for
$35.0 million which was outstanding at December 31, 2007. There were no other
loans outstanding between the Bank and the Company at December 31, 2007 or
December 31, 2006.
Note
13 –
Stock Based Compensation
At
December 31, 2007, 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.
The
Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of
non-qualifying stock options and restricted stock 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 1,365,708 are available for issuance
at December 31, 2007. It has a term of ten years, and is administered by a
committee of at least three independent 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
seven to 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 in equal increments 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.
The
board
of directors approved the granting of stock options totaling 3,750 shares in
2007 and 105,623 shares in 2006. The options are subject to a three year vesting
schedule with one third of the options vesting each year on the anniversary
date
of the respective grants. In addition, the board of directors granted restricted
shares totaling 750 shares in 2007 and 31,483 shares in 2006. The restricted
shares are subject to three year and five year vesting schedules, respectively,
with one third and one fifth, respectively, of the shares vesting each year
on
the anniversary date of the respective grants. Compensation expense is
recognized on a straight-line basis over the stock option or restricted stock
vesting period. The fair value based method for expense recognition of employee
awards resulted in expense of approximately $1.1 million and $0.5 million,
net
of a tax benefits of approximately $0.6 million and $0.1 million for the years
ended December 31, 2007 and 2006, respectively.
Had
the
compensation cost for the Company’s stock-based compensation plan been
determined under the fair value recognition provisions in SFAS No. 123 prior
to
the date of adopting SFAS No. 123R, the Company’s net income and earnings per
share would have been adjusted to the pro forma amounts below for the year
ended
December 31, 2005:
(In
thousands, except per share data)
|
|
2005
|
|
Net
income, as reported
|
|
$
|
33,098
|
|
Basic
earnings per share
|
|
|
2.26
|
|
Diluted
earnings per share
|
|
|
2.24
|
|
Stock-based
compensation cost, net of related tax effects
|
|
|
0
|
|
|
|
|
|
|
Information
calculated as if fair value method had been
|
|
|
|
|
applied
to all awards:
|
|
|
|
|
Net
income, as reported
|
|
$
|
33,098
|
|
Add:
Stock-based compensation expense recognized
|
|
|
|
|
during
the period, net of related tax effects
|
|
|
0
|
|
Less:
Stock-based compensation expense determined
|
|
|
|
|
under
the fair value-based method, net of tax effects
|
|
|
(2,107
|
)
|
Pro
forma net income
|
|
$
|
30,991
|
|
|
|
|
|
|
Basic
earnings per share –
as
reported
|
|
$
|
2.26
|
|
Basic
earnings per share – pro forma
|
|
$
|
2.11
|
|
Diluted
earnings per share – as reported
|
|
$
|
2.24
|
|
Diluted
earnings per share – pro forma
|
|
$
|
2.10
|
|
The
fair
values of all of the options granted during the last three years have been
estimated using a binomial option-pricing model with the following
weighted-average assumptions as of December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
Dividend
yield
|
|
|
3.12
|
%
|
|
2.43
|
%
|
|
2.48
|
%
|
Weighted
average expected volatility
|
|
|
26.71
|
%
|
|
19.12
|
%
|
|
21.27
|
%
|
Weighted
average risk-free interest rate
|
|
|
4.35
|
%
|
|
4.75
|
%
|
|
4.34
|
%
|
Weighted
average expected lives (in years)
|
|
|
7
|
|
|
6
|
|
|
5
|
|
Weighted
average grant-date fair value
|
|
$
|
7.50
|
|
$
|
8.14
|
|
$
|
6.72
|
|
The
dividend yield is based on estimated future dividend yields. The risk-free
rate
for periods within the contractual term of the share option is based on the
U.S.
Treasury yield curve in effect at the time of the grant. Expected volatilities
are generally based on historical volatilities. The expected term of share
options granted is generally derived from historical experience.
The
total
intrinsic value of options exercised during the year ended December 31, 2007
and
2006 was $1.1 million and $0.6 million, respectively. The number of options,
exercise prices, and fair values has been retroactively restated for all stock
dividends, if any, occurring since the date the options were granted. The
Company generally issues authorized but previously unissued shares to satisfy
option exercises.
The
total
of unrecognized compensation cost related to stock options was approximately
$0.4 million as of December 31, 2007. That cost is expected to be recognized
over a weighted average period of approximately 2.0 years.
The
following is a summary of changes in shares under option for the years ended
December 31:
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Aggregate
Intrinsic Value
|
|
Number
Of
Shares
|
|
Weighted
Average Exercise Price
|
|
Number
Of
Shares
|
|
Weighted
Average Exercise Price
|
|
Number
Of
Shares
|
|
Weighted
Average Exercise Price
|
|
Balance,
beginning of year
|
|
|
|
|
|
1,032,585
|
|
$
|
33.77
|
|
|
1,004,473
|
|
$
|
33.08
|
|
|
824,192
|
|
$
|
31.04
|
|
Options
(at fair value) related to option plans of acquired
companies
|
|
|
|
|
|
77,811
|
|
|
18.87
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
3,750
|
|
|
28.87
|
|
|
105,623
|
|
|
37.40
|
|
|
249,061
|
|
|
38.13
|
|
Forfeited
or Expired
|
|
|
|
|
|
(39,517
|
)
|
|
36.58
|
|
|
(41,510
|
)
|
|
37.73
|
|
|
(26,302
|
)
|
|
36.69
|
|
Exercised
|
|
|
|
|
|
(78,264
|
)
|
|
17.48
|
|
|
(36,001
|
)
|
|
20.53
|
|
|
(42,478
|
)
|
|
21.00
|
|
Balance,
end of year
|
|
$
|
1,588,288
|
|
|
996,365
|
|
$
|
33.72
|
|
|
1,032,585
|
|
$
|
33.77
|
|
|
1,004,473
|
|
$
|
33.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
$
|
1,588,288
|
|
|
924,144
|
|
$
|
33.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during the year
|
|
|
|
|
|
|
|
$
|
7.50
|
|
|
|
|
$
|
8.14
|
|
|
|
|
$
|
6.72
|
|
The
following table summarizes information about options outstanding at December
31,
2007:
|
|
Options
Outstanding
|
|
Exercisable
Options
|
|
Exercise Price
|
|
Outstanding
Number
|
|
Weighted Average
Remaining
Contracted Life
(in years)
|
|
Weighted
Average
Exercise Price
|
|
Exercisable
Number
|
|
Weighted
Average
Exercise Price
|
|
$11.78-$21.78
|
|
|
145,172
|
|
|
3.6
|
|
$
|
16.88
|
|
|
145,172
|
|
$
|
16.88
|
|
$28.59-$32.25
|
|
|
202,231
|
|
|
4.7
|
|
|
31.58
|
|
|
198,481
|
|
|
31.64
|
|
$37.40-$38.91
|
|
|
648,962
|
|
|
5.9
|
|
|
38.15
|
|
|
580,491
|
|
|
38.24
|
|
|
|
|
996,365
|
|
|
5.3
|
|
|
33.72
|
|
|
924,144
|
|
|
33.47
|
|
A
summary
of the status of the Company’s restricted stock as of December 31, 2007, is
presented below:
|
|
Number
Of
Shares
|
|
Weighted
Average
Grant-Date
Fair
Value
|
|
Restricted
stock at January 1, 2007
|
|
|
31,483
|
|
$
|
37.40
|
|
Granted
|
|
|
750
|
|
|
28.87
|
|
Vested
|
|
|
(6,078
|
)
|
|
37.40
|
|
Forfeited
|
|
|
(1,409
|
)
|
|
37.40
|
|
Restricted
stock at December 31, 2007
|
|
|
24,746
|
|
|
37.14
|
|
The
total
of unrecognized compensation cost related to restricted stock was approximately
$0.7 million as of December 31, 2007. That cost is expected to be recognized
over a weighted period of approximately 4.0 years.
Note
14 –
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 after January 1, 2005, are based on the
benefit earned as of December 31, 2004, plus benefits earned in future years
of
service based on the employee’s compensation during each such year. On November
14, 2007, the Company informed employees that the plan would be frozen for
new
and existing entrants after December 31, 2007. All benefit accruals for
employees were frozen as of December 31, 2007 based on past service and thus
future salary increases will no longer affect the defined benefit provided
by
the plan although additional vesting may continue to occur.
The
Company's funding policy is to contribute amounts to the plan sufficient to
meet
the minimum funding requirements of the Employee Retirement Income Security
Act
of 1974 (“ERISA”), as amended. In addition, the Company contributes additional
amounts as it deems appropriate based on benefits attributed to service prior
to
the date of the plan freeze. The Plan invests primarily in a diversified
portfolio of managed fixed income and equity funds.
The
Plan's funded status as of December 31 is as follows:
(In
thousands)
|
|
2007
|
|
2006
|
|
Reconciliation
of Projected Benefit Obligation:
|
|
|
|
|
|
|
|
Projected
obligation at January 1
|
|
$
|
22,055
|
|
$
|
21,201
|
|
Service
cost
|
|
|
1,315
|
|
|
1,105
|
|
Interest
cost
|
|
|
1,337
|
|
|
1,230
|
|
Actuarial
loss
|
|
|
734
|
|
|
153
|
|
Curtailment
|
|
|
(2,322
|
)
|
|
|
|
Increase/(decrease)
due to amendments during the year
|
|
|
0
|
|
|
(782
|
)
|
Increase/(decrease)
due to discount rate change
|
|
|
0
|
|
|
(164
|
)
|
Benefit
payments
|
|
|
(177
|
)
|
|
(688
|
)
|
Projected
obligation at December 31
|
|
|
22,942
|
|
|
22,055
|
|
Reconciliation
of Fair Value of Plan Assets:
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
|
20,192
|
|
|
18,431
|
|
Actual
return on plan assets
|
|
|
2,384
|
|
|
1,449
|
|
Employer
contributions
|
|
|
1,400
|
|
|
1,000
|
|
Benefit
payments
|
|
|
(177
|
)
|
|
(688
|
)
|
Fair
value of plan assets at December 31
|
|
|
23,799
|
|
|
20,192
|
|
Funded
Status:
|
|
|
|
|
|
|
|
Funded
status at December 31
|
|
|
857
|
|
|
(1,863
|
)
|
Unrecognized
prior service cost (benefit)
|
|
|
(1,589
|
)
|
|
(1,764
|
)
|
Unrecognized
net actuarial loss
|
|
|
5,078
|
|
|
8,053
|
|
Net
periodic benefit cost not yet recognized
|
|
|
(3,489
|
)
|
|
(6,289
|
)
|
Prepaid
(unfunded) pension cost
|
|
$
|
857
|
|
$
|
(1,863
|
)
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation at December 31
|
|
$
|
22,942
|
|
$
|
19,936
|
|
Net
periodic benefit cost for the previous three years includes the following
components:
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Service
cost for benefits earned
|
|
$
|
1,315
|
|
$
|
1,105
|
|
$
|
1,622
|
|
Interest
cost on projected benefit obligation
|
|
|
1,337
|
|
|
1,230
|
|
|
1,094
|
|
Expected
return on plan assets
|
|
|
(1,508
|
)
|
|
(1,377
|
)
|
|
(1,179
|
)
|
Amortization
of prior service cost
|
|
|
(175
|
)
|
|
(175
|
)
|
|
(63
|
)
|
Recognized
net actuarial loss
|
|
|
512
|
|
|
445
|
|
|
335
|
|
Net
periodic benefit cost
|
|
$
|
1,481
|
|
$
|
1,228
|
|
$
|
1,809
|
|
The
following shows the amounts recognized in accumulated other comprehensive income
as of the beginning of the fiscal year, the amount arising during the year,
the
adjustment due to being recognized as a component of net periodic benefit cost
during the year, and the amount remaining to be recognized and therefore a
part
of accumulated other comprehensive income (loss) as of December 31,
2007:
(In
thousands)
|
|
Prior
Service
Cost
|
|
Net
Gain/(Loss)
|
|
Included
in accumulated other comprehensive income (loss) as of January
1,
2006
|
|
$
|
(1,157
|
)
|
$
|
8,581
|
|
Additions
during the year
|
|
|
(782
|
)
|
|
(83
|
)
|
Reclassifications
due to recognition as net periodic pension cost
|
|
|
175
|
|
|
(445
|
)
|
Included
in accumulated other comprehensive income (loss) as of December
31,
2006
|
|
|
(1,764
|
)
|
|
8,053
|
|
Net
gain due to plan curtailment
|
|
|
0
|
|
|
(2,322
|
)
|
Additions
during the year
|
|
|
0
|
|
|
(142
|
)
|
Reclassifications
due to recognition as net periodic pension cost
|
|
|
175
|
|
|
(511
|
)
|
Included
in accumulated other comprehensive income (loss) as of December
31, 2007
|
|
$
|
(1,589
|
)
|
$
|
5,078
|
|
Applicable
tax effect
|
|
|
633
|
|
|
(2,024
|
)
|
Included
in accumulated other comprehensive income(loss) net of tax effect
as
of December 31, 2007
|
|
$
|
(956
|
)
|
$
|
3,054
|
|
|
|
|
|
|
|
|
|
Amount
expected to be recognized as part of net periodic pension cost
in the next
fiscal year
|
|
$
|
(174
|
)
|
$
|
272
|
|
There
are
no plan assets expected to be returned to the employer in the next twelve
months.
