UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
quarterly period ended March
31, 2008
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For
the
transition period from to
Commission
File Number: 0-19065
Sandy
Spring Bancorp, Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
|
|
52-1532952
|
(State
of incorporation)
|
|
|
|
(I.R.S.
Employer Identification Number)
|
|
|
|
|
|
17801
Georgia Avenue, Olney, Maryland
|
|
20832
|
|
301-774-6400
|
(Address
of principal office)
|
|
(Zip
Code)
|
|
(Telephone
Number)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for
the
past 90 days.
YES
x
NO
¨
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ |
Accelerated filer x |
Non-accelerated filer ¨ |
Smaller reporting Company ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
YES
¨
NO
x
The
number of shares of common stock outstanding as of April 21, 2008 is 16,416,667
shares.
SANDY
SPRING BANCORP, INC.
INDEX
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets at March 31, 2008 (Unaudited) and December 31,
2007
|
1
|
|
|
Consolidated
Statements of Income for the Three Month Periods Ended March 31,
2008 and
2007 (Unaudited)
|
2
|
|
|
Consolidated
Statements of Cash Flows for the Three Month Periods Ended March
31, 2008
and 2007 (Unaudited)
|
4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Three Month Periods
Ended March 31, 2008 and 2007 (Unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
|
18
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
29
|
|
|
ITEM
4. CONTROLS AND PROCEDURES
|
30
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
ITEM
1A. RISK FACTORS
|
30
|
|
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
30
|
|
|
ITEM
6. EXHIBITS
|
30
|
|
|
SIGNATURES
|
31
|
PART
I -
FINANCIAL INFORMATION
Item
1.
FINANCIAL STATEMENTS
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS (UNAUDITED)
|
|
March
31,
|
|
December 31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
66,536
|
|
$
|
63,432
|
|
Federal
funds sold
|
|
|
48,032
|
|
|
22,055
|
|
Interest-bearing
deposits with banks
|
|
|
11,112
|
|
|
365
|
|
Cash
and cash equivalents
|
|
|
125,680
|
|
|
85,852
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
9,876
|
|
|
7,089
|
|
Investments
available-for-sale (at fair value)
|
|
|
206,840
|
|
|
186,801
|
|
Investments
held-to-maturity —
fair value
of $209,937 (2008) and $240,995
(2007)
|
|
|
202,344
|
|
|
234,706
|
|
Other
equity securities
|
|
|
25,803
|
|
|
23,766
|
|
Total
loans and leases
|
|
|
2,364,023
|
|
|
2,277,031
|
|
Less:
allowance for loan and lease losses
|
|
|
(27,887
|
)
|
|
(25,092
|
)
|
Net
loans and leases
|
|
|
2,336,136
|
|
|
2,251,939
|
|
Premises
and equipment, net
|
|
|
53,780
|
|
|
54,457
|
|
Accrued
interest receivable
|
|
|
13,201
|
|
|
14,955
|
|
Goodwill
|
|
|
78,111
|
|
|
76,585
|
|
Other
intangible assets, net
|
|
|
15,507
|
|
|
16,630
|
|
Other
assets
|
|
|
93,618
|
|
|
91,173
|
|
Total
assets
|
|
$
|
3,160,896
|
|
$
|
3,043,953
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$
|
445,088
|
|
$
|
434,053
|
|
Interest-bearing
deposits
|
|
|
1,895,480
|
|
|
1,839,815
|
|
Total
deposits
|
|
|
2,340,568
|
|
|
2,273,868
|
|
Short-term
borrowings
|
|
|
372,625
|
|
|
373,972
|
|
Other
long-term borrowings
|
|
|
67,312
|
|
|
17,553
|
|
Subordinated
debentures
|
|
|
35,000
|
|
|
35,000
|
|
Accrued
interest payable and other liabilities
|
|
|
26,424
|
|
|
27,920
|
|
Total
liabilities
|
|
|
2,841,929
|
|
|
2,728,313
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Common
stock —
par value
$1.00; shares authorized 50,000,000; shares issued and
outstanding 16,361,444 (2008) and 16,349,317 (2007)
|
|
|
16,361
|
|
|
16,349
|
|
Additional
paid in capital
|
|
|
84,281
|
|
|
83,970
|
|
Retained
earnings
|
|
|
219,019
|
|
|
216,376
|
|
Accumulated
other comprehensive loss
|
|
|
(694
|
)
|
|
(1,055
|
)
|
Total
stockholders' equity
|
|
|
318,967
|
|
|
315,640
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,160,896
|
|
$
|
3,043,953
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(Dollars
in thousands, except per share data)
|
|
2008
|
|
2007
|
|
Interest
Income:
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$
|
38,469
|
|
$
|
34,574
|
|
Interest
on loans held for sale
|
|
|
96
|
|
|
195
|
|
Interest
on deposits with banks
|
|
|
49
|
|
|
90
|
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,698
|
|
|
3,871
|
|
Exempt
from federal income taxes
|
|
|
2,331
|
|
|
2,727
|
|
Interest
on federal funds sold
|
|
|
279
|
|
|
437
|
|
TOTAL
INTEREST INCOME
|
|
|
43,922
|
|
|
41,894
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
13,022
|
|
|
13,788
|
|
Interest
on short-term borrowings
|
|
|
3,279
|
|
|
3,481
|
|
Interest
on long-term borrowings
|
|
|
1,042
|
|
|
610
|
|
TOTAL
INTEREST EXPENSE
|
|
|
17,343
|
|
|
17,879
|
|
NET
INTEREST INCOME
|
|
|
26,579
|
|
|
24,015
|
|
Provision
for loan and lease losses
|
|
|
2,667
|
|
|
839
|
|
NET
INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES
|
|
|
23,912
|
|
|
23,176
|
|
Noninterest
Income:
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
574
|
|
|
2
|
|
Service
charges on deposit accounts
|
|
|
3,030
|
|
|
2,308
|
|
Gains
on sales of mortgage loans
|
|
|
722
|
|
|
638
|
|
Fees
on sales of investment products
|
|
|
822
|
|
|
800
|
|
Trust
and investment management fees
|
|
|
2,397
|
|
|
2,281
|
|
Insurance
agency commissions
|
|
|
2,086
|
|
|
2,690
|
|
Income
from bank owned life insurance
|
|
|
714
|
|
|
684
|
|
Visa
check fees
|
|
|
696
|
|
|
590
|
|
Other
income
|
|
|
1,655
|
|
|
913
|
|
TOTAL
NONINTEREST INCOME
|
|
|
12,696
|
|
|
10,906
|
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
13,763
|
|
|
13,434
|
|
Occupancy
expense of premises
|
|
|
2,799
|
|
|
2,417
|
|
Equipment
expenses
|
|
|
1,439
|
|
|
1,602
|
|
Marketing
|
|
|
497
|
|
|
529
|
|
Outside
data services
|
|
|
1,122
|
|
|
926
|
|
Amortization
of intangible assets
|
|
|
1,124
|
|
|
802
|
|
Other
expenses
|
|
|
3,959
|
|
|
3,904
|
|
TOTAL
NONINTEREST EXPENSES
|
|
|
24,703
|
|
|
23,614
|
|
Income
Before Income Taxes
|
|
|
11,905
|
|
|
10,468
|
|
Income
Tax Expense
|
|
|
3,700
|
|
|
2,923
|
|
NET
INCOME
|
|
$
|
8,205
|
|
$
|
7,545
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) (Continued)
|
|
Three
Months Ended
March
31,
|
|
(Dollars
in thousands, except per share data)
|
|
2008
|
|
2007
|
|
Basic
Net Income Per Share
|
|
$
|
0.50
|
|
$
|
0.49
|
|
Diluted
Net Income Per Share
|
|
|
0.50
|
|
|
0.49
|
|
Dividends
Declared Per Share
|
|
|
0.24
|
|
|
0.23
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
8,205
|
|
$
|
7,545
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,715
|
|
|
2,393
|
|
Provision
for loan and lease losses
|
|
|
2,667
|
|
|
839
|
|
Stock
compensation expense
|
|
|
157
|
|
|
226
|
|
Deferred
income taxes (benefits)
|
|
|
(1,475
|
)
|
|
(960
|
)
|
Origination
of loans held for sale
|
|
|
(45,418
|
)
|
|
(73,782
|
)
|
Proceeds
from sales of loans held for sale
|
|
|
43,353
|
|
|
75,356
|
|
Gains
on sales of loans held for sale
|
|
|
(722
|
)
|
|
(638
|
)
|
Securities
gains
|
|
|
(574
|
)
|
|
(2
|
)
|
Gains
on sales of premises and equipment
|
|
|
(2
|
)
|
|
0
|
|
Net
decrease (increase) in accrued interest receivable
|
|
|
1,754
|
|
|
(108
|
)
|
Net
increase in other assets
|
|
|
(2,988
|
)
|
|
(4,417
|
)
|
Net
decrease in accrued expenses and other liabilities
|
|
|
(1,354
|
)
|
|
(2,272
|
)
|
Other
–
net
|
|
|
(1,363
|
)
|
|
(654
|
)
|
Net
cash provided by operating activities
|
|
|
4,955
|
|
|
3,526
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of other equity securities
|
|
|
(2,037
|
)
|
|
(118
|
)
|
Purchases
of investments available-for-sale
|
|
|