The
following items have not yet been recognized as a component of net periodic
benefit cost as December 31, 2007 and 2008, respectively:
(In
thousands):
|
|
2008
|
|
2007
|
|
2006
|
|
Prior
service cost
|
|
$
|
1,415
|
|
$
|
1,589
|
|
$
|
1,764
|
|
Net
actuarial loss
|
|
|
(4,806
|
)
|
|
(5,078
|
)
|
|
(8,053
|
)
|
Net
periodic benefit cost not yet recognized
|
|
$
|
(3,391
|
)
|
$
|
(3,489
|
)
|
$
|
(6,289
|
)
|
Additional
Information
Weighted-average
assumptions used to determine benefit obligations at December 31 are as
follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
Rate
of compensation increase
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Weighted-average
assumptions used to determine net periodic benefit cost for years ended December
31 are as follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
Expected
return on plan assets
|
|
|
7.50
|
%
|
|
7.50
|
%
|
|
8.00
|
%
|
Rate
of compensation increase
|
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
The
expected rate of return on assets of 7.50% reflects the Plan’s predominant
investment of assets in equity type securities and an analysis of the average
rate of return of the S&P 500 index and the Lehman Brothers Gov’t/Corp.
index over the past 10 years weighted by 66.7% and 33.3%,
respectively.
Plan
Assets
The
Company’s pension plan weighted-average allocations at December 31, 2007 and
2006, by asset category are as follows:
Asset
Category
|
|
2007
|
|
2006
|
|
Equity
securities
|
|
|
47.9
|
%
|
|
71.3
|
%
|
Debt
securities
|
|
|
27.6
|
%
|
|
23.4
|
%
|
Cash,
other
|
|
|
24.5
|
%
|
|
5.3
|
%
|
Total
|
|
|
100.0
|
%
|
|
100.0
|
%
|
The
Company has a written investment policy approved by the Board of Directors
that
governs the investment of the defined benefit pension fund trust portfolio.
The
investment policy is designed to provide limits on risk that is undertaken
by
the investment managers both in terms of market volatility of the portfolio
and
the quality of the individual assets that are held in the portfolio. The
investment policy statement focuses on the following areas of concern:
preservation of capital, diversification, risk tolerance, investment duration,
rate of return, liquidity and investment management costs. Market volatility
risk is controlled by limiting the asset allocation of the most volatile asset
class, equities, to no more than 70% of the portfolio; and ensuring that there
is sufficient liquidity to meet distribution requirements from the portfolio
without disrupting long-term assets. Diversification of the equity portion
of
the portfolio is controlled by limiting the value of any initial acquisition
so
that it does not exceed 5% of the market value of the portfolio when purchased.
The policy requires the sale of any portion of an equity position when its
value
exceeds 10% of the portfolio. Fixed income market volatility risk is managed
by
limiting the term of fixed income investments to five years. Fixed income
investments must carry an “A” or better rating by a recognized credit rating
agency. Corporate debt of a single issuer may not exceed 10% of the market
value
of the portfolio. The investment in derivative instruments such as “naked” call
options, futures, commodities, and short selling is prohibited. Investment
in
equity index funds and the writing of “covered” call options (a conservative
strategy to increase portfolio income) are permitted. Foreign currencies
denominated debt instruments are not permitted. Investment performance is
measured against industry accepted benchmarks. The risk tolerance and asset
allocation limitations imposed by the policy are consistent with attaining
the
rate of return assumptions used in the actuarial funding calculations. A
Retirement Plan Investment Committee meets quarterly to review the activities
of
the investment managers to ensure adherence with the investment policy
statement.
Contributions
The
Company, with input from its actuaries, estimates that the 2008 contribution
will be approximately $1.0 million.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Year
|
|
Pension Benefits
(in
thousands)
|
|
2008
|
|
$
|
323
|
|
2009
|
|
|
387
|
|
2010
|
|
|
433
|
|
2011
|
|
|
511
|
|
2012
|
|
|
655
|
|
2013-2017
|
|
|
5,818
|
|
Cash
and Deferred Profit Sharing Plan
The
Sandy
Spring Bancorp, Inc. Cash and Deferred Profit Sharing Plan includes a 401(k)
provision with a Company match. Effective January 1, 2007 the Company revised
the Plan to eliminate the deferral option and require an all-cash payout of
any
profit sharing distributions beginning in 2007. The 401(k) provision is
voluntary and covers all eligible employees after ninety days of service.
Employees contributing to the 401(k) provision receive a matching contribution
of 100% of the first 3% of compensation and 50% of the next 2% of compensation
subject to employee contribution limitations. The Company match vests
immediately. The Plan permits employees to purchase shares of Sandy Spring
Bancorp, Inc. common stock with their 401(k) contributions, Company match,
and
other contributions under the Plan. Profit sharing contributions and Company
match are included in noninterest expenses and totaled $1.5 million in 2007,
$1.4 million in 2006, and $2.3 million in 2005.
The
Company also had a performance based compensation benefit in 2007 that at one
time was integrated with the Cash and Deferred Profit Sharing Plan and provided
incentives to employees based on the Company's financial results as measured
against key performance indicator goals set by management. Payments were made
annually and amounts included in noninterest expense under the plan amounted
to
$0.2 million in 2007, $2.3 million in 2006, and $2.7 million in 2005. For 2008,
this incentive plan has been replaced with a new short-term incentive plan
named
the Sandy Spring Leadership Incentive Plan. It will provide a cash bonus to
key
members of management based on the Company's financial results using a weighted
formula.
Supplemental
Executive Retirements Agreements
In
past
years, the Company had Supplemental Executive Retirement Agreements ("SERAs")
with its executive officers providing for retirement income benefits as well
as
pre-retirement death benefits. Retirement benefits payable under the SERAs,
if
any, were integrated with other pension plan and Social Security retirement
benefits expected to be received by the executive. The Company accrued the
present value of these benefits over the remaining number of years to the
executives' retirement dates. Effective January 1, 2008, these agreements were
replaced with a defined contribution plan, the “Executive Incentive Retirement
Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as
of December 31, 2007, and those amounts accrued were transferred to the new
plan
on behalf of each participant. Additionally, under the new Plan, officers
designated by the board of directors earn a deferral bonus which is accrued
annually based on the Company’s financial performance compared to a selected
group of peer banks. For current participants, accruals after January 1, 2008
vest immediately. Amounts transferred to the plan from the SERAs on behalf
of
each participant continue to vest based on years of service. Benefit costs
included in noninterest expenses for 2007, 2006 and 2005 were $0.9 million,
$1.0
million, and $0.6 million, respectively.
Executive
Health Insurance Plan
In
past
years, the Company had an Executive Health Insurance Plan that provided for
payment of defined medical and dental expenses not otherwise covered by
insurance for selected executives and their families. Benefits, which were
paid
during both employment and retirement, were subject to a $6,500 limitation
for
each executive per year. Effective January 1, 2008 this plan was eliminated
with
respect to all active executives and liabilities accrued for such payments
upon
retirement by such executives were reversed which resulted in income in 2007
of
$0.4 million. Currently retired executives that formerly retired under the
Plan
will continue to receive this benefit. Expenses under the Plan, covering
insurance premiums and out-of-pocket expense reimbursement benefits, totaled
$35
thousand in 2006, and ($72 thousand) in 2005.
Note
15 – Income Taxes
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
|
Current
Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
13,178
|
|
$
|
11,793
|
|
$
|
11,979
|
|
State
|
|
|
2,514
|
|
|
2,082
|
|
|
2,971
|
|
Total
current
|
|
|
15,692
|
|
|
13,875
|
|
|
14,950
|
|
Deferred
Income Taxes (benefits):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,003
|
)
|
|
(845
|
)
|
|
(2,052
|
)
|
State
|
|
|
(718
|
)
|
|
(141
|
)
|
|
(703
|
)
|
Total
deferred
|
|
|
(2,721
|
)
|
|
(986
|
)
|
|
(2,755
|
)
|
Total
income tax expense
|
|
$
|
12,971
|
|
$
|
12,889
|
|
$
|
12,195
|
|
Temporary
differences between the amounts reported in the financial statements and the
tax
bases of assets and liabilities result in deferred taxes. Deferred tax assets
and liabilities, shown as the sum of the appropriate tax effect for each
significant type of temporary difference, are presented below for the
years
ended
December 31:
(In
thousands)
|
|
2007
|
|
2006
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$
|
10,009
|
|
$
|
7,709
|
|
Loan
and deposit premium/discount
|
|
|
997
|
|
|
389
|
|
Intangible
assets
|
|
|
0
|
|
|
573
|
|
Employee
benefits
|
|
|
3,002
|
|
|
2,573
|
|
Pension
plan costs
|
|
|
0
|
|
|
737
|
|
Unrealized
losses on investments available for sale
|
|
|
0
|
|
|
144
|
|
Non-qualified
stock option expense
|
|
|
149
|
|
|
88
|
|
Other
|
|
|
424
|
|
|
289
|
|
Gross
deferred tax assets
|
|
|
14,581
|
|
|
12,502
|
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(953
|
)
|
|
(1,230
|
)
|
Intangible
assets
|
|
|
(2,777
|
)
|
|
0
|
|
Deferred
loan fees and costs
|
|
|
(1,098
|
)
|
|
(1,494
|
)
|
Unrealized
gains on investments available for sale
|
|
|
(691
|
)
|
|
0
|
|
Bond
accretion
|
|
|
(396
|
)
|
|
(299
|
)
|
Pension
plan costs
|
|
|
(342
|
)
|
|
0
|
|
Other
|
|
|
(3
|
)
|
|
(1
|
)
|
Gross
deferred tax liabilities
|
|
|
(6,260
|
)
|
|
(3,024
|
)
|
Net
deferred tax (liabilities) assets
|
|
$
|
8,321
|
|
$
|
9,478
|
|
No
valuation allowance exists with respect to deferred tax items.
|
|
2007
|
|
2006
|
|
2005
|
|
Federal
income tax rate
|
|
35.0
|
% |
35.0
|
% |
35.0
|
% |
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
Tax
exempt income, net
|
|
|
(9.1
|
)
|
|
(9.7
|
)
|
|
(11.4
|
)
|
State
income taxes, net of federal income tax benefits
|
|
|
3.0
|
|
|
2.9
|
|
|
3.3
|
|
State
tax rate change on deferred tax assets
|
|
|
(0.4
|
)
|
|
0
|
|
|
0
|
|
Other,
net
|
|
|
0.2
|
|
|
0
|
|
|
0
|
|
Effective
tax rate
|
|
|
28.7
|
%
|
|
28.2
|
%
|
|
26.9
|
%
|
Note
16 – Net Income per Common Share
The
calculation of net income per common share for the years ended December
31
is as
follows:
(In
thousands, except per share data)
|
|
2007
|
|
2006
|
|
2005
|
|
Basic:
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
|
Average
common shares outstanding
|
|
|
16,015
|
|
|
14,801
|
|
|
14,664
|
|
Basic
net income per share
|
|
$
|
2.01
|
|
$
|
2.22
|
|
$
|
2.26
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
|
Average
common shares outstanding
|
|
|
16,015
|
|
|
14,801
|
|
|
14,664
|
|
Stock
option adjustment
|
|
|
72
|
|
|
126
|
|
|
103
|
|
Average
common shares outstanding-diluted
|
|
|
16,087
|
|
|
14,927
|
|
|
14,767
|
|
Diluted
net income per share
|
|
$
|
2.01
|
|
$
|
2.20
|
|
$
|
2.24
|
|
As
of
December 31, 2007 options for 733,482 shares of common stock were not included
in computing diluted net income per share because their effects were
anti-dilutive.
Note
17 – Related Party Transactions
Certain
directors and executive officers have loan transactions with the Company. Such
loans were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the
time
for comparable transactions with outsiders. The following schedule summarizes
changes in amounts of loans outstanding, both direct and indirect, to these
persons during the years indicated.
(In
thousands)
|
|
|
2007
|
|
|
2006
|
|
Balance
at January 1
|
|
$
|
38,342
|
|
$
|
40,295
|
|
Additions
|
|
|
3,300
|
|
|
6,852
|
|
Repayments
|
|
|
(15,934
|
)
|
|
(8,805
|
)
|
Balance
at December 31
|
|
$
|
25,708
|
|
$
|
38,342
|
|
Note
18 – Financial Instruments with Off-balance Sheet Risk and
Derivatives
In
the
normal course of business, the Company has various outstanding credit
commitments that are properly not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Company's clients.
The associated credit risk is controlled by subjecting such activity to the
same
credit and quality controls as exist for the Company's lending and investing
activities. The commitments involve diverse business and consumer customers
and
are generally well collateralized. Collateral held varies, but may include
residential real estate, commercial real estate, property and equipment,
inventory and accounts receivable. Management does not anticipate that losses,
if any, which may occur as a result of these commitments, would materially
affect the stockholders' equity of the Company. Since a portion of the
commitments have some likelihood of not being exercised, the amounts do not
necessarily represent future cash requirements. A summary of the financial
instruments with off-balance sheet credit risk is as follows at December
31:
(In
thousands)
|
|
2007
|
|
2006
|
|
Commitments
to extend credit and available credit lines:
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
98,930
|
|
$
|
93,614
|
|
Real
estate-development and construction
|
|
|
82,498
|
|
|
70,159
|
|
Real
estate-residential mortgage
|
|
|
2,955
|
|
|
11,529
|
|
Lines
of credit, principally home equity and business lines
|
|
|
665,778
|
|
|
566,877
|
|
Standby
letters of credit
|
|
|
55,280
|
|
|
42,443
|
|
|
|
$
|
905,441
|
|
$
|
784,622
|
|
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify as
derivatives, but are not designated as hedging instruments. Interest rate swap
contracts involve the risk of dealing with counterparties and their ability
to
meet contractual terms. When the fair value of a derivative instrument contract
is positive, this generally indicates that the counterparty or customer owes
the
Company, and results in credit risk to the Company. When the fair value of
a
derivative instrument contract is negative, the Company owes the customer or
counterparty and therefore, has no credit risk.