(129,792
|
)
|
|
(4,967
|
)
|
Proceeds
from the sales of other real estate owned
|
|
|
0
|
|
|
192
|
|
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
32,362
|
|
|
9,613
|
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
110,405
|
|
|
12,382
|
|
Net
increase in loans and leases
|
|
|
(87,193
|
)
|
|
(34,651
|
)
|
Redemption
of VISA stock
|
|
|
429
|
|
|
0
|
|
Acquisition
of business activity, net
|
|
|
0
|
|
|
(28,039
|
)
|
Expenditures
for premises and equipment
|
|
|
(664
|
)
|
|
(660
|
)
|
Net
cash (used in) investing activities
|
|
|
(76,490
|
)
|
|
(46,248
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
66,700
|
|
|
83,134
|
|
Net
decrease in short-term borrowings
|
|
|
(1,588
|
)
|
|
(6,513
|
)
|
Net
increase (decrease) in long-term borrowings
|
|
|
50,000
|
|
|
(64
|
)
|
Proceeds
from issuance of common stock
|
|
|
166
|
|
|
346
|
|
Dividends
paid
|
|
|
(3,915
|
)
|
|
(3,603
|
)
|
Net
cash provided by financing activities
|
|
|
111,363
|
|
|
73,300
|
|
Net
increase in cash and cash equivalents
|
|
|
39,828
|
|
|
30,578
|
|
Cash
and cash equivalents at beginning of period
|
|
|
85,852
|
|
|
106,897
|
|
Cash
and cash equivalents at end of period
|
|
$
|
125,680
|
|
$
|
137,475
|
|
Sandy
Spring Bancorp and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
|
|
Three
Months Ended
March
31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
|
Interest
payments
|
|
$
|
16,886
|
|
$
|
17,196
|
|
Income
tax payments
|
|
|
7,104
|
|
|
5,910
|
|
Transfers
from loans to other real estate owned
|
|
|
200
|
|
|
0
|
|
Reclassification
of borrowings from long-term to short-term
|
|
|
241
|
|
|
87
|
|
Details
of acquisition:
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
|
0
|
|
$
|
252,487
|
|
Fair
value of liabilities assumed
|
|
|
0
|
|
|
(224,956
|
)
|
Stock
issued for acquisition
|
|
|
0
|
|
|
(32,977
|
)
|
Purchase
price in excess of net assets acquired
|
|
|
0
|
|
|
39,914
|
|
Cash
paid for acquisition
|
|
|
0
|
|
|
34,468
|
|
Cash
acquired with acquisition
|
|
|
0
|
|
|
(6,429
|
)
|
Acquisition
of business activity, net
|
|
$
|
0
|
|
$
|
28,039
|
|
See
Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
(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, 2007
|
|
$
|
16,349
|
|
$
|
83,970
|
|
$
|
216,376
|
|
$
|
(1,055
|
)
|
$
|
315,640
|
|
Adjustment
to reflect adoption of EITF Issue 06-04 effective January 1,
2008
|
|
|
|
|
|
|
|
|
(1,647
|
)
|
|
|
|
|
(1,647
|
)
|
Balance
as of January 1, 2008 following adoption of EITF Issue
06-04
|
|
|
16,349
|
|
|
83,970
|
|
|
214,729
|
|
$
|
(1,055
|
)
|
|
313,993
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
8,205
|
|
|
|
|
|
8,205
|
|
Other
comprehensive income, net of tax effects and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
361
|
|
|
361
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,566
|
|
Cash
dividends - $0.24 per share
|
|
|
|
|
|
|
|
|
(3,915
|
)
|
|
|
|
|
(3,915
|
)
|
Stock
compensation expense
|
|
|
|
|
|
157
|
|
|
|
|
|
|
|
|
157
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan –
6,474
shares (14,184 shares issued less 7,710 shares retired)
|
|
|
6
|
|
|
24
|
|
|
|
|
|
|
|
|
30
|
|
Employee
stock purchase plan – 5,653 shares
|
|
|
6
|
|
|
130
|
|
|
|
|
|
|
|
|
136
|
|
Balances
at March 31, 2008
|
|
$
|
16,361
|
|
$
|
84,281
|
|
$
|
219,019
|
|
$
|
(694
|
)
|
$
|
318,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
$
|
14,827
|
|
$
|
27,869
|
|
$
|
199,102
|
|
$
|
(4,021
|
)
|
$
|
237,777
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
7,545
|
|
|
|
|
|
7,545
|
|
Other
comprehensive loss, net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,596
|
|
Cash
dividends - $0.23 per share
|
|
|
|
|
|
|
|
|
(3,603
|
)
|
|
|
|
|
(3,603
|
)
|
Stock
Compensation Expense
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuance pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan – 6,200 shares
|
|
|
6
|
|
|
190
|
|
|
|
|
|
|
|
|
196
|
|
Acquisition
of Potomac Bank- 886,989 shares
|
|
|
887
|
|
|
32,090
|
|
|
|
|
|
|
|
|
32,977
|
|
Employee
stock purchase plan - 4,901 shares
|
|
|
5
|
|
|
145
|
|
|
|
|
|
|
|
|
150
|
|
Balances
at March 31, 2007
|
|
$
|
15,725
|
|
$
|
60,520
|
|
$
|
203,044
|
|
$
|
(3,970
|
)
|
$
|
275,319
|
|
See
Notes
to Consolidated Financial Statements.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note
1
–
General
The
accompanying financial statements are unaudited. In the opinion of Management,
all adjustments (comprising only normal recurring accruals) necessary for a
fair
presentation of the results of the interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in Sandy Spring Bancorp's 2007 Annual Report on
Form
10-K. There have been no significant changes to the Company’s Accounting
Policies as disclosed in the 2007 Annual Report on Form 10-K. The results shown
in this interim report are not necessarily indicative of results to be expected
for the full year 2008.
The
accounting and reporting policies of Sandy Spring Bancorp, Inc. (the "Company")
and its wholly-owned subsidiary, Sandy Spring Bank (the “Bank”), together with
its subsidiaries, Sandy Spring Insurance Corporation, The Equipment Leasing
Company, and West Financial Services, Inc., conform to accounting principles
generally accepted in the United States of America and to general practices
within the financial services industry. Certain reclassifications have been
made
to amounts previously reported to conform to current
classifications.
Consolidation
has resulted in the elimination of all significant intercompany accounts and
transactions.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash and
due
from banks and federal funds sold (which have original maturities of three
months or less).
Note
2 – Acquisitions
On
February 15, 2007, the Company completed the acquisition of Potomac Bank of
Virginia (“Potomac”), a bank headquartered in Fairfax, Virginia. Potomac
operated five branch offices in the Northern Virginia metropolitan market at
the
time of the acquisition. The primary reason for the merger with Potomac was
to
gain entry into the northern Virginia high growth market. The total
consideration paid to Potomac shareholders in connection with the acquisition
was $68.2 million. The results of Potomac’s operations have been included in the
Company’s consolidated financial results subsequent to February 15, 2007. 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. 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 $225.0 million, including $197.0
million of deposits. Additionally, the Company recorded $39.9 million of
goodwill, $5.1 million of core deposit intangibles (“CDI”) and $0.3 million of
other intangibles. CDI is subject to amortization and is 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 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 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 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 and $0.1 million of other intangibles. CDI is
subject to amortization and is being amortized over seven years on a
straight-line basis.
The
acquisition of Potomac and CNB, individually and in the aggregate, are
considered immaterial for purposes of the disclosures required by SFAS No.
141,
“Business Combinations.”
Note
3 - New Accounting Pronouncements
Adopted
Accounting Pronouncements
In
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. The adoption of this Statement did not have a material impact on the
Company’s 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 $21.1 million as of March 31,
2007
and recorded a liability and a corresponding reduction of retained earnings
of
$1.6 million on January 1, 2008.