A
summary
of the Company’s interest rate swaps is included in the following
table:
|
As
of December 31, 2007
|
(in
thousands)
|
Weighted
Average
|
|
|
Notional
Amount
|
|
|
Estimated
Fair
Value
|
|
Years
to
Maturity
|
|
Receive
Rate
|
|
|
Pay
Rate
|
|
Interest
Rate Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
Fixed/Receive Variable Swaps
|
$
|
3,153
|
|
$
|
74
|
|
2.7
|
|
7.00
|
%
|
|
7.47
|
%
|
Pay
Variable/Receive Fixed Swaps
|
|
3,153
|
|
|
(74
|
)
|
2.7
|
|
7.47
|
|
|
7.00
|
|
Total
Swaps
|
$
|
6,306
|
|
$
|
0
|
|
2.7
|
|
7.24
|
%
|
|
7.24
|
%
|
Note
19 – Litigation
In
the
normal course of business, the Company becomes involved in litigation arising
from the banking, financial, and other activities it conducts. Management,
after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect
on
the Company's financial condition, operating results or liquidity.
Note
20 – Fair Value of Financial Instruments
The
Company discloses fair value information about financial instruments for which
it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial instruments have
been
defined broadly to encompass 94.0% of the Company's assets and 99.0% of its
liabilities at December 31, 2007 and 97.0% of its assets and 99.0% of its
liabilities at December 31, 2006. Fair value is the amount at which a financial
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation, and is best evidenced by a quoted
market price, if one exists.
Quoted
market prices, where available, are shown as estimates of fair market values.
Because no quoted market prices are available for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on the amount and timing of future cash flows and estimated
discount rates.
Present
value techniques used in estimating the fair value of many of the Company's
financial instruments are significantly affected by the assumptions used. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities, and should not be considered an
indication of the fair value of the Company.
The
estimated fair values of the Company's financial instruments at December 31
are
as follows:
|
|
2007
|
|
2006
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(In
thousands)
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial
Assets
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$
|
92,941
|
|
$
|
93,028
|
|
$
|
117,492
|
|
$
|
117,591
|
Investments
available for sale
|
|
186,801
|
|
186,801
|
|
256,845
|
|
256,845
|
Investments
held to maturity and other equity securities
|
|
258,472
|
|
264,761
|
|
284,063
|
|
289,925
|
|
|
|
|
|
|
|
|
|
Loans,
net of allowances
|
|
2,251,939
|
|
2,261,950
|
|
1,786,087
|
|
1,788,214
|
Accrued
interest receivable and other assets (2)
|
|
85,759
|
|
85,759
|
|
76,810
|
|
76,810
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,273,868
|
|
$
|
2,274,872
|
|
$
|
1,994,223
|
|
$
|
1,990,623
|
Short-term
borrowings
|
|
373,972
|
|
395,302
|
|
314,732
|
|
318,189
|
Long-term
borrowings
|
|
52,553
|
|
57,311
|
|
36,808
|
|
39,298
|
Accrued
interest payable and other liabilities (2)
|
|
3,552
|
|
3,552
|
|
3,426
|
|
3,426
|
(1) |
Temporary
investments include federal funds sold, interest-bearing deposits
with
banks and residential mortgage loans held for
sale.
|
(2) |
Only
financial instruments as defined in SFAS No. 107, “Disclosure about Fair
Value of Financial Instruments,” are included in other assets and other
liabilities.
|
The
following methods and assumptions were used to estimate the fair value of each
category of financial instruments for which it is practicable to estimate that
value:
Cash
and Temporary Investments:
Cash
and due from banks, federal funds sold and interest-bearing deposits with
banks.
The
carrying amount approximated the fair value.
Residential
mortgage loans held for sale.
The fair
value of residential mortgage loans held for sale was derived from secondary
market quotations for similar instruments.
Investments.
The fair
value for U.S. Treasury, U.S. Agency, state and municipal, corporate debt and
trust preferred securities was based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and, for equity securities upon quoted market prices.
Loans.
The fair
value was estimated by computing the discounted value of estimated cash flows,
adjusted for potential loan and lease losses, for pools of loans having similar
characteristics. The discount rate was based upon the current loan origination
rate for a similar loan. Non-performing loans have an assumed interest rate
of
0%.
Accrued
interest receivable.
The
carrying amount approximated the fair value of accrued interest, considering
the
short-term nature of the receivable and its expected collection.
Other
assets.
The
carrying amount approximated the fair value considering their short-term
nature.
Deposits.
The fair
value of demand, money market savings and regular savings deposits, which have
no stated maturity, were considered equal to their carrying amount, representing
the amount payable on demand. While management believes that the Bank’s core
deposit relationships provide a relatively stable, low-cost funding source
that
has a substantial intangible value separate from the value of the deposit
balances, these estimated fair values do not include the intangible value of
core deposit relationships, which comprise a significant portion of the Bank’s
deposit base.
The
fair
value of time deposits was based upon the discounted value of contractual cash
flows at current rates for deposits of similar remaining maturity.
Short-term
borrowings.
The
carrying amount approximated the fair value of repurchase agreements due to
their variable interest rates. The fair value of Federal Home Loan Bank of
Atlanta advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
Long-term
borrowings.
The fair
value of the Federal Home Loan Bank of Atlanta advances and subordinated
debentures was estimated by computing the discounted value of contractual cash
flows payable at current interest rates for obligations with similar remaining
terms.
Accrued
interest payable and other liabilities.
The
carrying amount approximated the fair value of accrued interest payable, accrued
dividends and premiums payable, considering their short-term nature and expected
payment.
Note
21 – Parent Company Financial Information
The
condensed financial statements for Sandy Spring Bancorp, Inc. (Parent Only)
pertaining to the periods covered by the Company's consolidated
financial
statements are presented below:
Balance
Sheets
|
|
December
31,
|
(In
thousands)
|
|
2007
|
|
2006
|
Assets
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,601
|
|
$
|
2,870
|
Investments
available for sale (at fair value)
|
|
350
|
|
200
|
Investment
in subsidiary
|
|
302,980
|
|
235,346
|
Loan
to subsidiary
|
|
35,000
|
|
35,000
|
Other
assets
|
|
6,994
|
|
556
|
Total
assets
|
|
$
|
351,925
|
|
$
|
273,972
|
Liabilities
|
|
|
|
|
Subordinated
debentures
|
|
$
|
35,000
|
|
$
|
35,000
|
Accrued
expenses and other liabilities
|
|
1,285
|
|
1,195
|
Total
liabilities
|
|
36,285
|
|
36,195
|
Stockholders’
Equity
|
|
|
|
|
Common
stock
|
|
16,349
|
|
14,827
|
Additional
paid in capital
|
|
83,970
|
|
27,869
|
Retained
earnings
|
|
216,376
|
|
199,102
|
Accumulated
other comprehensive income(loss)
|
|
(1,055
|
)
|
(4,021)
|
Total
stockholders’ equity
|
|
315,640
|
|
237,777
|
Total
liabilities and stockholders’ equity
|
|
$
|
351,925
|
|
$
|
273,972
|
Statements
of Income
|
|
Years
Ended December 31,
|
(In
thousands)
|
|
2007
|
|
2006
|
|
2005
|
Income:
|
|
|
|
|
|
|
Cash
dividends from subsidiary
|
|
$
|
68,880
|
|
$
|
13,073
|
|
$
|
2,952
|
Securities
gains
|
|
0
|
|
0
|
|
1,758
|
Other
income, principally interest
|
|
2,802
|
|
2,269
|
|
2,324
|
Total
income
|
|
71,682
|
|
15,342
|
|
7,034
|
Expenses:
|
|
|
|
|
|
|
Interest
|
|
2,223
|
|
2,223
|
|
2,223
|
Other
expenses
|
|
1,972
|
|
1,555
|
|
695
|
Total
expenses
|
|
4,195
|
|
3,778
|
|
2,918
|
Income
before income taxes and equity in undistributed
income
of subsidiary
|
|
67,487
|
|
11,564
|
|
4,116
|
Income
tax expense (benefit)
|
|
(309
|
)
|
(471
|
)
|
437
|
Income
before equity in undistributed income of subsidiary
|
|
67,796
|
|
12,035
|
|
3,679
|
Equity
in undistributed (excess distributions) income of subsidiary
|
|
(35,534
|
)
|
20,836
|
|
29,419
|
Net
income
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
Statements
of Cash Flows
|
|
Years
Ended December 31,
|
(In
thousands)
|
|
2007
|
2006
|
2005
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
32,262
|
|
$
|
32,871
|
|
$
|
33,098
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Excess
distributions of (equity in undistributed)
income-subsidiary
|
|
35,534
|
|
(20,836
|
)
|
(29,419
|
)
|
Investment
in subsidiary
|
|
(41,176
|
)
|
0
|
|
0
|
|
Securities
gains
|
|
0
|
|
0
|
|
(1,758
|
)
|
Stock
compensation expense
|
|
1,128
|
|
624
|
|
0
|
|
Net
change in other liabilities
|
|
(142
|
)
|
(959
|
)
|
(90
|
)
|
Other-net
|
|
(295
|
)
|
(91
|
)
|
(49
|
)
|
Net
cash provided by operating activities
|
|
27,311
|
|
11,609
|
|
1,782
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Net
increase in loans receivable
|
|
(6,171
|
)
|
0
|
|
0
|
|
Proceeds
from sales of investments available for sale
|
|
0
|
|
0
|
|
4,249
|
|
Increase
in note receivable from subsidiary
|
|
0
|
|
0
|
|
(1,435
|
)
|
Net
cash (used) provided by investing activities
|
|
(6,171
|
)
|
0
|
|
2,814
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Common
stock purchased and retired
|
|
(4,354
|
)
|
(866
|
)
|
(1,437
|
)
|
Proceeds
from issuance of common stock
|
|
1,823
|
|
1,424
|
|
1,498
|
|
Tax
benefit from stock options exercised
|
|
110
|
|
121
|
|
0
|
|
Dividends
paid
|
|
(14,988
|
)
|
(13,028
|
)
|
(12,329
|
)
|
Net
cash used by financing activities
|
|
(17,409
|
)
|
(12,349
|
)
|
(12,268
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
3,731
|
|
(740
|
)
|
(7,672
|
)
|
Cash
and cash equivalents at beginning of year
|
|
2,870
|
|
3,610
|
|
11,282
|
|
Cash
and cash equivalents at end of year
|
|
$
|
6,601
|
|
$
|
2,870
|
|
$
|
3,610
|
|
Note
22 – Regulatory Matters
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have
a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company
and
the Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 2007 and 2006, the capital levels of
the
Company and the Bank substantially exceeded all capital adequacy requirements
to
which they are subject.
As
of
December 31, 2007, the most recent notification from the Bank’s primary
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier
1
leverage ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The
Company's and the Bank's actual capital amounts and ratios are also presented
in
the table:
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
|
To
Be Well
Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
283,571
|
|
|
11.28
|
%
|
$
|
201,123
|
|
|
8.00
|
%
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
269,828
|
|
|
10.77
|
|
|
200,480
|
|
|
8.00
|
|
$
|
250,601
|
|
|
10.00
|
%
|
Tier
1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
258,479
|
|
|
10.28
|
|
|
100,561
|
|
|
4.00
|
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
209,737
|
|
|
8.37
|
|
|
100,240
|
|
|
4.00
|
|
|
150,360
|
|
|
6.00
|
|
Tier
1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
258,479
|
|
|
8.87
|
|
|
87,386
|
|
|
3.00
|
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
209,737
|
|
|
7.22
|
|
|
87,156
|
|
|
3.00
|
|
|
145,260
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
273,143
|
|
|
13.62
|
%
|
$
|
160,482
|
|
|
8.00
|
%
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
269,629
|
|
|
13.45
|
|
|
160,369
|
|
|
8.00
|
|
$
|
200,461
|
|
|
10.00
|
%
|
Tier
1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
253,651
|
|
|
12.64
|
|
|
80,241
|
|
|
4.00
|
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
215,137
|
|
|
10.73
|
|
|
80,185
|
|
|
4.00
|
|
|
120,277
|
|
|
6.00
|
|
Tier
1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
253,651
|
|
|
9.81
|
|
|
77,595
|
|
|
3.00
|
|
|
N/A
|
|
|
|
|
Sandy
Spring Bank
|
|
|
215,137
|
|
|
8.32
|
|
|
77,555
|
|
|
3.00
|
|
|
129,258
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
23 - Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing and Investment Management. Only Community Banking presently 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 were
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 inter-segment 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 effort
of these functions is 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 non-cash charges associated with amortization
of
intangibles related to acquired entities totaling $2.9 million in 2007, $1.8
million in 2006 and 2005.
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. Sandy Spring Insurance Corporation operates the Chesapeake
Insurance Group and Wolfe and Reichelt Insurance Agency, general insurance
agencies located in Annapolis, Maryland, and Neff and Associates, located in
Ocean City, Maryland. Major sources of revenue are insurance commissions from
commercial lines, personal lines, and medical liability lines. Expenses include
personnel and support charges. Included in insurance expenses are non-cash
charges associated with amortization of intangibles related to acquired entities
totaling $0.4 million in 2007 and 2006 and $0.2 million in 2005.
The
Leasing segment is conducted through The Equipment Leasing Company, a subsidiary
of the Bank that provides leases for essential commercial equipment used by
small to medium sized businesses. Equipment leasing is conducted through vendor
relations and direct solicitation to end-users located primarily in states
along
the east coast from New Jersey to Florida. The typical lease is categorized
as a
financing lease and is characterized as a “small ticket” by industry standards,
averaging less than $100 thousand, with individual leases generally not
exceeding $500 thousand. 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 investment management and 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 currently has approximately $711 million in
assets under management. 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 related to acquired entities totaling $0.8 million
in 2007 and 2006 and $0.2 million in 2005.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
(In
thousands)
|
|
Community
Banking
|
|
Insurance
|
|
|
|
Investment
Mgmt.
|
|
Inter-Segment
Elimination
|
|
Total
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
179,364
|
|
$
|
104
|
|
$
|
2,759
|
|
$
|
70
|
|
$
|
(1,322)
|
|
$
|
180,975
|
Interest
expense
|
|
76,319
|
|
0
|
|
1,152
|
|
0
|
|
(1,322)
|
|
76,149
|
Provision
for loan and lease losses
|
|
4,094
|
|
0
|
|
0
|
|
0
|
|
0
|
|
4,094
|
Noninterest
income
|
|
34,680
|
|
7,097
|
|
818
|
|
4,588
|
|
(2,894)
|
|
44,289
|
Noninterest
expenses
|
|
89,930
|
|
5,515
|
|
1,068
|
|
3,848
|
|
(573)
|
|
99,788
|
Income
before income taxes
|
|
43,701
|
|
1,686
|
|
1,357
|
|
810
|
|
(2,321)
|
|
45,233
|
Income
tax expense
|
|
11,439
|
|
676
|
|
539
|
|
317
|
|
0
|
|
12,971
|
Net
income
|
|
$
|
32,262
|
|
$
|
1,010
|
|
$
|
818
|
|
$
|
493
|
|
$
|
(2,321)
|
|
$
|
32,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,045,055
|
|
$
|
12,073
|
|
$
|
36,151
|
|
$
|
10,037
|
|
$
|
(59,363)
|
|
$
|
$3,043,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
151,982
|
|
$
|
68
|
|
$
|
2,277
|
|
$
|
27
|
|
$
|
(911)
|
|
$
|
153,443
|
Interest
expense
|
|
58,780
|
|
0
|
|
818
|
|
0
|
|
(911)
|
|
58,687
|
Provision
for loan and lease losses
|
|
2,795
|
|
0
|
|
0
|
|
0
|
|
0
|
|
2,795
|
Noninterest
income
|
|
29,480
|
|
7,452
|
|
884
|
|
4,115
|
|
(3,036)
|
|
38,895
|
Noninterest
expense
|
|
75,618
|
|
5,690
|
|
994
|
|
3,588
|
|
(794)
|
|
85,096
|
Income
before income taxes
|
|
44,269
|
|
1,830
|
|
1,349
|
|
554
|
|
(2,242)
|
|
45,760
|
Income
tax expense
|
|
11,398
|
|
724
|
|
554
|
|
213
|
|
0
|
|
12,889
|
Net
income
|
|
$
|
32,871
|
|
$
|
1,106
|
|
$
|
795
|
|
$
|
341
|
|
$
|
(2,242)
|
|
$
|
32,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,608,392
|
|
$
|
11,146
|
|
$
|
32,843
|
|
$
|
8,015
|
|
$
|
(49,939)
|
|
$
|
2,610,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
120,842
|
|
$
|
40
|
|
$
|
1,828
|
|
$
|
1
|
|
$
|
(551)
|
|
$
|
122,160
|
Interest
expense
|
|
|
34,023
|
|
|
0
|
|
|
510
|
|
|
0
|
|
(551)
|
|
33,982
|
Provision
for loan and lease losses
|
|
|
2,600
|
|
|
0
|
|
|
0
|
|
|
0
|
|
0
|
|
2,600
|
Noninterest
income
|
|
|
31,526
|
|
|
5,916
|
|
|
1,049
|
|
|
866
|
|
(2,448)
|
|
36,909
|
Noninterest
expense
|
|
|
71,556
|
|
|
4,654
|
|
|
928
|
|
|
795
|
|
(739)
|
|
77,194
|
Income
before income taxes
|
|
|
44,189
|
|
|
1,302
|
|
|
1,439
|
|
|
72
|
|
(1,709)
|
|
45,293
|
Income
tax expense
|
|
|
11,091
|
|
|
516
|
|
|
560
|
|
|
28
|
|
0
|
|
12,195
|
Net
income
|
|
$
|
33,098
|
|
$
|
786
|
|
$
|
879
|
|
$
|
44
|
|
$
|
(1,709)
|
|
$
|
33,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,459,292
|
|
$
|
9,274
|
|
$
|
26,281
|
|
$
|
6,940
|
|
$
|
(42,171)
|
|
$
|
2,459,616
|
Note
24 – Quarterly Financial Results (unaudited)
A
summary
of selected consolidated quarterly financial data for the two years ended
December 31, 2007 is reported in the following table.
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(In
thousands, except per share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
41,894
|
|
$
|
46,014
|
|
$
|
46,958
|
|
$
|
46,109
|
|
Net
interest income
|
|
|
24,015
|
|
|
26,199
|
|
|
27,212
|
|
|
27,400
|
|
Provision
for loan and lease losses
|
|
|
839
|
|
|
780
|
|
|
750
|
|
|
1,725
|
|
Income
before income taxes
|
|
|
10,468
|
|
|
11,333
|
|
|
11,693
|
|
|
11,739
|
|
Net
income
|
|
|
7,545
|
|
|
8,169
|
|
|
8,181
|
|
|
8,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.49
|
|
$
|
0.51
|
|
$
|
0.50
|
|
$
|
0.51
|
|
Diluted
net income per share
|
|
|
0.49
|
|
|
0.51
|
|
|
0.50
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
35,177
|
|
$
|
37,873
|
|
$
|
40,018
|
|
$
|
40,375
|
|
Net
interest income
|
|
|
23,177
|
|
|
23,852
|
|
|
24,122
|
|
|
23,605
|
|
Provision
for loan and lease losses
|
|
|
950
|
|
|
1,045
|
|
|
550
|
|
|
250
|
|
Income
before income taxes
|
|
|
11,717
|
|
|
11,374
|
|
|
11,468
|
|
|
11,201
|
|
Net
income
|
|
|
8,340
|
|
|
8,095
|
|
|
8,122
|
|
|
8,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$
|
0.56
|
|
$
|
0.55
|
|
$
|
0.55
|
|
$
|
0.56
|
|
Diluted
net income per share
|
|
|
0.56
|
|
|
0.54
|
|
|
0.55
|
|
|
0.55
|
|
OTHER
MATERIAL REQUIRED BY FORM 10-K
DESCRIPTION
OF BUSINESS
General
Sandy
Spring Bancorp, Inc. (the “Company") is the one-bank holding company for Sandy
Spring Bank (the "Bank"). The Company is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). As such, the Company is subject to supervision and regulation
by
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
The Company began operating in 1988. The Bank was founded in 1868, and is the
oldest banking business based in Montgomery County, Maryland. The Bank is
independent, community oriented, and conducts a full-service commercial banking
business through 42 community offices located in Anne Arundel, Carroll,
Frederick, Howard, Montgomery and Prince George's counties in Maryland, and
Fairfax and Loudoun counties in Virginia. The Bank is a state chartered bank
subject to supervision and regulation by the Federal Reserve and the state
of
Maryland. The Bank's deposit accounts are insured by the Deposit Insurance
Fund
administered by the Federal Deposit Insurance Corporation (the "FDIC") to the
maximum permitted by law. The Bank is a member of the Federal Reserve System
and
is an Equal Housing Lender. The Company, the Bank, and its other subsidiaries
are Affirmative Action/Equal Opportunity Employers.
The
Bank
experiences substantial competition both in attracting and retaining deposits
and in making loans. Direct competition for deposits comes from other commercial
banks, savings associations, and credit unions located in the Bank's primary
market area of Anne Arundel, Carroll, Frederick, Howard, Montgomery and Prince
George's counties in Maryland, and Fairfax and Loudoun counties in Virginia.
Additional significant competition for deposits comes from mutual funds and
corporate and government debt securities. Sandy Spring Insurance Corporation
(“SSIC”), a wholly-owned subsidiary of the Bank, offers annuities as an
alternative to traditional deposit accounts. SSIC also operates the Chesapeake
Insurance Group, a general insurance agency located in Annapolis, Maryland,
which faces competition primarily from other insurance agencies and insurance
companies. In October 2005, the Company acquired West Financial Services, Inc.
(“WFS”), an asset management and financial planning company located in McLean,
Virginia. WFS faces competition primarily from other financial planners, banks,
and financial management companies. In January 2006, the Company acquired Neff
& Associates (“Neff”), an insurance agency located in Ocean City, Maryland.
Neff faces competition primarily from other insurance agencies and insurance
companies. The primary factors in competing for loans are interest rates, loan
origination fees, and the range of services offered by lenders. Competitors
for
loan originations include other commercial banks, mortgage bankers, mortgage
brokers, savings associations, and insurance companies. Equipment leasing
through the equipment leasing subsidiary basically involves the same competitive
factors as lending, with competition from other equipment leasing companies.
Management believes the Bank is able to compete effectively in its primary
market area.
The
Company's and the Bank's principal executive office is located at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is 301-774-6400. The
Company’s Web site is located at www.sandyspringbank.com.
Loan
and Lease Products
Residential
Real Estate Loans.
The
residential real estate category contains loans principally to consumers secured
by residential real estate. The Company's residential real estate lending policy
requires each loan to have viable repayment sources. Residential real estate
loans are evaluated for the adequacy of these repayment sources at the time
of
approval, based upon measures including credit scores, debt-to-income ratios,
and collateral values. Credit risk for residential real estate loans arises
from
borrowers lacking the ability or willingness to repay the loan, and by a
shortfall in the value of the residential real estate in relation to the
outstanding loan balance in the event of a default and subsequent liquidation
of
the real estate collateral. The residential real estate portfolio includes
both
conforming and nonconforming mortgage loans. Conforming mortgage loans represent
loans originated in accordance with underwriting standards set forth by the
government-sponsored entities (“GSEs”), including the Federal National Mortgage
Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie
Mac”), and the Government National Mortgage Association (“Ginnie Mae”), which
serve as the primary purchasers of loans sold in the secondary mortgage market
by mortgage lenders. These loans are generally collateralized by
one-to-four-family residential real estate, have loan-to-collateral value ratios
of 80% or less or have mortgage insurance to insure down to 80%, and are made
to
borrowers in good credit standing. Substantially all fixed-rate conforming
loans
originated are sold in the secondary mortgage market. For any loans retained
by
the Company, title insurance insuring the priority of its mortgage lien, as
well
as fire and extended coverage casualty insurance protecting the properties
securing the loans are required. Borrowers may be required to advance funds,
with each monthly payment of principal and interest, to a loan escrow account
from which the Company makes disbursements for items such as real estate taxes
and mortgage insurance premiums. Appraisers approved by the Company appraise
the
properties securing substantially all of the Company's residential mortgage
loans.
Nonconforming
mortgage loans represent loans that generally are not saleable in the secondary
market to the GSEs for inclusion in conventional mortgage-backed securities
due
to the credit characteristics of the borrower, the underlying documentation,
the
loan-to-value ratio, or the size of the loan, among other factors. The Company
originates nonconforming loans for its own portfolio and for sale to third-party
investors, usually large mortgage companies, under commitments by them to
purchase subject to compliance with pre-established investor criteria. These
nonconforming loans generated for sale include some residential mortgage credits
that may be categorized as sub-prime under federal banking regulations. Such
sub-prime credits typically remain on the Company’s consolidated books after
funding for thirty days or less, and are included in residential mortgages
held
for sale on the face of the balance sheet. The Company also holds occasional,
isolated credits that inadvertently failed to meet GSE or other third-party
investor criteria, or that were originated and managed in the ordinary course
of
business (rather than in any sub-prime lending program) and may have
characteristics that could cause them to be categorized as sub-prime. The
Company’s current practice is to sell all such sub-prime loans to third-party
investors. The Company believes that the sub-prime credits it originates or
holds and the risks they entail are not significant to its financial condition,
results of operations, liquidity, or capital resources.
The
Company engages in sales of residential mortgage loans originated by the Bank.
The Company's current practice is to sell loans on a servicing released basis.
The
Company makes residential real estate development and construction loans
generally to provide interim financing on property during the development and
construction period. Borrowers include builders, developers and persons who
will
ultimately occupy the single-family dwelling. Residential real estate
development and construction loan funds are disbursed periodically as
pre-specified stages of completion are attained based upon site inspections.
Interest rates on these loans are usually adjustable. Loans to individuals
for
the construction of primary personal residences are typically secured by the
property under construction, frequently include additional collateral (such
as a
second mortgage on the borrower's present home), and commonly have maturities
of
six to twelve months. The Company attempts to obtain the permanent mortgage
loan
under terms, conditions and documentation standards that permit the sale of
the
mortgage loan in the secondary mortgage loan market. The Company's practice
is
to immediately sell substantially all fixed-rate residential mortgage loans
in
the secondary market with servicing released.
Commercial
Loans and Leases.
The
Company devotes significant resources and attention to seeking and then serving
commercial clients. Included in this category are commercial real estate loans,
commercial construction loans, leases and other commercial loans. Over the
years, the Company’s commercial loan clients have come to represent a diverse
cross-section of small to mid-size local businesses, whose owners and employees
are often established Bank customers. Such banking relationships are a natural
business for the Company, with its long-standing community roots and extensive
experience in serving and lending to this market segment.