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.
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 adoption of this Statement did not have a material impact on the
Company’s 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 adoption of this
Statement did not have a material impact on the Company’s financial position,
results of operations or cash flows.
In
March
2007, the FASB ratified EITF Issue No. 06-11, “Accounting
for Income Tax Benefits of Dividends on Share-Based Payment
Awards.”
EITF
06-11 requires companies to recognize the income tax benefit realized from
dividends or dividend equivalents that are charged to retained earnings and
paid
to employees for nonvested equity-classified employee share-based payment awards
as an increase to additional paid-in-capital. EITF 06-11 is effective for fiscal
years beginning after September 15, 2007. The adoption of this issue did not
have a material impact on the Company’s financial position, results of
operations or cash flows.
In
December 2007, the Securities and Exchange Commission staff released Staff
Accounting Bulletin (“SAB”) 109, “Written
Loan Commitments Recorded at Fair Value Through Earnings.”
This
SAB supersedes SAB 105 and expresses the current view that, consistent with
the
guidance in SFAS No. 156 and SFAS No. 159, the expected net future cash flows
related to the associated servicing of a loan should be included in the
measurement of all written loan commitments that are accounted for at fair
value
through earnings. The staff expects registrants to apply the views of SAB 109
on
a prospective basis to derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. The adoption of this SAB did not
have a material impact on the Company’s financial position, results of
operations or cash flows.
Pending
Accounting Pronouncements
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.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures
about Derivative Instruments and Hedging Activities – an Amendment of
FASB Statement No. 133.”
This
Statement amends and expands the disclosure requirements of SFAS No. 133,
“Accounting
for Derivative Instruments and Hedging Activities.”
The
Statement requires qualitative disclosures about objectives and strategies
for
using derivatives, quantitative disclosures about fair value amounts of and
gains and losses on derivative instruments, and disclosures about
credit-risk-related contingent features in derivative agreements. This Statement
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Company does not expect that
the
adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
Note
4 – Stock Based Compensation
At
March
31, 2008, 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 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 1,227,563 are available for issuance at March 31, 2008,
has a term of ten years, and is administered by a committee of at least three
directors appointed by the Board of Directors. Options granted under the plan
have an exercise price which may not be less than 100% of the fair market value
of the common stock on the date of the grant and must be exercised within 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.
Effective
March 26, 2008, the Board of Directors approved the granting of 116,360 stock
options, subject to a three year vesting schedule with one third of the options
vesting each year as of March 26, 2009, 2010, and 2011, respectively. In
addition, on March 26, 2008, the Board of Directors granted 28,675 restricted
shares subject to a five year vesting schedule with one fifth of the shares
vesting each year as of March 26, 2009, 2010, 2011, 2012, and 2013,
respectively. 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
$0.2 million, net of a tax benefit of approximately $4 thousand, for the three
month period ended March 31, 2008, and $0.2 million, net of tax benefit of
$15
thousand, for the three month period ended March 31, 2007.
No
options or restricted stock grants were awarded during the three month period
ended March 31, 2007.
The
fair
values of all of the options granted have been estimated using a binomial
option-pricing model.
The
total
intrinsic value of options exercised during the quarters ended March 31, 2008
and 2007 was $0.2 million and $35,000, respectively
A
summary
of share option activity for the three month period ended March 31, 2008
follows:
(Dollars
in thousands, except per share data):
|
|
Number
of
Shares
|
|
Weighted
Average
Exercised
Share
Price
|
|
Weighted
Average
Remaining
Contractual
Life(Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2008
|
|
|
996,365
|
|
$
|
33.72
|
|
|
5.3
|
|
$
|
1,588
|
|
Granted
|
|
|
116,360
|
|
|
27.96
|
|
|
7.0
|
|
|
|
|
Exercised
|
|
|
(14,184
|
)
|
|
17.45
|
|
|
5.1
|
|
|
|
|
Forfeited
or expired
|
|
|
(6,304
|
)
|
|
38.03
|
|
|
6.3
|
|
|
|
|
Balance
at March 31, 2008
|
|
|
1,092,237
|
|
$
|
33.29
|
|
|
5.3
|
|
$
|
984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2008
|
|
|
905,872
|
|
$
|
31.18
|
|
|
|
|
$
|
984
|
|
A
summary
of the status of the Company’s nonvested options as of March 31, 2008, and
changes during the three month period then ended, is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
Grant-Date
|
|
|
|
Of Shares
|
|
Fair Value
|
|
Nonvested
at January 1, 2008
|
|
|
72,221
|
|
$
|
8.11
|
|
Granted
|
|
|
116,360
|
|
|
4.47
|
|
Vested
|
|
|
0
|
|
|
0
|
|
Forfeited
|
|
|
(2,216
|
)
|
|
8.14
|
|
Nonvested
at March 31, 2008
|
|
|
186,365
|
|
$
|
5.84
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
Grant-Date
|
|
|
|
Of
Shares
|
|
Fair
Value
|
|
Restricted
stock at January 1, 2008
|
|
|
24,746
|
|
$
|
37.14
|
|
Granted
|
|
|
28,675
|
|
|
27.96
|
|
Vested
|
|
|
0
|
|
|
0
|
|
Forfeited
|
|
|
(586
|
)
|
|
37.40
|
|
Restricted
stock at March 31, 2008
|
|
|
52,835
|
|
$
|
32.16
|
|
The
number of options, exercise prices, and fair values has been retroactively
restated for all stock dividends occurring since the date the options were
granted.
The
total
of unrecognized compensation cost related to nonvested share-based compensation
arrangements was approximately $2.3 million as of March 31, 2008. That cost
is
expected to be recognized over a weighted average period of approximately
3.6
years.
The
Company generally issues authorized but previously unissued shares to satisfy
option exercises.
Note
5 -
Per Share Data
The
calculations of net income per common share for the three month periods ended
March 31, 2008 and 2007 are shown in the following table. Basic net income
per
share is computed by dividing net income available to common stockholders
by the
weighted average number of common shares outstanding and does not include
the
impact of any potentially dilutive common stock equivalents. The diluted
earnings per share calculation method is derived by dividing net income
available to common stockholders by the weighted average number of common
shares
outstanding adjusted for the dilutive effect of outstanding stock options
and
restricted stock, the unamortized compensation cost of stock options, and
the
accumulated tax benefit or shortfall that would be credited or charged to
additional paid in capital.
(Dollars
and amounts in thousands, except per share data)
|
|
Three Months Ended
March 31,
|
|
|
|
2008
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
8,205
|
|
$
|
7,545
|
|
Average
common shares outstanding
|
|
|
16,355
|
|
|
15,269
|
|
Basic
net income per share
|
|
$
|
0.50
|
|
$
|
0.49
|
|
Diluted:
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$
|
8,205
|
|
$
|
7,545
|
|
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
16,355
|
|
|
15,269
|
|
Stock
option and restricted stock adjustment
|
|
|
53
|
|
|
132
|
|
Average
common shares outstanding–diluted
|
|
|
16,408
|
|
|
15,401
|
|
Diluted
net income per share
|
|
$
|
0.50
|
|
$
|
0.49
|
|
Options
for 961,249 shares and 674,922 shares of common stock were not included in
computing diluted net income per share for the three month periods ended
March
31, 2008 and 2007, respectively, because their effects are antidilutive.
Note
6 -
Pension, Profit Sharing, and Other Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all employees. Benefits 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 Company, with input
from
its actuaries, estimates that the 2008 contribution will be approximately
$1.0
million.
Net
periodic benefit cost for the three month periods ended March 31 includes
the
following components:
|
|
Three Months Ended
March 31,
|
|
(In
thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Service
cost for benefits earned
|
|
$
|
0
|
|
$
|
320
|
|
Interest
cost on projected benefit obligation
|
|
|
355
|
|
|
341
|
|
Expected
return on plan assets
|
|
|
(326
|
)
|
|
(379
|
)
|
Amortization
of prior service cost
|
|
|
(44
|
)
|
|
(44
|
)
|
Recognized
net actuarial loss
|
|
|
99
|
|
|
136
|
|
Net
periodic benefit cost
|
|
$
|
84
|
|
$
|
374
|
|
Cash
and
Deferred Profit Sharing Plan
The
Company has a qualified Cash and Deferred Profit Sharing Plan that includes
a
401(k) provision with a Company match. 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 the
Company
match are included in noninterest expenses and totaled $0.4 million for both
of
the three month periods ended March 31, 2008 and 2007,
respectively.