Commercial
loans are evaluated for the adequacy of repayment sources at the time of
approval and are regularly reviewed for any possible deterioration in the
ability of the borrower to repay the loan. Collateral generally is required
to
provide the Company with an additional source of repayment in the event of
default by a commercial borrower. The structure of the collateral package,
including the type and amount of the collateral, varies from loan to loan
depending on the financial strength of the borrower, the amount and terms of
the
loan, and the collateral available to be pledged by the borrower, but generally
may include real estate, accounts receivable, inventory, equipment or other
assets. Loans also may be supported by personal guarantees from the principals
of the commercial loan borrowers. The financial condition and cash flow of
commercial borrowers are closely monitored by the submission of corporate
financial statements, personal financial statements and income tax returns.
The
frequency of submissions of required information depends upon the size and
complexity of the credit and the collateral that secures the loan. Credit risk
for commercial loans arises from borrowers lacking the ability or willingness
to
repay the loan, and in the case of secured loans, by a shortfall in the
collateral value in relation to the outstanding loan balance in the event of
a
default and subsequent liquidation of collateral. The Company has no commercial
loans to borrowers in similar industries that exceed 10% of total
loans.
Included
in commercial loans are credits directly originated by the Company and
syndicated transactions or loan participations that are originated by other
lenders. The Corporation's commercial lending policy requires each loan,
regardless of whether it is directly originated or is purchased, to have viable
repayment sources. The risks associated with syndicated loans or purchased
participations are similar to those of directly originated commercial loans,
although additional risk may arise from the limited ability to control actions
of the primary lender. Shared National Credits (SNC), as defined by the banking
regulatory agencies, represent syndicated lending arrangements with three or
more participating financial institutions and credit exceeding $20.0 million
in
the aggregate. As of December 31, 2007, the Company had $48.1 million in SNC
purchased outstanding and no SNC sold outstanding. The Company also sells
participations in loans it originates to other financial institutions in order
to build long-term customer relationships or limit loan concentration. Strict
policies are in place governing the degree of risk assumed and volume of loans
held. At December 31, 2007, other financial institutions had $10.8 million
in
outstanding commercial and commercial real estate loan participations sold
by
the Company, and the Company had $39.4 million in outstanding commercial and
commercial real estate loan participations purchased from other lenders,
excluding SNC.
The
Company's commercial real estate loans consist of loans secured by owner
occupied properties where an established banking relationship exists and
involves investment properties for warehouse, retail, and office space with
a
history of occupancy and cash flow. The
commercial real estate category contains mortgage loans to developers and owners
of commercial real estate. Commercial real estate loans are governed by the
same
lending policies and subject to credit risk as previously described for
commercial loans. Although terms and amortization periods vary, the Company's
commercial mortgages generally have maturities or repricing opportunities of
five years or less. The Company seeks to reduce the risks associated with
commercial mortgage lending by generally lending in its market area, using
conservative loan-to-value ratios and obtaining periodic financial statements
and tax returns from borrowers to perform annual loan reviews. It is also the
Company's general policy to obtain personal guarantees from the principals
of
the borrowers and to underwrite the business entity from a cash flow
perspective.
Commercial
real estate loans secured by owner occupied properties are based upon the
borrower’s financial health and the ability of the borrower and the business to
repay. Whenever appropriate and available, the Bank seeks governmental loan
guarantees, such as the Small Business Administration loan programs, to reduce
risks. All borrowers are required to forward annual corporate, partnership
and
personal financial statements. Interest rate risks are mitigated by using either
floating interest rates or by fixing rates for a short period of time, generally
less than three years. While loan amortizations may be approved for up to 300
months, each loan generally has a call provision (maturity date) of five years
or less. A risk rating system is used to determine loss exposure.
The
Company lends for commercial construction in markets it knows and understands,
works selectively with local, top-quality builders and developers, and requires
substantial equity from its borrowers. The underwriting process is designed
to
confirm that the project will be economically feasible and financially viable;
it is generally evaluated as though the Company will provide permanent
financing. The Company's portfolio growth objectives do not include speculative
commercial construction projects or projects lacking reasonable proportionate
sharing of risk. The Company has limited loan losses in this area of lending
through monitoring of development and construction loans with on-site
inspections and control of disbursements on loans in process. Development and
construction loans are secured by the properties under development or
construction and personal guarantees are typically obtained. Further, to assure
that reliance is not placed solely upon the value of the underlying collateral,
the Company considers the financial condition and reputation of the borrower
and
any guarantors, the amount of the borrower's equity in the project, independent
appraisals, cost estimates and pre-construction sales information.
Residential
construction loans to residential builders are generally made for the
construction of residential homes for which a binding sales contract exists
and
the prospective buyers had been pre-qualified for permanent mortgage financing
by either third-party lenders (mortgage companies or other financial
institutions) or the Company. Loans for the development of residential land
are
extended when evidence is provided that the lots under development will be
or
have been sold to builders satisfactory to the Company. These loans are
generally extended for a period of time sufficient to allow for the clearing
and
grading of the land and the installation of water, sewer and roads, typically
a
minimum of eighteen months to three years. In addition, residential land
development loans generally carry a loan-to-value ratio not to exceed 75% of
the
value of the project as completed.
The
Company's equipment leasing business is, for the most part, technology based,
consisting of a portfolio of leases for essential commercial equipment used
by
small to medium sized businesses. Equipment leasing is conducted through vendor
relations and direct solicitation to end-users located primarily in east coast
states from New Jersey to Florida. The typical lease is “small ticket” by
industry standards, averaging less than $100 thousand, with individual leases
generally not exceeding $500 thousand. Terms generally are fixed payment for
up
to five years. Leases are extended based primarily upon the ability of the
borrower to pay rather than the value of the leased property.
The
Company makes other commercial loans. Commercial term loans are made to provide
funds for equipment and general corporate needs. This loan category is designed
to support borrowers who have a proven ability to service debt over a term
generally not to exceed 84 months. The Company generally requires a first lien
position on all collateral and requires guarantees from owners having at least
a
20% interest in the involved business. Interest rates on commercial term loans
are generally floating or fixed for a term not to exceed five years. Management
carefully monitors industry and collateral concentrations to avoid loan
exposures to a large group of similar industries or similar collateral.
Commercial loans are evaluated for historical and projected cash flow
attributes, balance sheet strength, and primary and alternate resources of
personal guarantors. Commercial term loan documents require borrowers to forward
regular financial information on both the business and personal guarantors.
Loan
covenants require at least annual submission of complete financial information
and in certain cases this information is required monthly, quarterly or
semi-annually depending on the degree to which the Company desires information
resources for monitoring a borrower’s financial condition and compliance with
loan covenants. Examples of properly margined collateral for loans, as required
by bank policy, would be a 75% advance on the lesser of appraisal or recent
sales price on commercial property, an 80% or less advance on eligible
receivables, a 50% or less advance on eligible inventory and an 80% advance
on
appraised residential property. Collateral borrowing certificates may be
required to monitor certain collateral categories on a monthly or quarterly
basis. Loans may require personal guarantees. Key person life insurance may
be
required as appropriate and as necessary to mitigate the risk of loss of a
primary owner or manager.
Commercial
lines of credit are granted to finance a business borrower’s short-term credit
needs and/or to finance a percentage of eligible receivables and inventory.
In
addition to the risks inherent in term loan facilities, line of credit borrowers
typically require additional monitoring to protect the lender against increasing
loan volumes and diminishing collateral values. Commercial lines of credit
are
generally revolving in nature and require close scrutiny. The Company generally
requires at least an annual out of debt period (for seasonal borrowers) or
regular financial information (monthly or quarterly financial statements,
borrowing base certificates, etc.) for borrowers with more growth and greater
permanent working capital financing needs. Advances against collateral value
are
limited. Lines of credit and term loans to the same borrowers generally are
cross-defaulted and cross-collateralized. Interest rate charges on this group
of
loans generally float at a factor at or above the prime lending
rate.
Consumer
Lending.
Consumer lending continues to be very important to the Company’s full-service,
community banking business. This category of loans includes primarily home
equity loans and lines, installment loans, personal lines of credit, marine
loans and student loans.
The
home
equity category consists mainly of revolving lines of credit to consumers which
are secured by residential real estate. Home
equity lines of credit and other home equity loans are originated by the Company
for typically up to 90% of the appraised value, less the amount of any existing
prior liens on the property. While home equity loans have maximum terms of
up to
twenty years and interest rates are generally fixed, home equity lines of credit
have maximum terms of up to ten years for draws and thirty years for repayment,
and interest rates are generally adjustable. The Company secures these loans
with mortgages on the homes (typically a second mortgage). Purchase money second
mortgage loans originated by the Company have maximum terms ranging from ten
to
thirty years. These loans generally carry a fixed rate of interest for the
entire term or a fixed rate of interest for the first five years, repricing
every five years thereafter at a predetermined spread to the prime rate of
interest. Home equity lines are generally governed by the same lending policies
and subject to credit risk as described above for residential real estate
loans.
Other
consumer loans include installment loans used by customers to purchase
automobiles, boats, recreational vehicles, and student loans. These consumer
loans are generally governed by the same overall lending policies as described
for residential real estate. Credit risk for consumer loans arises from
borrowers lacking the ability or willingness to repay the loan, and in the
case
of secured loans, by a shortfall in the value of the collateral in relation
to
the outstanding loan balance in the event of a default and subsequent
liquidation of collateral.
Consumer
installment loans are generally offered for terms of up to five years at fixed
interest rates. The Company makes loans for automobiles, recreational vehicles,
and marine craft, both new and used, directly to the borrowers. Automobile
loans
can be for up to 100% of the purchase price or the retail value listed by the
National Automobile Dealers Association. The terms of the loans are determined
by the age and condition of the collateral. Collision insurance policies are
required on all these loans, unless the borrower has substantial other assets
and income. The Company’s student loans are made in amounts of up to $20,500 per
year. The Company offers a variety of graduate and undergraduate loan programs
under the Federal Family Education Loan Program. Interest is capitalized
annually until the student leaves school and amortization over a ten-year period
then begins. It is the Company’s practice to sell all such loans in the
secondary market when the student leaves school. The Company also makes other
consumer loans, which may or may not be secured. The term of the loans usually
depends on the collateral. Unsecured loans usually do not exceed $50 thousand
and have a term of no longer than 36 months.
Availability
of Filings Through the Company’s Website
The
Company provides internet access to annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms
3,
4, and 5, and amendments to those reports, through the Investor Relations area
of the Company’s Web site, at www.sandyspringbank.com.
Access
to these reports is provided by means of a link to a third-party vendor that
maintains a database of such filings. In general, the Company intends that
these
reports be available as soon as reasonably practicable after they are filed
with
or furnished to the SEC. However, technical and other operational obstacles
or
delays caused by the vendor may delay their availability. The SEC maintains
a
Web site (www.sec.gov)
where
these filings also are available through the SEC’s EDGAR system. There is no
charge for access to these filings through either the Company’s site or the
SEC’s site.
Regulation,
Supervision, and Governmental Policy
Following
is a brief summary of certain statutes and regulations that significantly affect
the Company and the Bank. A number of other statutes and regulations affect
the
Company and the Bank but are not summarized below.
Bank
Holding Company Regulation.
The
Company is registered as a bank holding company under the Holding Company Act
and, as such, is subject to supervision and regulation by the Federal Reserve.
As a bank holding company, the Company is required to furnish to the Federal
Reserve annual and quarterly reports of its operations and additional
information and reports. The Company is also subject to regular examination
by
the Federal Reserve.
Under
the
Holding Company Act, a bank holding company must obtain the prior approval
of
the Federal Reserve before (1) acquiring direct or indirect ownership or control
of any class of voting securities of any bank or bank holding company if, after
the acquisition, the bank holding company would directly or indirectly own
or
control more than 5% of the class; (2) acquiring all or substantially all of
the
assets of another bank or bank holding company; or (3) merging or consolidating
with another bank holding company.
Under
the
Holding Company Act, any company must obtain approval of the Federal Reserve
prior to acquiring control of the Company or the Bank. For purposes of the
Holding Company Act, "control" is defined as ownership of 25% or more of any
class of voting securities of the Company or the Bank, the ability to control
the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank.
The
Change in Bank Control Act and the related regulations of the Federal Reserve
require any person or persons acting in concert (except for companies required
to make application under the Holding Company Act), to file a written notice
with the Federal Reserve before the person or persons acquire control of the
Company or the Bank. The Change in Bank Control Act defines "control" as the
direct or indirect power to vote 25% or more of any class of voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The
Holding Company Act also limits the investments and activities of bank holding
companies. In general, a bank holding company is prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares
of
a company that is not a bank or a bank holding company or from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks, providing services for its subsidiaries, non-bank activities that are
closely related to banking, and other financially related activities. The
activities of the Company are subject to these legal and regulatory limitations
under the Holding Company Act and Federal Reserve regulations.
In
general, bank holding companies that qualify as financial holding companies
under federal banking law may engage in an expanded list of non-bank activities.
Non-bank and financially related activities of bank holding companies, including
companies that become financial holding companies, also may be subject to
regulation and oversight by regulators other than the Federal Reserve. The
Company is not a financial holding company, but may choose to become one in
the
future.
The
Federal Reserve has the power to order a holding company or its subsidiaries
to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
The
Federal Reserve has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "Regulatory Capital Requirements."
The
Federal Reserve has the power to prohibit dividends by bank holding companies
if
their actions constitute unsafe or unsound practices. The Federal Reserve has
issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve's view that a bank holding
company should pay cash dividends only to the extent that the company's net
income for the past year is sufficient to cover both the cash dividends and
a
rate of earnings retention that is consistent with the company's capital needs,
asset quality, and overall financial condition.