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
$0.1 million for the three month period ended March 31, 2007. 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. The expense for this plan is included in noninterest expenses and
totaled $0.2 million for the three month period ended March 31, 2008.
Supplemental
Executive Retirement 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. The Company
had
expenses related to the new Plan of $0.2 million for the three months ended
March 31, 2008 and $0.3 million for the SERAs for the three months ended
March
31, 2007.
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 who retired while the Plan was
in
effect will continue to receive this benefit. The Company had expenses related
to the Executive Health Insurance Plan of $0 and $28 thousand for the three
month periods ended March 31, 2008 and 2007, respectively.
Note
7 – Unrealized Losses on Investments
Shown
below is information that summarizes the gross unrealized losses and fair
value
for the Company’s available-for-sale and held-to-maturity investment
portfolios.
Gross
unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss position
at March 31, 2008 and December 31, 2007 are as follows:
(In
thousands)
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
Available
for sale as of March 31, 2008
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
|
|
|
53,600
|
|
|
397
|
|
|
7
|
|
|
404
|
|
|
|
|
53,600
|
|
|
397
|
|
|
7
|
|
|
404
|
|
(In
thousands)
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
Available
for sale as of
December
31, 2007
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
$
|
20,925
|
|
$
|
0
|
|
$
|
99
|
|
$
|
99
|
|
Mortgage-backed
|
|
|
12,554
|
|
|
43
|
|
|
4
|
|
|
47
|
|
|
|
$
|
33,479
|
|
$
|
43
|
|
$
|
103
|
|
$
|
146
|
|
Approximately
100% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of March 31, 2008 and 2007 are rated AAA.
The
securities representing the unrealized losses in the available-for-sale
portfolio as of March 31, 2008 and Decmember 31, 2007 all have minimal duration
risk (3.33 years in 2008 and 1.14 years in 2007), low credit risk, and minimal
loss (approximately 0.75% in 2008 and 0.43% in 2007) when compared to book
value. The unrealized losses that exist are the result of market changes
in
interest rates since the original purchase. These factors coupled with the
fact
that the Company has both the intent and ability to hold these investments
for a
period of time sufficient to allow for any anticipated recovery in fair value
substantiates that the unrealized losses in the available-for-sale portfolio
are
temporary.
Gross
unrealized losses and fair value by length of time that the individual
held-to-maturity securities have been in a continuous unrealized loss position
at March 31, 2008 and December 31, 2007 are as follows:
(In
thousands)
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
Held
to Maturity as of March 31, 2008
|
|
|
Fair
Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
1,275
|
|
|
1
|
|
|
0
|
|
|
1
|
|
|
|
|
1,275
|
|
|
1
|
|
|
0
|
|
|
1
|
|
(In
thousands)
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
Held
to Maturity as of December 31, 2007
|
|
Fair Value
|
|
Less than 12
months
|
|
More than 12
months
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
3,340
|
|
|
1
|
|
|
31
|
|
|
32
|
|
|
|
$
|
3,340
|
|
$
|
1
|
|
$
|
31
|
|
$
|
32
|
|
Approximately
100% of the bonds carried in the held-to-maturity portfolio with continuous
unrealized losses as of March 31, 2008 are rated Aa2. Approximately 92%of
the
bonds carried in the held-to-maturity investment portfolio with continuous
unrealized losses as of December 31, 2007 are rated AAA and 8% are rated
AA1.
The securities representing the unrealized losses in the held-to-maturity
portfolio as of March 31, 2008 have no duration risk since they were called
on
April 1, 2008, low credit risk and minimal loss (approximately .01%) when
compared to book value. The securities representing the unrealized losses
in the
held-to-maturity portfolio as of December 31, 2007, all have modest duration
risk of 4.69 years , low credit risk, and minimal loss (approximately 1%)
when
compared to book value. The unrealized losses that exist are the result of
market changes in interest rates since the original purchase. These factors
coupled with the Company’s intent and ability to hold these investments for a
period of time sufficient to allow for any anticipated recovery in fair value
substantiates that the unrealized losses in the held-to-maturity portfolio
are
temporary.
Note
8 -
Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing, and Investment Management. Only Community Banking currently meets
the
threshold for segment reporting; however, the Company is disclosing separate
information for all four operating segments. Each of the operating segments
is a
strategic business unit that offers different products and services. The
Insurance, Leasing, and Investment Management segments are businesses that
were
acquired in separate transactions where management at the time of acquisition
was retained. The accounting policies of the segments are the same as those
described in Note 1 to the consolidated financial statements included in
the
2007 Annual Report on Form 10-K. However, the segment data reflect intersegment
transactions and balances.
The
Community Banking segment is conducted through Sandy Spring Bank and involves
delivering a broad range of financial products and services, including various
loan and deposit products to both individuals and businesses. Parent company
income is included in the Community Banking segment, as the majority of parent
company activities are related to this segment. Major revenue sources include
net interest income, gains on sales of mortgage loans, trust income, fees
on
sales of investment products and service charges on deposit accounts. Expenses
include personnel, occupancy, marketing, equipment and other expenses. Included
in Community Banking expenses are noncash charges associated with amortization
of intangibles related to acquired entities totaling $0.8 million and $0.5
million for the three month periods ended March 31, 2008 and 2007, respectively.
The
Insurance segment is conducted through Sandy Spring Insurance Corporation,
a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. In addition, Sandy Spring Insurance Corporation operates
the
Chesapeake Insurance Group and Wolfe and Reichelt Insurance Agency, general
insurance agencies located in Annapolis, Maryland, and Neff & Associates,
located in Ocean City, Maryland. Major sources of revenue are insurance
commissions from commercial lines and personal lines. Expenses include personnel
and support charges. Included in insurance expenses are non-cash charges
associated with amortization of intangibles totaling $0.1 million for both
of
the three month periods ended March 31, 2008 and 2007.
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 financial planning to individuals, families, small businesses
and
associations including cash flow analysis, investment review, tax planning,
retirement planning, insurance analysis and estate planning. West Financial
has
approximately $689.0 million in assets under management as of March 31, 2008.
Major revenue sources include noninterest income earned on the above services.
Expenses include personnel and support charges. Included in investment
management expenses are non-cash charges associated with amortization of
intangibles totaling $0.2 million for both of the three month periods ended
March 31, 2008 and 2007.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
(In
thousands)
|
|
Community
Banking
|
|
Insurance
|
|
Leasing
|
|
Investment
Mgmt.
|
|
Inter-Segment
Elimination
|
|
Total
|
|
Quarter
ended
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
43,499
|
|
$
|
20
|
|
$
|
707
|
|
$
|
14
|
|
$
|
(318
|
)
|
$
|
43,922
|
|
Interest
expense
|
|
|
17,377
|
|
|
0
|
|
|
284
|
|
|
0
|
|
|
(318
|
)
|
|
17,343
|
|
Provision
for loan and lease losses
|
|
|
2,667
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
2,667
|
|
Noninterest
income
|
|
|
9,398
|
|
|
2,171
|
|
|
137
|
|
|
1,142
|
|
|
(152
|
)
|
|
12,696
|
|
Noninterest
expenses
|
|
|
22,270
|
|
|
1,363
|
|
|
291
|
|
|
931
|
|
|
(152
|
)
|
|
24,703
|
|
Income
before income taxes
|
|
|
10,583
|
|
|
828
|
|
|
269
|
|
|
225
|
|
|
0
|
|
|
11,905
|
|
Income
tax expense
|
|
|
3,169
|
|
|
335
|
|
|
108
|
|
|
88
|
|
|
0
|
|
|
3,700
|
|
Net
income
|
|
$
|
7,414
|
|
$
|
493
|
|
$
|
161
|
|
$
|
137
|
|
$
|
0
|
|
$
|
8,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
3,163,891
|
|
$
|
11,871
|
|
$
|
34,983
|
|
$
|
11,060
|
|
$
|
(60,909
|
)
|
$
|
3,160,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March
31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
41,509
|
|
$
|
15
|
|
$
|
644
|
|
$
|
15
|
|
$
|
(289
|
)
|
$
|
41,894
|
|
Interest
expense
|
|
|
17,910
|
|
|
0
|
|
|
258
|
|
|
0
|
|
|
(289
|
)
|
|
17,879
|
|
Provision
for loan and lease losses
|
|
|
839
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
839
|
|
Noninterest
income
|
|
|
6,953
|
|
|
2,877
|
|
|
149
|
|
|
1,083
|
|
|
(156
|
)
|
|
10,906
|
|
Noninterest
expenses
|
|
|
21,306
|
|
|
1,290
|
|
|
270
|
|
|
904
|
|
|
(156
|
)
|
|
23,614
|
|
Income
before income taxes
|
|
|
8,407
|
|
|
1,602
|
|
|
265
|
|
|
194
|
|
|
0
|
|
|
10,468
|
|
Income
tax expense
|
|
|
2,108
|
|
|
634
|
|
|
105
|
|
|
76
|
|
|
0
|
|
|
2,923
|
|
Net
income
|
|
$
|
6,299
|
|
$
|
968
|
|
$
|
160
|
|
$
|
118
|
|
$
|
0
|
|
$
|
7,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
2,946,888
|
|
$
|
11,611
|
|
$
|
33,200
|
|
$
|
8,937
|
|
$
|
(55,159
|
)
|
$
|
2,945,477
|
|
Note
9 – Comprehensive Income
The
components of total comprehensive income for the three month periods ended
March
31, 2008 and 2007 are as follows:
|
|
For the three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Tax
|
|
|
|
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
Pretax
|
|
Benefit/
|
|
Net
|
|
(In
thousands)
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Amount
|
|
(Expense)
|
|
Amount
|
|
Net
Income
|
|
|
|
|
|
|
|
$
|
8,205
|
|
|
|
|
|
|
|
$
|
7,545
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
holding (losses) gains arising during the period
|
|
|
1,119
|
|
|
446
|
|
|
673
|
|
|
733
|
|
|
(290
|
)
|
|
443
|
|
Reclassification
adjustment for (gains) losses included in net income
|
|
|
(574
|
)
|
|
(229
|
)
|
|
(345
|
)
|
|
(2
|
)
|
|
1
|
|
|
(1
|
)
|
Adjustment
for pensions (FAS 158)
|
|
|
55
|
|
|
22
|
|
|
33
|
|
|
(643
|
)
|
|
252
|
|
|
(391
|
)
|
Total
change in other comprehensive income
|
|
|
|
|
|
|
|
|
361
|
|
|
88
|
|
|
(37
|
)
|
|
51
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
$
|
8,566
|
|
|
|
|
|
|
|
$
|
7,596
|
|
Note
10-
Fair Value Measurements
On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159), which gives entities the option to measure eligible financial
assets, financial liabilites and Company commitments at fair value (i.e.
the
fair value option), on an instrument-by-instrument basis, that are otherwise
not
permitted to be accounted for at fair value under other accounting standards.
The election to use the fair value option is available when an entity first
recognizes a financial asset or financial liability or upon entering into
a
Company commitment. Subsequent changes in fair value must be recorded in
earnings. Additionally, SFAS No. 159 allows for a one-time election for recorded
to beginning retained earnings.
The
Company adopted SFAS No. 159 as of January 1, 2008 and elected the fair value
option for a group of specific financial instruments which are mortgage loans
held for sale. The Company believes by electing the fair value option for
this
financial instrument, it will allow the accounting for gains on sale of mortgage
loans to more accurately reflect the timing and economics of the transaction.
The effect of this adjustment was immaterial to the Company’s financial results
for the three month period ending March 31, 2008.
Simultaneously
with the adoption of SFAS No, 159, the Company adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), effective January 1, 2008. SFAS No. 157
clarifies that fair value is an exit price, representing the amount that
would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. Under SFAS No. 157, fair value
measurements are not adjusted for transaction costs. SFAS No. 157 establishes
a
fair value hierarchy that prioritizes the inputs to valuation techniques
used to
measure fair value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities (level
1
measurements) and the lowest priority to unobservable inputs (level 3
measurements). The three levels of the fair value hierarchy under SFAS No.
157
are described below.
Basis
of
Fair Value Measurement:
Level
1-
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical, unrestricted assets or liabilities;
Level
2-
Quoted prices in markets that are not active, or inputs that are observable,
either directly or indirectly, for substantially the full term of the asset
or
liability;
Level
3-
Prices or valuation techniques that require inputs that are both significant
to
the fair value measurement and unobservable (i.e. supported by little or
no
market activity).
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value measurement.
The
types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities, many other sovereign government
obligations, liquid mortgage products, active listed equities and most money
market securities. Such instruments are generally classified within level
1 or
level 2 of the fair value hierarchy. As required by SFAS No. 157, the Company
does not adjust the quoted price for such instruments.
The
types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid equities, state,
municipal and provincial obligations, and certain physical commodities. Such
instruments are generally classified within level 2 of the fair value
hierarchy.
Level
3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best estimate is
used.
Impaired
loans are evaluated and valued at the time the loan is identified as impaired,
at the lower of cost or market value. Market value is measured based on the
value of the collateral securing these loans and is classified at a level
3 in
the fair value hierarchy. Collateral may be real estate and/or business assets
including equipment, inventory and/or accounts receivable. The value of real
estate collateral is determined based on appraisals by qualified licensed
appraisers hired by the Company. The value of business equipment, inventory
and
accounts receivable collateral is based on net book value on the business’
financial statements and if necessary discounted based on managements review
and
analysis. Appraised and reported values may be discounted based on management’s
historical knowledge, changes in market conditions from the time of valuation,
and/or management’s expertise and knowledge of the client and client’s business.
Impaired loans are reviewed and evaluated on at least a quarterly basis for
additional impairment and adjusted accordingly, based on the same factors
identified above.
Impaired
loans totaled $36.4 million at March 31, 2008, compared to $21.9 million
at
December 31, 2007.
Interest
rate swap agreements are measured by alternative pricing sources with reasonable
levels of price transparency in markets that are not active. Based on the
complex nature of interest rate swap agreements, the markets these instruments
trade in are not as efficient and are less liquid than that of the more mature
level 1 markets. These markets do however have comparable, observable inputs
in
which an alternative pricing source values these assets in order to arrive
at a
fair market value. These characteristics classify interest rate swap agreements
as level 2 as represented in SFAS No. 157.
The
following table set forth the Company’s financial assets and liabilities that
were accounted for or disclosed at fair value. Assets and liabilities are
classified in their entirety based on the lowest level of input that is
significant to the fair value measurement (in thousands):
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Balance as of
March 31,
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Mortgage loans held for sale
|
|
$
|
-
|
|
$
|
9,876
|
|
$
|
|
|
$
|
$
9,876
|
|
Impaired
loans
|
|
|
|
|
|
|
|
|
36,363
|
|
|
36,363
|
|
Investments
securities, available for sale
|
|
|
|
|
|
206,840
|
|
|
-
|
|
|
206,840
|
|
Investment
securities, held to maturity
|
|
|
-
|
|
|
209,937
|
|
|
-
|
|
|
209,937
|
|
Interest
rate swap agreements
|
|
|
-
|
|
|
5,010
|
|
|
-
|
|
|
5,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$
|
-
|
|
$
|
(5,010
|
)
|
$
|
-
|
|
$
|
(5,010
|
)
|
Item
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS
Sandy
Spring Bancorp makes forward-looking statements in this report. These
forward-looking statements may include: statements of goals, intentions,
earnings expectations, and other expectations; estimates of risks and of
future
costs and benefits; assessments of probable loan and lease losses; assessments
of market risk; and statements of the ability to achieve financial and other
goals. Forward-looking
statements are typically identified by words such as “believe,” “expect,”
“anticipate,” “intend,” “outlook,” “estimate,” “forecast,” “project” and other
similar words and expressions. Forward-looking statements are subject to
numerous assumptions, risks and uncertainties, which change over time.
Forward-looking statements speak only as of the date they are made. The Company
does not assume any duty and does not undertake to update its forward-looking
statements. Because forward-looking statements are subject to assumptions
and
uncertainties, actual results or future events could differ, possibly
materially, from those that the Company anticipated in its forward-looking
statements, and future results could differ materially from historical
performance.
The
Company’s forward-looking statements are subject to the following principal
risks and uncertainties:
general
economic conditions and trends, either nationally or locally; conditions
in the
securities markets; changes in interest rates; changes in deposit flows,
and in
the demand for deposit, loan, and investment products and other financial
services; changes in real estate values; changes in the quality or composition
of the Company’s loan or investment portfolios; changes in competitive pressures
among financial institutions or from non-financial institutions; the Company’s
ability to retain key members of management; changes in legislation, regulation,
and policies;
and a
variety of other matters which, by their nature, are subject to significant
uncertainties.
The
Company provides greater detail regarding some of these factors in its Form
10-K
for the year ended December 31, 2007, including in the Risk Factors section
of that report. The Company’s forward-looking statements may also be subject to
other risks and uncertainties, including those that it may discuss elsewhere
in
this report or in its other filings with the SEC.