Bank
Regulation.
On
September 21, 2001, the Bank's application to the Maryland State Commissioner
of
Financial Regulation to become a state chartered bank and trust company was
approved and the Bank began operations as such. The Bank previously was a
national bank regulated by the United States Comptroller of the Currency. The
Bank is a member of the Federal Reserve System and is subject to supervision
by
the Federal Reserve and the State of Maryland. Deposits of the Bank are insured
by the FDIC to
the
legal maximum of $100 thousand for each insured depositor.
Deposits, reserves, investments, loans, consumer law compliance, issuance of
securities, payment of dividends, establishment of branches, mergers and
acquisitions, corporate activities, changes in control, electronic funds
transfers, responsiveness to community needs, management practices, compensation
policies, and other aspects of operations are subject to regulation by the
appropriate federal and state supervisory authorities. In addition, the Bank
is
subject to numerous federal, state and local laws and regulations which set
forth specific restrictions and procedural requirements with respect to
extensions of credit (including to insiders), credit practices, disclosure
of
credit terms and discrimination in credit transactions.
The
Federal Reserve regularly examines the operations and condition of the Bank,
including, but not limited to, its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of the Bank's depositors and the Deposit Insurance Fund. In addition, the Bank
is required to furnish quarterly and annual reports to the Federal Reserve.
The
Federal Reserve's enforcement authority includes the power to remove officers
and directors and the authority to issue cease-and-desist orders to prevent
a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
The
Federal Reserve has adopted regulations regarding capital adequacy, which
require member banks to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "Regulatory Capital
Requirements." Federal Reserve and State regulations limit the amount of
dividends that the Bank may pay to the Company. See “Note 12 - Stockholders’
Equity” of the Notes to the Consolidated Financial Statements.
The
Bank
is subject to restrictions imposed by federal law on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and
on
investments in their stock or other securities. These restrictions prevent
the
Company and the Bank's other affiliates from borrowing from the Bank unless
the
loans are secured by specified collateral, and require those transactions to
have terms comparable to terms of arms-length transactions with third persons.
In addition, secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Company and all other
affiliates together to an aggregate of 20% of the Bank's capital and surplus.
Certain exemptions to these limitations apply to extensions of credit and other
transactions between the Bank and its subsidiaries. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank
for
its cash needs, including funds for acquisitions and for payment of dividends,
interest, and operating expenses.
Under
Federal Reserve regulations, banks must adopt and maintain written policies
that
establish appropriate limits and standards for extensions of credit secured
by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards; prudent underwriting standards, including
loan-to-value limits, that are clear and measurable; loan administration
procedures; and documentation, approval, and reporting requirements. A bank's
real estate lending policy must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
adopted by the federal bank regulators. The Interagency Guidelines, among other
things, call for internal loan-to-value limits for real estate loans that are
not in excess of the limits specified in the Guidelines. The Interagency
Guidelines state, however, that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
The
FDIC
has established a risk-based deposit insurance premium assessment system for
insured depository institutions. Under the current system, insured institutions
are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors. An institution’s assessment
rate depends upon the category to which it is assigned. Risk category I, which
contains the least risky depository institutions, is expected to include more
than 90% of all institutions. Unlike the other categories, Risk Category I
contains further risk differentiation based on the FDIC’s analysis of financial
ratios, examination component ratings and other information. Assessment rates
are determined by the FDIC and currently range from five to seven basis points
for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust
rates uniformly from one quarter to the next, except that no single adjustment
can exceed three basis points. No institution may pay a dividend if in default
of its FDIC assessment.
Regulatory
Capital Requirements.
The
Federal Reserve has established guidelines for maintenance of appropriate levels
of capital by bank holding companies and member banks. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to risk-weighted assets.
These capital regulations are subject to change.
The
regulations of the Federal Reserve require bank holding companies and member
banks to maintain a minimum leverage ratio of "Tier 1 capital" (as defined
in
the risk-based capital guidelines discussed in the following paragraphs) to
total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies and banks, with composite examination ratings
of 1 under the rating system used by the federal bank regulators, would be
permitted to operate at or near this minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. A bank
or
bank holding company experiencing or anticipating significant growth is expected
to maintain capital well above the minimum levels. In addition, the Federal
Reserve has indicated that it also may consider the level of an organization's
ratio of tangible Tier 1 capital (after deducting all intangibles) to total
assets in making an overall assessment of capital.
The
risk-based capital rules of the Federal Reserve require bank holding companies
and member banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a core capital (Tier
1)
requirement and a supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock (noncumulative perpetual preferred stock with respect to banks), and
minority interests in the equity accounts of consolidated subsidiaries; less
all
intangible assets, except for certain mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements include, subject
to
certain limitations, the allowance for losses on loans and leases; perpetual
preferred stock that does not qualify as Tier 1 capital; long-term preferred
stock with an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to
45%
of pre-tax net unrealized gains on available-for-sale equity
securities.
The
risk-based capital regulations assign balance sheet assets and credit equivalent
amounts of off-balance sheet obligations to one of four broad risk categories
based principally on the degree of credit risk associated with the obligor.
The
assets and off-balance sheet items in the four risk categories are weighted
at
0%, 20%, 50% and 100%. These computations result in the total risk-weighted
assets.
The
risk-based capital regulations require all commercial banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of
core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for credit losses that may be included in capital to 1.25% of total
risk-weighted assets.
The
federal bank regulatory agencies have established a joint policy regarding
the
evaluation of commercial banks' capital adequacy for interest rate risk. Under
the policy, the Federal Reserve's assessment of a bank's capital adequacy
includes an assessment of the bank's exposure to adverse changes in interest
rates. The Federal Reserve has determined to rely on its examination process
for
such evaluations rather than on standardized measurement systems or formulas.
The Federal Reserve may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are
adequate.
Federal
banking regulations also require banks with significant trading assets or
liabilities to maintain supplemental risk-based capital based upon their levels
of market risk. The Bank did not have significant levels of trading assets
or
liabilities during 2007, and was not required to maintain such supplemental
capital.
Well-capitalized
institutions are not subject to limitations on brokered deposits, while an
adequately capitalized institution is able to accept, renew, or rollover
brokered deposits only with a waiver from the FDIC and subject to certain
restrictions on the yield paid on such deposits. Undercapitalized institutions
are not permitted to accept brokered deposits.
The
Federal Reserve has established regulations that classify banks by capital
levels and provide for the Federal Reserve to take various "prompt corrective
actions" to resolve the problems of any bank that fails to satisfy the capital
standards. Under these regulations, a well-capitalized bank is one that is
not
subject to any regulatory order or directive to meet any specific capital level
and that has a total risk-based capital ratio of 10% or more, a Tier 1
risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more.
An
adequately capitalized bank is one that does not qualify as well-capitalized
but
meets or exceeds the following capital requirements: a total risk-based capital
ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio
of
either (i) 4% or (ii) 3% if the bank has the highest composite examination
rating. A bank that does not meet these standards is categorized as
undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A bank that falls within
any
of the three undercapitalized categories established by the prompt corrective
action regulation is subject to severe regulatory sanctions. As of December
31,
2007, the Bank was well-capitalized as defined in the Federal Reserve's
regulations.
For
information regarding the Company's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations — Capital
Management” of this report, and “Note 11-Long-term Borrowings,” and "Note
22 – Regulatory Matters" of the Notes to the Consolidated Financial
Statements of this report.
Supervision
and Regulation of Mortgage Banking Operations
The
Company's mortgage banking business is subject to the rules and regulations
of
the U.S. Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration ("FHA"), the Veterans' Administration ("VA"), and the
Fannie Mae with respect to originating, processing, selling and servicing
mortgage loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines, which include provisions
for inspections and appraisals, require credit reports on prospective borrowers,
and fix maximum loan amounts. Lenders such as the Company are required annually
to submit audited financial statements to Fannie Mae, FHA and VA. Each of these
regulatory entities has its own financial requirements. The Company's affairs
are also subject to examination by the Federal Reserve, Fannie Mae, FHA and
VA
at all times to assure compliance with the applicable regulations, policies
and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act,
Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate
Settlement Procedures Act and related regulations that prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. The Company's mortgage banking operations
also are affected by various state and local laws and regulations and the
requirements of various private mortgage investors.
Community
Reinvestment
Under
the
Community Reinvestment Act (“CRA”), a financial institution has a continuing and
affirmative obligation to help meet the credit needs of the entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions, or limit
an institution’s discretion to develop the types of products and services that
it believes are best suited to its particular community. However, institutions
are rated on their performance in meeting the needs of their communities.
Performance is tested in three areas: (a) lending, to evaluate the institution’s
record of making loans in its assessment areas; (b) investment, to evaluate
the
institution’s record of investing in community development projects, affordable
housing, and programs benefiting low or moderate income individuals and
businesses; and (c) service, to evaluate the institution’s delivery of services
through its branches, ATMs and other offices. The CRA requires each federal
banking agency, in connection with its examination of a financial institution,
to assess and assign one of four ratings to the institution’s record of meeting
the credit needs of the community and to take such record into account in its
evaluation of certain applications by the institution, including applications
for charters, branches and other deposit facilities, relocations, mergers,
consolidations, acquisitions of assets or assumptions of liabilities, and
savings and loan holding company acquisitions. The CRA also requires that all
institutions make public, disclosure of their CRA ratings. The Bank was assigned
a “satisfactory” rating as a result of its last CRA examination.
Bank
Secrecy Act
Under
the
Bank Secrecy Act (“BSA”), a financial institution is required to have systems in
place to detect certain transactions, based on the size and nature of the
transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In
addition, financial institutions are required to file suspicious activity
reports for transactions that involve more than $5,000 and which the financial
institution knows, suspects, or has reason to suspect involves illegal funds,
is
designed to evade the requirements of the BSA, or has no lawful purpose. The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot
Act" or the "Patriot Act", enacted in response to the September 11, 2001,
terrorist attacks, enacted prohibitions against specified financial transactions
and account relationships, as well as enhanced due diligence standards intended
to prevent the use of the United States financial system for money laundering
and terrorist financing activities. The Patriot Act requires banks and other
depository institutions, brokers, dealers and certain other businesses involved
in the transfer of money to establish anti-money laundering programs, including
employee training and independent audit requirements meeting minimum standards
specified by the act, to follow standards for customer identification and
maintenance of customer identification records, and to compare customer lists
against lists of suspected terrorists, terrorist organizations and money
launderers. The Patriot Act also requires federal bank regulators to evaluate
the effectiveness of an applicant in combating money laundering in determining
whether to approve a proposed bank acquisition.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established a broad range of
corporate governance and accounting measures intended to increase corporate
responsibility and protect investors by improving the accuracy and reliability
of disclosures under federal securities laws. The Company is subject to
Sarbanes-Oxley because it is required to file periodic reports with the SEC
under the Securities and Exchange Act of 1934. Among other things,
Sarbanes-Oxley, its implementing regulations and related Nasdaq Stock Market
rules have established membership requirements and additional responsibilities
for the Company’s audit committee, imposed restrictions on the relationship
between the Company and its outside auditors (including restrictions on the
types of non-audit services our auditors may provide to us), imposed additional
financial statement certification responsibilities for the Company’s chief
executive officer and chief financial officer, expanded the disclosure
requirements for corporate insiders, required management to evaluate the
Company’s disclosure controls and procedures and its internal control over
financial reporting, and required the Company’s auditors to issue a report on
our internal control over financial reporting.
Other
Laws and Regulations
Some
of
the aspects of the lending and deposit business of the Bank that are subject
to
regulation by the Federal Reserve and the FDIC include reserve requirements
and
disclosure requirements in connection with personal and mortgage loans and
deposit accounts. The Bank’s federal student lending activities are subject to
regulation and examination by the United States Department of Education. In
addition, the Bank is subject to numerous federal and state laws and regulations
that include specific restrictions and procedural requirements with respect
to
the establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms, and discrimination in credit
transactions.
Enforcement
Actions
Federal
statutes and regulations provide financial institution regulatory agencies
with
great flexibility to undertake an enforcement action against an institution
that
fails to comply with regulatory requirements. Possible enforcement actions
range
from the imposition of a capital plan and capital directive to civil money
penalties, cease-and-desist orders, receivership, conservatorship, or the
termination of the deposit insurance.
RISK
FACTORS
Investing
in our common stock involves risks. You should carefully consider the following
risk factors before you decide to make an investment decision regarding our
stock. The risk factors may cause our future earnings to be lower or our
financial condition to be less favorable than we expect. In addition, other
risks of which we are not aware, or which we do not believe are material, may
cause earnings to be lower, or may hurt our financial condition. You should
also
consider the other information in this Annual Report on Form 10-K, as well
as in
the documents incorporated by reference into it.
Changes
in interest rates and other factors beyond our control may adversely affect
our
earnings and financial condition.
Our
net
income depends to a great extent upon the level of our net interest income.
Changes in interest rates can increase or decrease net interest income and
net
income. Net interest income is the difference between the interest income we
earn on loans, investments, and other interest-earning assets, and the interest
we pay on interest-bearing liabilities, such as deposits and borrowings. Net
interest income is affected by changes in market interest rates, because
different types of assets and liabilities may react differently, and at
different times, to market interest rate changes. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in
a
period, an increase in market rates of interest could reduce net interest
income. Similarly, when interest-earning assets mature or reprice more quickly
than interest-bearing liabilities, falling interest rates could reduce net
interest income.