THE
COMPANY
The
Company is the registered bank holding company for Sandy Spring Bank (the
"Bank"), headquartered in Olney, Maryland. The Bank operates forty two community
offices in Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince
George’s Counties in Maryland and Fairfax and Loudoun counties in Virginia,
together with an insurance subsidiary, an equipment leasing company and an
investment management company in McLean, Virginia.
The
Company offers a broad range of financial services to consumers and businesses
in this market area. Through March 31, 2008, year-to-date average commercial
loans and leases and commercial real estate loans accounted for approximately
57% of the Company’s loan and lease portfolio, and year-to-date average consumer
and residential real estate loans accounted for approximately 43%. The Company
has established a strategy of independence, and intends to establish or acquire
additional offices, banking organizations, and non-banking organizations
as
appropriate opportunities arise.
CRITICAL
ACCOUNTING POLICIES
The
Company’s financial statements are prepared in accordance with generally
accepted accounting principles (“GAAP”) in the United States of America and
follow general practices within the industry in which it operates. Application
of these principles requires management to make estimates, assumptions, and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions, and judgments are based
on
information available as of the date of the financial statements; accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions, and judgments. Certain policies inherently have a
greater reliance on the use of estimates, assumptions, and judgments and
as such
have a greater possibility of producing results that could be materially
different than originally reported. Estimates, assumptions, and judgments
are
necessary when assets and liabilities are required to be recorded at fair
value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent
upon
a future event. Carrying assets and liabilities at fair value inherently
results
in more financial statement volatility. The fair values and the information
used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. The estimates used in management’s assessment of the adequacy of
the allowance for loan and lease losses require that management make assumptions
about matters that are uncertain at the time of estimation. Differences in
these
assumptions and differences between the estimated and actual losses could
have a
material effect.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure as defined in Securities and Exchange Commission
Regulation G and Item 10 of Commission Regulation S-K. This traditional
efficiency ratio is used as a measure of operating expense control and
efficiency of operations. Management believes that its traditional ratio
better
focuses attention on the operating performance of the Company over time than
does a GAAP ratio, and that it is highly useful in comparing period-to-period
operating performance of the Company’s core business operations. It is used by
management as part of its assessment of its performance in managing noninterest
expenses. However, this measure is supplemental, and is not a substitute
for an
analysis of performance based on GAAP measures. The reader is cautioned that
the
traditional efficiency ratio used by the Company may not be comparable to
GAAP
or non-GAAP efficiency ratios reported by other financial
institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of
net
interest income plus total noninterest income. This is a GAAP financial measure.
Noninterest expenses used in the calculation of the traditional, non-GAAP
efficiency ratio exclude intangible asset amortization. Income for the
traditional ratio is increased for the favorable effect of tax-exempt income,
and excludes securities gains and losses, which can vary widely from period
to
period without appreciably affecting operating expenses. The traditional
measure
is different from the GAAP efficiency ratio. The GAAP measure is calculated
using noninterest expense and income amounts as shown on the face of the
Consolidated Statements of Income. The traditional and GAAP efficiency ratios
are presented and reconciled in Table 1.
Table
1 – GAAP based and traditional efficiency ratios
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars
in thousands)
|
|
2008
|
|
2007
|
|
Noninterest
expenses
|
|
$
|
24,703
|
|
$
|
23,614
|
|
Net
interest income plus noninterest income
|
|
|
|
|
|
|
|
|
|
|
39,275
|
|
|
34,921
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–GAAP
|
|
|
62.90
|
%
|
|
67.62
|
%
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$
|
24,703
|
|
$
|
23,614
|
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
1,124
|
|
|
802
|
|
Noninterest
expenses–traditional ratio
|
|
|
23,579
|
|
|
22,812
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income
|
|
|
39,275
|
|
|
34,921
|
|
|
|
|
|
|
|
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
1,140
|
|
|
1,285
|
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
Securities
gains (losses)
|
|
|
574
|
|
|
2
|
|
Net
interest income plus noninterest
|
|
|
|
|
|
|
|
Income –
traditional ratio
|
|
|
39,841
|
|
|
36,204
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – traditional
|
|
|
59.18
|
%
|
|
63.01
|
%
|
A.
FINANCIAL CONDITION
The
Company's total assets were $3.2 billion at March 31, 2008, increasing $116.9
million or 4% during the first three months of 2008. Earning assets increased
by
4% or $116.2 million in the first three months of 2008 to $2.9 billion at
March
31, 2008. These increases were mainly the result of growth in the loan
portfolio.
Total
loans and leases, excluding loans held for sale, increased 4% or $87.0 million
during the first three months of 2008, to $2.4 billion. This increase was
due
primarily to growth in the commercial and mortgage loan portfolios. During
this
period, commercial loans and leases increased by $66.5 million or 5%,
attributable primarily to commercial mortgage loans (up 11%). Consumer loans
increased by $0.4 million, primarily due to an increase in home equity lines.
Residential real estate loans grew by $20.2 million or 3% due to an increase
in
residential construction loans. Residential mortgage loans held for sale
increased by $0.3 million from December 31, 2007, to $9.9 million at March
31,
2008.
Table
2 – Analysis of Loans and Leases
The
following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In
thousands)
|
|
March
31, 2008
|
|
%
|
|
December
31, 2007
|
|
%
|
|
Residential
real estate
|
|
$
|
643,458
|
|
|
27
|
%
|
$
|
623,286
|
|
|
27
|
%
|
Commercial
loans and leases
|
|
|
1,343,915
|
|
|
57
|
|
|
1,277,450
|
|
|
56
|
|
Consumer
|
|
|
376,650
|
|
|
16
|
|
|
376,295
|
|
|
17
|
|
Total
Loans and Leases
|
|
|
2,364,023
|
|
|
100
|
%
|
|
2,277,031
|
|
|
100
|
%
|
Less:
Allowance for credit losses
|
|
|
(27,887
|
)
|
|
|
|
|
(25,092
|
)
|
|
|
|
Net
loans and leases
|
|
$
|
2,336,136
|
|
|
|
|
$
|
2,251,939
|
|
|
|
|
Certain
loan terms may create concentrations of credit risk and increase the lender’s
exposure to loss. These include terms that permit the deferral of principal
payments or payments that are smaller than normal interest accruals (negative
amortization); loans with high loan-to-value ratios (“LTV”); loans, such as
option adjustable-rate mortgages, that may expose the borrower to future
increases in repayments that are in excess of increases that would result
solely
from increases in market interest rates; and interest-only loans. The Company
does not make loans that provide for negative amortization. The Company
originates option adjustable-rate mortgages infrequently and sells all of
them
in the secondary market.
At
March
31, 2008, the Company had a total of $41.5 million in residential real estate
loans and $2.8 million in consumer loans with a LTV greater than 90%. The
Company also had an additional $90.9 million in residential lot loans owned
by
individuals with an LTV greater than 75%. Commercial loans with a LTV greater
than 75% to 85%, depending on the type of property, totaled $68.6 million
at
March 31, 2008.
Interest
only loans at March 31, 2008 include almost all of the $223.2 million
outstanding under the Company’s equity lines of credit, (included in the
consumer loan portfolio) and $102.7 million in other loans. The aggregate
of
these loan concentrations was $529.7 million at March 31, 2008, 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 assess any additional risk that the above types of loans might
present.
The
total
investment portfolio decreased by 2% or $10.3 million from December 31, 2007,
to
$435.0 million at March 31, 2008. The decrease was due mainly to a decrease
of
$32.4 million or 14% in held-to-maturity securities and $2.0 million or 9%
in
other equity securities, offset by an increase of $20.0 million or 11% in
available-for-sale securities. The decreases were the result of calls and
maturities. The aggregate of federal funds sold and interest-bearing deposits
with banks increased by $36.7 million during the first three months of 2008,
reaching $59.1 million at March 31, 2008.