Changes
in market interest rates are affected by many factors beyond our control,
including inflation, unemployment, money supply, international events, and
events in world financial markets. We attempt to manage our risk from changes
in
market interest rates by adjusting the rates, maturity, repricing, and balances
of the different types of interest-earning assets and interest-bearing
liabilities, but interest rate risk management techniques are not exact. As
a
result, a rapid increase or decrease in interest rates could have an adverse
effect on our net interest margin and results of operations. Changes in the
market interest rates for types of products and services in our various markets
also may vary significantly from location to location and over time based upon
competition and local or regional economic factors. At December 31, 2007, our
interest rate sensitivity simulation model projected that net interest income
would decrease by 1.01% if interest rates immediately fell by 200 basis points
and would decrease by 6.12% if interest rates immediately rose by 200 basis
points. The results of our interest rate sensitivity simulation model depend
upon a number of assumptions which may not prove to be accurate. There can
be no
assurance that we will be able to successfully manage our interest rate risk.
Please see “Market Risk Management” on page 22 of this report.
Changes
in local economic conditions could adversely affect our
business.
Our
commercial and commercial real estate lending operations are concentrated in
Anne Arundel, Frederick, Howard, Montgomery, and Prince George’s counties in
Maryland, and Fairfax and Loudoun counties in Virginia. Our success depends
in
part upon economic conditions in these markets. Adverse changes in economic
conditions in these markets could reduce our growth in loans and deposits,
impair our ability to collect our loans, increase our problem loans and
charge-offs, and otherwise negatively affect our performance and financial
condition.
Our
allowance for loan and lease losses may not be adequate to cover our actual
loan
and lease losses, which could adversely affect our
earnings.
We
maintain an allowance for loan and lease losses in an amount that we believe
is
adequate to provide for probable losses in the portfolio. While we strive to
carefully monitor credit quality and to identify loans and leases that may
become nonperforming, at any time there are loans and leases included in the
portfolio that will result in losses, but that have not been identified as
nonperforming or potential problem credits. We cannot be sure that we will
be
able to identify deteriorating credits before they become nonperforming assets,
or that we will be able to limit losses on those loans and leases that are
identified. As a result, future additions to the allowance may be necessary.
Additionally, future additions may be required based on changes in the loans
and
leases comprising the portfolio and changes in the financial condition of
borrowers, such as may result from changes in economic conditions, or as a
result of incorrect assumptions by management in determining the allowance.
Additionally, federal banking regulators, as an integral part of their
supervisory function, periodically review our allowance for loan and lease
losses. These regulatory agencies may require us to increase our provision
for
loan and lease losses or to recognize further loan or lease charge-offs based
upon their judgments, which may be different from ours. Any increase in the
allowance for loan and lease losses could have a negative effect on our
financial condition and results of operations.
We
rely on our management and other key personnel, and the loss of any of them
may
adversely affect our operations.
We
are
and will continue to be dependent upon the services of our executive management
team. In addition, we will continue to depend on our ability to retain and
recruit key client relationship managers. The unexpected loss of services of
any
key management personnel, or the inability to recruit and retain qualified
personnel in the future, could have an adverse effect on our business and
financial condition.
The
market price for our common stock may be volatile.
The
market price for our common stock has fluctuated, ranging between $25.60 and
$38.97 per share during the 12 months ended December 31, 2007. The overall
market and the price of our common stock may continue to be volatile. There
may
be a significant impact on the market price for our common stock due to, among
other things:
Variations
in our anticipated or actual operating results or the results of our
competitors;
Changes
in investors’ or analysts’ perceptions of the risks and conditions of our
business;
The
size
of the public float of our common stock;
Regulatory
developments;
The
announcement of acquisitions or new branch locations by us or our
competitors;
Market
conditions; and
General
economic conditions.
Additionally,
the average daily trading volume for our common stock as reported on the Nasdaq
Market was 46,447 shares during the twelve months ended December 31, 2007,
with
daily volume ranging from a low of 8,900 shares to a high of 172,100 shares.
There can be no assurance that a more active or consistent trading market in
our
common stock will develop. As a result, relatively small trades could have
a
significant impact on the price of our common stock.
We
may fail to realize the cost savings we estimate for mergers and acquisitions.
The
success of our mergers and acquisitions may depend, in part, on our ability
to
realize the estimated cost savings from combining the businesses. It is possible
that the potential cost savings could turn out to be more difficult to achieve
than we anticipated. Our cost savings estimates also depend on our ability
to
combine the businesses in a manner that permits those cost savings to be
realized. If our estimates turn out to be incorrect or we are not able to
combine successfully, the anticipated cost savings may not be realized fully
or
at all, or may take longer to realize than expected.
Combining
acquired businesses with Sandy Spring may be more difficult, costly, or
time-consuming than we expect, or could result in the loss of customers.
It
is
possible that the process of merger integration of acquired companies could
result in the loss of key employees, the disruption of ongoing business or
inconsistencies in standards, controls, procedures and policies that adversely
affect the ability to maintain relationships with clients and employees or
to
achieve the anticipated benefits of the merger or acquisition. There also may
be
disruptions that cause us to lose customers or cause customers to withdraw
their
deposits. Customers may not readily accept changes to their banking arrangements
or other customer relationships after the merger or acquisition.
Competition
may decrease our growth or profits.
We
compete for loans, deposits, and investment dollars with other banks and other
financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders, many of which have substantially greater resources than ours. Credit
unions have federal tax exemptions, which may allow them to offer lower rates
on
loans and higher rates on deposits than taxpaying financial institutions such
as
commercial banks. In addition, non-depository institution competitors are
generally not subject to the extensive regulation applicable to institutions
that offer federally insured deposits. Other institutions may have other
competitive advantages in particular markets or may be willing to accept lower
profit margins on certain products. These differences in resources, regulation,
competitive advantages, and business strategy may decrease our net interest
margin, increase our operating costs, and may make it harder for us to compete
profitably.
Government
regulation significantly affects our business.
The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Sandy Spring Bank is subject to regulation and supervision by
the
Board of Governors of the Federal Reserve System and by Maryland banking
authorities. Sandy Spring Bancorp is subject to regulation and supervision
by
the Board of Governors of the Federal Reserve System. The burdens imposed by
federal and state regulations put banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, mortgage banking
companies, and leasing companies. Changes in the laws, regulations, and
regulatory practices affecting the banking industry may increase our costs
of
doing business or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial services
companies undergo continuous change, and we cannot predict the ultimate effect
of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy
may
also affect our ability to attract deposits and other funding sources, make
loans and investments, and achieve satisfactory interest spreads.
Our
ability to pay dividends is limited by law and
contract.
Our
ability to pay dividends to our shareholders largely depends on Sandy Spring
Bancorp’s receipt of dividends from Sandy Spring Bank. The amount of dividends
that Sandy Spring Bank may pay to Sandy Spring Bancorp is limited by federal
laws and regulations. We also may decide to limit the payment of dividends
even
when we have the legal ability to pay them in order to retain earnings for
use
in our business. We also are prohibited from paying dividends on our common
stock if the required payments on our subordinated debentures have not been
made.
Restrictions
on unfriendly acquisitions could prevent a takeover.
Our
articles of incorporation and bylaws contain provisions that could discourage
takeover attempts that are not approved by the board of directors. The Maryland
General Corporation Law includes provisions that make an acquisition of Sandy
Spring Bancorp more difficult. These provisions may prevent a future takeover
attempt in which our shareholders otherwise might receive a substantial premium
for their shares over then-current market prices.
These
provisions include supermajority provisions for the approval of certain business
combinations and certain provisions relating to meetings of shareholders. Our
certificate of incorporation also authorizes the issuance of additional shares
without shareholder approval on terms or in circumstances that could deter
a
future takeover attempt.
Future
sales of our common stock or other securities may dilute the value of our common
stock.
In
many
situations, our board of directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued stock, including
shares authorized and unissued under our omnibus stock plan. In the future,
we
may issue additional securities, through public or private offerings, in order
to raise additional capital. Any such issuance would dilute the percentage
of
ownership interest of existing shareholders and may dilute the per share book
value of the common stock. In addition, option holders may exercise their
options at a time when we would otherwise be able to obtain additional equity
capital on more favorable terms.
We
may not attain the revenue increases or expense reduction goals targeted by
Project LIFT.
The
Company's results in the coming year may depend, in part, on our ability to
realize the estimated revenue increases and expense reductions from Project
LIFT.
It is
possible that the potential revenue increases or expense savings could turn
out
to be more difficult to achieve than we anticipated. Our estimates also depend
on our ability to execute on a number of expense reduction initiatives. If
our
estimates turn out to be incorrect the anticipated revenue increases or cost
savings may not be realized fully or at all, or may take longer to realize
than
expected.
COMPETITION
The
Bank's principal competitors for deposits are other financial institutions,
including other banks, credit unions, and savings institutions. Competition
among these institutions is based primarily on interest rates and other terms
offered, service charges imposed on deposit accounts, the quality of services
rendered, and the convenience of banking facilities. Additional competition
for
depositors' funds comes from U.S. Government securities, private issuers of
debt
obligations and suppliers of other investment alternatives for depositors,
such
as securities firms. Competition from credit unions has intensified in recent
years as historical federal limits on membership have been relaxed. Because
federal law subsidizes credit unions by giving them a general exemption from
federal income taxes, credit unions have a significant cost advantage over
banks
and savings associations, which are fully subject to federal income taxes.
Credit unions may use this advantage to offer rates that are highly competitive
with those offered by banks and thrifts.
The
banking business in Maryland generally, and the Bank's primary service areas
specifically, are highly competitive with respect to both loans and deposits.
As
noted above, the Bank competes with many larger banking organizations that
have
offices over a wide geographic area. These larger institutions have certain
inherent advantages, such as the ability to finance wide-ranging advertising
campaigns and promotions and to allocate their investment assets to regions
offering the highest yield and demand. They also offer services, such as
international banking, that are not offered directly by the Bank (but are
available indirectly through correspondent institutions), and, by virtue of
their larger total capitalization, such banks have substantially higher legal
lending limits, which are based on bank capital, than does the Bank. The Bank
can arrange loans in excess of its lending limit, or in excess of the level
of
risk it desires to take, by arranging participations with other banks. Other
entities, both governmental and in private industry, raise capital through
the
issuance and sale of debt and equity securities and indirectly compete with
the
Bank in the acquisition of deposits.
In
addition to competing with other commercial banks, credit unions and savings
associations, commercial banks such as the Bank compete with non-bank
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and
hold
deposits. Mutual funds also provide substantial competition to banks for
deposits.
The
Holding Company Act permits the Federal Reserve to approve an application of
an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than that holding company's home state. The Federal Reserve
may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law
of
the host state. The Holding Company Act also prohibits the Federal Reserve
from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits
in
the United States or 30% or more of the deposits in the target bank's home
state
or in any state in which the target bank maintains a branch. The Holding Company
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or
bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. The State of Maryland allows
out-of-state financial institutions to merge with Maryland banks and to
establish branches in Maryland, subject to certain limitations.
Financial
holding companies may engage in banking as well as types of securities,
insurance, and other financial activities that historically had been prohibited
for bank holding companies under prior law. Banks with or without holding
companies also may establish and operate financial subsidiaries that may engage
in most financial activities in which financial holding companies may engage.
Competition may increase as bank holding companies and other large financial
services companies take advantage of the ability to engage in new activities
and
provide a wider array of products.
EMPLOYEES
The
Company and the Bank employed 749 persons, including executive officers, loan
and other banking and trust officers, branch personnel, and others at December
31, 2007. None of the Company's or the Bank's employees is represented by a
union or covered under a collective bargaining agreement. Management of the
Company and the Bank consider their employee relations to be
excellent.
EXECUTIVE
OFFICERS
The
following listing sets forth the name, age (as of February 27, 2008), principal
position and business experience of each executive officer that is not a
director for at least the last five years are set forth below:
R.
Louis
Caceres, 45, Executive Vice President of the Bank. Mr. Caceres was made
Executive Vice President of the Bank in 2002. Prior to that, Mr. Caceres was
a
Senior Vice President of the Bank.
Ronald
E.
Kuykendall, 55, became Executive Vice President, General Counsel and Secretary
of the Company and the Bank in 2002. Prior to that, Mr. Kuykendall was General
Counsel and Secretary of Bancorp and Senior Vice President of the Bank.
Philip
J.
Mantua, CPA, 49, became Executive Vice President and Chief Financial Officer
of
the Company and the Bank in 2004. Prior to that, Mr. Mantua was Senior Vice
President of Managerial Accounting.
Joseph
J.
O'Brien, Jr., 44, joined the Bank in July 2007 as Executive Vice President.
On
January 1, 2008 he became president of the Potomac Bank Division. Prior to
joining the Bank Mr. O'Brien was Executive Vice President and senior lender
for
a local banking institution.
Daniel
J.
Schrider, 43, became Executive Vice President and Chief Credit Officer effective
January 1, 2003. Prior to that, Mr. Schrider served as a Senior Vice President
of the Bank.
Frank
H.
Small, 61, became an Executive Vice President of the Company and the Bank in
2001 and Chief Operating Officer of the Bank in 2002. Prior to that, Mr. Small
was an Executive Vice President of the Bank.
Sara
E.
Watkins, 51, became an Executive Vice President of the Bank in 2002. Prior
to
that, Ms. Watkins was a Senior Vice President of the Bank.
PROPERTIES
The
locations of Sandy Spring Bancorp, Inc. and its subsidiaries are shown
below.
COMMUNITY
BANKING OFFICES
40
West – Rockledge Plaza*
|
Bedford
Court
|
Colesville*
|
1100
West Patrick St, Unit A
|
3701
International Drive
|
13300
New Hampshire Avenue
|
Frederick,
MD 21702
|
Silver
Spring, MD 20906
|
Silver
Spring, MD 20904
|
|
|
|
Airpark*
|
Bethesda*
|
Damascus*
|
7653
Lindbergh Drive
|
7126
Wisconsin Avenue
|
26250
Ridge Road
|
Gaithersburg,
MD 20879
|
Bethesda,
MD 20814
|
Damascus,
MD 20872
|
|
|
|
Ashton*
|
Burtonsville*
|
East
Gude Drive*
|
1
Ashton Road
|
3535
Spencerville Road
|
1601
East Gude Drive
|
Ashton,
MD 20861
|
Burtonsville,
MD 20866
|
Rockville,
MD 20850
|
|
|
|
Asbury*
|
Clarksville*
|
Eastport*
|
409
Russell Avenue
|
12276
Clarksville Pike
|
1013
Bay Ridge Avenue
|
Gaithersburg
MD 20877
|
Clarksville,
MD 21029
|
Annapolis,
MD 21403
|
|
|
|
Ballenger
Creek*
|
Chantilly*
|
Edgewater*
|
6560
Mercantile Drive
|
14231
Willard Road, Suite 100
|
116
Mitchells Chance Road
|
Frederick,
MD 21703
|
Chantilly,
VA 20151
|
Edgewater,
MD 21037
|
Fairfax*
|
Lisbon*
|
Potomac*
|
9910
Main Street
|
704
Lisbon Centre Drive
|
9822
Falls Road
|
Fairfax,
VA 22031
|
Woodbine,
MD 21797
|
Potomac,
MD 20854
|
|
|
|
Fulton-Cherry
Tree Crossing*
|
Merrifield*
|
Rockville*
|
8315
Ice Crystal Drive
|
8501
Arlington Blvd
|
611
Rockville Pike
|
Laurel,
MD 20723
|
Fairfax,
VA 22031
|
Rockville,
MD 20852
|
|
|
|
Gaithersburg
Square*
|
Milestone
Center*
|
Sandy
Spring
|
484
North Frederick Avenue
|
20930
Frederick Avenue
|
908
Olney-Sandy Spring Road
|
Gaithersburg,
MD 20877
|
Germantown,
MD 20876
|
Sandy
Spring, MD 20860
|
|
|
|
Glen
Burnie*
|
Millersville*
|
Silver
Spring*
|
7405
Ritchie Highway
|
8310
Veterans Highway
|
8677
Georgia Avenue
|
Glen
Burnie, MD 21061
|
Millersville,
MD 21108
|
Silver
Spring, MD 20910
|
|
|
|
Jennifer
Road*
|
Montgomery
Village*
|
Urbana*
|
166
Jennifer Road
|
9921
Stedwick Road
|
8921
Fingerboard Road
|
Annapolis,
MD 21401
|
Montgomery
Village, MD 20886
|
Frederick,
MD 21704
|
|
|
|
Laurel
Lakes*
|
Mt.
Airy Shopping Center*
|
Vienna*
|
14404
Baltimore Avenue
|
425
East Ridgeville Blvd.
|
414
Maple Ave N.E.
|
Laurel,
MD 20707
|
Mt.
Airy, MD 21771
|
Vienna,
VA 22180
|
|
|
|
Lansdowne*
|
Odenton*
|
Wildwood*
|
19460
golf Vista Plaza
|
8759
Piney Orchard Parkway
|
10329
Old Georgetown Road
|
Lansdowne,
VA 20175
|
Odenton,
MD 21090
|
Bethesda,
MD 20814
|
|
|
|
Layhill*
|
Olney*
|
*
ATM Available
|
14241
Layhill Road
|
17801
Georgia Avenue
|
|
Silver
Spring, MD 20906
|
Olney,
MD 20832
|
|
|
|
|
Leisure
World Plaza*
|
Pasadena*
|
|
3801
International Drive, Suite 100
|
4001
Mountain Road
|
|
Silver
Spring, MD 20906
|
Pasadena,
MD 21122
|
|
|
|
|
Linthicum*
|
Patrick
Street*
|
|
504
S. Camp Meade Road
|
14
West Patrick Street
|
|
Linthicum,
MD 21090
|
Frederick,
MD 21701
|
|
OTHER
PROPERTIES
Administrative
Offices
17735
Georgia Avenue
Olney,
MD 20832
|
The
Equipment Leasing Company
53
Loveton Circle, Suite 100
Sparks,
MD 21152
|
Sandy
Spring Mortgage and
Columbia
Center
9112
Guilford Road
Columbia,
MD 21046
|
|
|
|
Sandy
Spring Financial Center
148
Jennifer Road
Annapolis,
MD 21401
|
Sandy
Spring Insurance Corp.
T/A
Chesapeake Insurance Group
151
West Street, Suite 300
Annapolis,
MD 21401
|
West
Financial Services, Inc.
1355
Beverly Road, Suite 250
McLean,
Virginia 22101
|
|
|
|
Neff
& Associates
9921
Stephen Decatur Highway
Suite
C5
Ocean
City, MD 21842
|
|
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
The
following financial statements are filed as a part of this report:
Consolidated
Balance Sheets at December 31, 2007 and 2006
Consolidated
Statements of Income for the years ended December 31, 2007, 2006, and
2005
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006, and
2005
Consolidated
Statements of Changes in Stockholders' Equity for the years ended December
31,
2007, 2006, and 2005
Notes
to
the Consolidated Financial Statements
Reports
of Registered Public Accounting Firm
All
financial statement schedules have been omitted, as the required information
is
either not applicable or included in the Consolidated Financial Statements
or
related Notes.
The
following exhibits are filed as a part of this report:
Exhibit
No.
|
|
Description
|
|
Incorporated
by Reference to:
|
3(a)
|
|
Articles
of Incorporation of Sandy Spring Bancorp, Inc., as Amended
|
|
Exhibit
3.1 to Form 10-Q for the quarter ended June 30, 1996, SEC File
No.
0-19065.
|
|
|
|
|
|
3(b)
|
|
Bylaws
of Sandy Spring Bancorp, Inc.
|
|
Exhibit
3.2 to Form 8-K dated May 13, 1992, SEC File No.
0-19065.
|
|
|
|
|
|
4
|
|
No
long-term debt instrument issued by the Company exceeds 10% of
consolidated assets or is registered. In accordance with paragraph
4(iii)
of Item 601(b) of Regulation S-K, the Company will furnish the
SEC copies
of all long-term debt instruments and related agreements upon
request.
|
|
|
|
|
|
|
|
10(a)*
|
|
Amended
and Restated Sandy Spring Bancorp, Inc., Cash and Deferred Profit
Sharing
Plan and Trust
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 1997, SEC
File No.
0-19065.
|
|
|
|
|
|
10(b)*
|
|
Sandy
Spring Bancorp, Inc. 2005 Omnibus Stock Plan
|
|
Exhibit
10.1 to Form 8-K dated June 27, 2005, Commission File No.
0-19065.
|
|
|
|
|
|
10(c)*
|
|
Sandy
Spring Bancorp, Inc. 1992 Stock Option Plan
|
|
Exhibit
10(i) to Form 10-K for the year ended December 31, 1991, SEC File
No.
0-19065.
|
|
|
|
|
|
10(d)*
|
|
Sandy
Spring Bancorp, Inc. Amended and Restated Stock Option Plan for
Employees
of Annapolis Bancshares, Inc.
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement
No.
333-11049.
|
|
|
|
|
|
10(e)*
|
|
Sandy
Spring Bancorp, Inc. 1999 Stock Option Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement
No.
333-81249.
|
|
|
|
|
|
10(f)*
|
|
Sandy
Spring National Bank of Maryland Executive Health Insurance
Plan
|
|
Exhibit
10 to Form 10-Q for the quarter ended March 31, 2002, SEC File
No.
0-19065.
|
|
|
|
|
|
10(g)*
|
|
Sandy
Spring National Bank of Maryland Executive Health Expense Reimbursement
Plan, as amended
|
|
Exhibit
10(g) to Form 10-K for the year ended December 31, 2001, SEC File
No.
0-19065.
|
|
|
|
|
|
10(h)*
|
|
Form
of Director Fee Deferral Agreement, August 26, 1997, as
amended
|
|
Exhibit
10(h) to Form 10-K for the year ended December 31, 2003, SEC File
No.
0-19065.
|
|
|
|
|
|
10(i)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
National
Bank of Maryland, and Hunter R. Hollar
|
|
Exhibit
10A to Form 10-Q for the quarter ended March 31, 2003, SEC File
No.
0-19065.
|
|
|
|
|
|
10(j)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
Philip J. Mantua
|
|
Exhibit
10(l) to Form 10-K for the year ended December 31, 2004, SEC File
No.
0-19065.
|
|
|
|
|
|
10(k)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
Daniel J. Schrider
|
|
Exhibit
10(b) to Form 10-Q for the quarter ended September 30, 2004, SEC
File No.
0-19065.
|
|
|
|
|
|
10(l)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
Frank H. Small
|
|
Exhibit
10(o) to Form 10-K for the year ended December 31, 2002, SEC File
No.
0-19065.
|
10(m)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
Sara E. Watkins
|
|
Exhibit
10(p) to Form 10-K for the year ended December 31, 2002, SEC File
No.
0-19065.
|
|
|
|
|
|
10(n)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
Ronald E. Kuykendall
|
|
Exhibit
10(q) to Form 10-K for the year ended December 31, 2002, SEC File
No.
0-19065.
|
|
|
|
|
|
10(p)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank, and
R. Louis Caceres
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 2004, SEC
File No.
0-19065.
|
|
|
|
|
|
10(q)*
|
|
Form
of Sandy Spring National Bank of Maryland Officer Group Term Replacement
Plan
|
|
Exhibit
10(r) to Form 10-K for the year ended December 31, 2001, SEC File
No.
0-19065.
|
|
|
|
|
|
10(r)
|
|
Sandy
Spring Bancorp, Inc. Directors’ Stock Purchase Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, File No.
333-117330.
|
|
|
|
|
|
10(s)*
|
|
Amended
and Restated Potomac Bank of Virginia 199 Stock Option
Plan
|
|
Exhibit
4.1 to Registration Statement on Form S-8, File No.
333-141052
|
|
|
|
|
|
10(t)*
|
|
Amended
and Restated Potomac Bank of Virginia Employee Stock Purchase
Plan
|
|
Exhibit
4.2 to Registration Statement on Form S-8, File No.
333-141052
|
|
|
|
|
|
10(u)*
|
|
Amended
and Restated CN Bancorp, Inc. Stock Option Plan
|
|
Exhibit
4.1 to Registration Statement on Form S-8, File No.
333-144949
|
|
|
|
|
|
10(v)*
|
|
Sandy
Spring Bank Executive Incentive Retirement Plan
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries
|
|
|
|
|
|
|
|
23
|
|
Consent
of Registered Public Accounting Firm
|
|
|
|
|
|
|
|
31
(a),(b)
|
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
|
|
|
32
(a),(b)
|
|
18
U.S.C. Section 1350 Certifications
|
|
|
|
|
|
|
|
*
Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
15(c) of this Report.
Shareholders
may obtain, upon payment of a reasonable fee, a copy of the exhibits to this
Report on Form 10-K by writing Ronald E. Kuykendall, General Counsel and
Secretary, at Sandy Spring Bancorp, Inc., 17801 Georgia Avenue, Olney, Maryland
20832. Shareholders also may access a copy of the Form 10-K including exhibits
on the SEC Web site at www.sec.gov
or through the Company’s Investor Relations Web site maintained at
www.sandyspringbank.com.
Signatures
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANDY
SPRING BANCORP, INC.
(Registrant)
By:
|
/s/
Hunter R. Hollar
|
Hunter
R. Hollar |
President
and Chief Executive Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities indicated as of February 28, 2007.
Principal
Executive Officer and Director:
|
|
Principal
Financial and Accounting Officer:
|
/s/
Hunter R. Hollar
|
|
/s/
Philip J. Mantua
|
Hunter
R. Hollar
|
|
Philip
J. Mantua
|
President
and Chief Executive Officer
|
|
Executive
Vice President and Chief Financial
Officer
|
|
|
Title
|
|
|
|
/s/
John Chirtea
|
|
Director
|
John
Chirtea
|
|
|
|
|
|
/s/
Mark E. Friis
|
|
Director
|
Mark
E. Friis
|
|
|
|
|
|
/s/
Susan D. Goff
|
|
Director
|
Susan
D. Goff
|
|
|
|
|
|
/s/
Solomon Graham
|
|
Director
|
Solomon
Graham
|
|
|
|
|
|
/s/
Marshall H. Groom
|
|
Director
|
Marshall
Groom
|
|
|
|
|
|
/s/
Gilbert L. Hardesty
|
|
Director
|
Gilbert
L. Hardesty
|
|
|
|
|
|
/s/
Pamela A. Little
|
|
Director
|
Pamela
A. Little
|
|
|
|
|
|
/s/
Charles F. Mess
|
|
Director
|
Charles
F. Mess
|
|
|
|
|
|
/s/
Robert L. Orndorff
|
|
Director
|
Robert
L. Orndorff
|
|
|
|
|
|
/s/
David E. Rippeon
|
|
Director
|
David
E. Rippeon
|
|
|
|
|
|
/s/
Craig A. Ruppert
|
|
Director
|
Craig
A. Ruppert
|
|
|
|
|
|
/s/
Lewis R. Schumann
|
|
Director
|
Lewis
R. Schumann
|
|
|
|
|
|
|
|
Chairman
of the Board,
|
W.
Drew Stabler
|
|
Director
|