Table
3 – Analysis of Deposits
The
following table presents the trends in the composition of deposits at the
dates
indicated:
(In
thousands)
|
|
March
31, 2008
|
|
%
|
|
December
31, 2007
|
|
%
|
|
Noninterest-bearing
deposits
|
|
$
|
445,088
|
|
|
19
|
%
|
$
|
434,053
|
|
|
19
|
%
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
249,028
|
|
|
11
|
|
|
254,878
|
|
|
11
|
|
Money
market savings
|
|
|
714,496
|
|
|
30
|
|
|
726,647
|
|
|
32
|
|
Regular
savings
|
|
|
156,488
|
|
|
7
|
|
|
153,964
|
|
|
7
|
|
Time
deposits less than $100,000
|
|
|
449,481
|
|
|
19
|
|
|
416,601
|
|
|
18
|
|
Time
deposits $100,000 or more
|
|
|
325,987
|
|
|
14
|
|
|
287,725
|
|
|
13
|
|
Total
interest-bearing
|
|
|
1,895,480
|
|
|
81
|
|
|
1,839,815
|
|
|
81
|
|
Total
deposits
|
|
$
|
2,340,568
|
|
|
100
|
%
|
$
|
2,273,868
|
|
|
100
|
%
|
Total
deposits were $2.3 billion at March 31, 2008, increasing $66.7 million or
3%
from December 31, 2007. During the first three months of 2008, growth rates
of
3% were achieved for noninterest bearing demand deposits (up $11.0 million),
8%
for time deposits of less than $100,000 (up $32.9 million), 13% for time
deposits of $100,000 or more (up $38.3 million), and 2% for interest-bearing
regular savings (up $2.5 million). Over the same period, decreases of 2%
were
recorded for money market deposits (down $12.2 million.), for interest bearing
demand deposits (down $5.9 million). The growth in time deposits was due
in
large part to management of rates in the face of intense competition in order
to
maintain sufficient liquidity to fund loan growth.
Total
borrowings were $474.9 million at March 31, 2008, which represented an increase
of $48.4 million or 11% from December 31, 2007. These additional borrowings
were
made due to opportunities to fund loan growth at rates typically better than
those offered on deposits. The new borrowings were all ten year callable
FHLB
advances with call dates between six months and two years. Approximately
60% of
these borrowings had call dates of two years.
Market
Risk and Interest Rate Sensitivity
Overview
The
Company’s net income is largely dependent on its net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net interest
income.
Similarly, when interest-earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net interest income. Net interest income is also affected by changes in
the
portion of interest-earning assets that are funded by interest-bearing
liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders’ equity.
The
Company’s Board of Directors has established a comprehensive interest rate risk
management policy, which is administered by Management’s Asset Liability
Management Committee (“ALCO”). The policy establishes limits of risk, which are
quantitative measures of the percentage change in net interest income (a
measure
of net interest income at risk) and the fair value of equity capital (a measure
of economic value of equity (“EVE”) at risk) resulting from a hypothetical
change in U.S. Treasury interest rates for maturities from one day to thirty
years. The Company measures the potential adverse impacts that changing interest
rates may have on its short-term earnings, long-term value, and liquidity
by
employing simulation analysis through the use of computer modeling. The
simulation model captures optionality factors such as call features and interest
rate caps and floors imbedded in investment and loan portfolio contracts.
As
with any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by the Company. When
interest rates change, actual movements in different categories of
interest-earning assets and interest-bearing liabilities, loan prepayments,
and
withdrawals of time and other deposits, may deviate significantly from
assumptions used in the model. Finally, the methodology does not measure
or
reflect the impact that higher rates may have on adjustable-rate loan customers’
ability to service their debts, or the impact of rate changes on demand for
loan, lease, and deposit products.
The
Company prepares a current base case and eight alternative simulations, at
least
once a quarter, and reports the analysis to the Board of Directors. In addition,
more frequent forecasts are produced when interest rates are particularly
uncertain or when other business conditions so dictate.
If
a
measure of risk produced by the alternative simulations of the entire balance
sheet violates policy guidelines, ALCO is required to develop a plan to restore
the measure of risk to a level that complies with policy limits within two
quarters.
The
Company’s interest rate risk management goals are (1) to increase net interest
income at a growth rate consistent with the growth rate of total assets and,
(2)
to minimize fluctuations in net interest margin as a percentage of earning
assets. Management attempts to achieve these goals by balancing, within policy
limits, the volume of floating-rate liabilities with a similar volume of
floating-rate assets; by keeping the average maturity of fixed-rate asset
and
liability contracts reasonably matched; by maintaining a pool of administered
core deposits; and by adjusting pricing rates to market conditions on a
continuing basis.
The
balance sheet is subject to quarterly testing for eight alternative interest
rate shock possibilities to indicate the inherent interest rate risk. Average
interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”),
although the Company may elect not to use particular scenarios that it
determines are impractical in a current rate environment. It is management’s
goal to structure the balance sheet so that net interest earnings at risk
over a
twelve-month period and the economic value of equity at risk do not exceed
policy guidelines at the various interest rate shock levels.
The
Company augments its quarterly interest rate shock analysis with alternative
external interest rate scenarios on a monthly basis. These alternative interest
rate scenarios may include non-parallel rate ramps and non-parallel yield
curve
twists.
Analysis
Measures
of net interest income at risk produced by simulation analysis are indicators
of
an institution’s short-term performance in alternative rate environments. These
measures are typically based upon a relatively brief period, usually one
year.
They do not necessarily indicate the long-term prospects or economic value
of
the institution.
ESTIMATED
CHANGES IN NET INTEREST INCOME
CHANGE
IN
INTEREST
RATES:
|
|
+ 400 bp
|
|
+ 300 bp
|
|
+ 200 bp
|
|
+ 100 bp
|
|
- 100 bp
|
|
- 200 bp
|
|
-300 bp
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
-25
|
%
|
|
-20
|
%
|
|
-17.5
|
%
|
|
-12.5
|
%
|
|
-12.5
|
%
|
|
-17.5
|
%
|
|
-20
|
%
|
|
-25
|
%
|
March
2008
|
|
|
-8.62
|
|
|
-4.88
|
|
|
-1.51
|
|
|
1.14
|
|
|
-0.79
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
December
2007
|
|
|
-14.82
|
|
|
-10.47
|
|
|
-6.12
|
|
|
-1.91
|
|
|
-0.68
|
|
|
-1.01
|
|
|
-2.84
|
|
|
N/A
|
|
The
Net
Interest Income at Risk position improved compared to the 4th
quarter
of 2007 in all rate scenarios except the -100 basis point scenario. All of
the
above measures of net interest income at risk remained well within prescribed
policy limits. Although assumed to be unlikely, our largest exposure is at
the
+400bp level, with a measure of -8.62%. This is also well within our prescribed
policy limit of 25%.
The
measures of equity value at risk indicate the ongoing economic value of the
Company by considering the effects of changes in interest rates on all of
the
Company’s cash flows, and discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these discounted
values
of the assets and liabilities is the economic value of equity, which, in
theory,
approximates the fair value of the Company’s net assets.
ESTIMATED
CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
CHANGE
IN
INTEREST
RATES:
|
|
+ 400 bp
|
|
+ 300 bp
|
|
+ 200 bp
|
|
+ 100 bp
|
|
- 100 bp
|
|
-200 bp
|
|
-300 bp
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
-40
|
%
|
|
-30
|
%
|
|
-
22.5
|
%
|
|
-10.0
|
%
|
|
-12.5
|
%
|
|
-22.5
|
%
|
|
-30
|
%
|
|
-40
|
%
|
March
2008
|
|
|
-16.75
|
|
|
-9.72
|
|
|
-0.16
|
|
|
3.88
|
|
|
-6.82
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
December
2007
|
|
|
-15.40
|
|
|
-9.09
|
|
|
-1.44
|
|
|
3.14
|
|
|
-3.57
|
|
|
-9.01
|
|
|
-13.26
|
|
|
N/A
|
|
Measures
of the economic value of equity (EVE) at risk position increased in the +400,
+300 and -100 shock bands and decreased over year-end 2007 in the +100 and
+200
shock bands. Although assumed to be highly unlikely, the largest exposure
is at
the +400bp level, with a measure of -16.75%. This is also well within our
prescribed policy limit of 40%.
Liquidity
Liquidity
is measured using an approach designed to take into account loan and lease
payments, maturities, calls and pay-downs of securities, earnings, balance
sheet
growth, mortgage banking activities, investment portfolio liquidity, and
other
factors. Through this approach, implemented by the funds management subcommittee
of ALCO under formal policy guidelines, the Company’s liquidity position is
measured weekly, looking forward at thirty-day intervals out to 180
days. The
measurement is based upon the asset-liability management model’s projection of a
funds’ sold or purchased position, along with ratios and trends developed to
measure dependence on purchased funds and core growth. Resulting projections
as
of March 31, 2008 showed short-term investments exceeding short-term borrowings
over the subsequent 180 days by $77.0 million, which increased from an excess
of
$49.0 million at December 31, 2007. This excess of liquidity over projected
requirements for funds indicates that the Company can increase its loans
and
other earning assets without incurring additional borrowing.
The
Company also has external sources of funds, which can be drawn upon when
required. The main source of external liquidity is a line of credit for $910.8
million from the Federal Home Loan Bank of Atlanta, of which $669.2 million
was
available based on pledged collateral with $338.3 million outstanding at
March
31, 2008. Other external sources of liquidity available to the Company in
the
form of lines of credit granted by the Federal Reserve, correspondent banks
and
other institutions totaled $136.5 million at March 31, 2008, against which
there
were no outstandings. Based upon its liquidity analysis, including external
sources of liquidity available, management believes the liquidity position
is
appropriate at March 31, 2008.
The
following is a schedule of significant commitments at March 31,
2008:
|
|
|
|
Commitments
to extend credit:
|
|
|
|
|
Unused
lines of credit (home equity and business)
|
|
$
|
429,906
|
|
Other
commitments to extend credit
|
|
|
184,611
|
|
|
|
|
59,370
|
|
|
|
$
|
673,887
|
|
Capital
Management
The
Company recorded a total risk-based capital ratio of 10.84% at March 31,
2008,
compared to 11.28% at December 31, 2007; a tier 1 risk-based capital ratio
of
9.79%, compared to 10.28%; and a capital leverage ratio of 8.76%, compared
to
8.87%. These decreases were mainly the result of growth in the Company’s loan
portfolio for the three month period ending March 31, 2008 coupled with a
$1.6
million decrease to capital as the result of the adoption of EITF issue 06-04.
Capital adequacy, as measured by these ratios, was well above regulatory
requirements. Management believes the level of capital at March 31, 2008,
is
appropriate.
Stockholders'
equity for March 31, 2008, totaled $319.0 million, representing an increase
of
$3.4 million or 1% from $315.6 million at December 31, 2007.
Internal
capital generation (net income less dividends) added $4.3 million to total
stockholders’ equity during the first three months of 2008. When internally
formed capital is annualized and expressed as a percentage of average total
stockholders’ equity, the resulting rate was 5% compared to 5% reported for the
full-year 2007.
External
capital formation (equity created through the issuance of stock under the
employee stock purchase plan and the stock option plan) totaled $166,000 during
the three month period ended March 31, 2008.
Dividends
for the first three months of the year were $0.24 per share in 2008, compared
to
$0.23 per share in 2007, for respective dividend payout ratios (dividends
declared per share to diluted net income per share) of 48% versus 47% for the
first three months of 2007.
B.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2008 AND MARCH 31,
2007
Net
income for the first three months of the year increased $0.7 million or 9%
to
$8.2 million in 2008 from $7.5 million in 2007, representing annualized returns
on average equity of 10.45% in 2008 and 11.96% in 2007, respectively. Diluted
earnings per share (“EPS”) for the first three months of the year was $0.50 in
2008, compared to $0.49 in 2007.
Net
interest income grew by $2.6 million, or 11%, to $26.6 million for the first
three months of 2008, while total noninterest income grew by $1.8 million,
or
16% for the period. This growth was somewhat offset by a $1.1 million, or 5%,
increase in noninterest expenses.
The
increase in net interest income was the result of continued growth in the loan
portfolio which was largely offset by lower loan yields due to three interest
rate reductions by the Federal Reserve in the first quarter of 2008. In
addition, the Company increased its use of time deposits to fund loan growth
as
growth in noninterest bearing deposits was not sufficient to support such
funding needs. These factors produced a net interest margin decrease of 8 basis
points to 3.99% for the three months ended March 31, 2008, from 4.07% for the
same period of 2007.
Table
4 – Consolidated Average Balances, Yields and Rates
(Dollars
in thousands and tax equivalent)
|
|
For
the three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
Annualized
|
|
|
|
Average
Balance
|
|
Interest
(1)
|
|
Average
Yield/Rate
|
|
Average
Balance
|
|
Interest
(1)
|
|
Average
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases (2)
|
|
$
|
2,324,733
|
|
$
|
38,565
|
|
|
6.66
|
%
|
$
|
1,926,614
|
|
$
|
34,769
|
|
|
7.30
|
%
|
Total
securities
|
|
|
427,819
|
|
|
6,169
|
|
|
5.84
|
|
|
551,566
|
|
|
7,883
|
|
|
5.86
|
|
Other
earning assets
|
|
|
42,901
|
|
|
328
|
|
|
3.07
|
|
|
40,617
|
|
|
527
|
|
|
5.26
|
|
TOTAL
EARNING ASSETS
|
|
|
2,795,453
|
|
|
45,062
|
|
|
6.48
|
%
|
|
2,518,797
|
|
|
43,179
|
|
|
6.95
|
%
|
Nonearning
assets
|
|
|
276,975
|
|
|
|
|
|
|
|
|
225,093
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
3,072,428
|
|
|
|
|
|
|
|
$
|
2,743,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$
|
241,177
|
|
|
171
|
|
|
0.28
|
%
|
$
|
231,152
|
|
|
189
|
|
|
0.33
|
%
|
Money
market savings deposits
|
|
|
709,009
|
|
|
4,667
|
|
|
2.65
|
|
|
547,135
|
|
|
4,974
|
|
|
3.69
|
|
Regular
savings deposits
|
|
|
153,365
|
|
|
120
|
|
|
0.32
|
|
|
163,037
|
|
|
156
|
|
|
0.39
|
|
Time
deposits
|
|
|
744,917
|
|
|
8,064
|
|
|
4.35
|
|
|
749.131
|
|
|
8,469
|
|
|
4.58
|
|
Total
interest-bearing deposits
|
|
|
1,848,468
|
|
|
13,022
|
|
|
2.83
|
|
|
1,690,455
|
|
|
13,788
|
|
|
3.31
|
|
Short-term
borrowings
|
|
|
366,986
|
|
|
3,279
|
|
|
3.59
|
|
|
316,929
|
|
|
3,481
|
|
|
4.45
|
|
Long-term
borrowings
|
|
|
96,175
|
|
|
1,042
|
|
|
4.36
|
|
|
40,939
|
|
|
610
|
|
|
5.97
|
|
Total
interest-bearing liabilities
|
|
|
2,311,629
|
|
|
17,343
|
|
|
3.01
|
|
|
2,048,323
|
|
|
17,879
|
|
|
3.54
|
|
Noninterest-bearing
demand deposits
|
|
|
412,369
|
|
|
|
|
|
|
|
|
408,954
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
32,675
|
|
|
|
|
|
|
|
|
30,832
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
315,755
|
|
|
|
|
|
|
|
|
255,781
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
3,072,428
|
|
|
|
|
|
|
|
$
|
2,743,890
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
$
|
27,719
|
|
|
3.47
|
%
|
|
|
|
$
|
25,300
|
|
|
3.41
|
%
|
Less:
tax equivalent adjustment
|
|
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
1,285
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
26,579
|
|
|
|
|
|
|
|
|
24,015
|
|
|
|
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
4.07
|
%
|
Ratio
of average earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities
|
|
|
120.93
|
%
|
|
|
|
|
|
|
|
122.97
|
%
|
|
|
|
|
|
|
(1)
Interest income includes the effects of taxable-equivalent adjustments (reduced
by the nondeductible portion of interest expense) using the appropriate federal
income tax rate of 35.00% and, where applicable, the marginal state income
tax
rate of 7.50% (or a combined marginal federal and state rate of 39.88%) for
2008
and a marginal state income tax rate of 6.55% (or a combined federal and state
rate of 39.26%) for 2007, to increase tax-exempt interest income to a
taxable-equivalent basis. The net taxable-equivalent adjustment amounts utilized
in the above table to compute yields were $1.1 million and $1.3 million for
the
three months ended March 31, 2008 and 2007, respectively.
(2)
Non-accrual loans are included in the average balances.
(3)
Net
interest margin = annualized net interest income on a tax-equivalent basis
divided by total interest-earning assets.
Net
Interest Income
Net
interest income for the first three months of the year was $26.6 million in
2008, an increase of 11% from $24.0 million in 2007, due primarily to a 21%
increase in average loans and leases, offset by a 64 basis point decrease in
tax-equivalent yield on loans when compared to the first three months of 2007.
Non-GAAP tax-equivalent net interest income, which takes into account the
benefit of tax advantaged investment securities, increased by 10%, to $27.7
million in 2008 from $25.3 million in 2007. The effects of changes in average
balances, yields and rates are presented in Table 5.
For
the
first three months, total interest income increased by $2.0 million or 5% in
2008, compared to 2007. On a non-GAAP tax-equivalent basis, interest income
increased by 4%. Average earning assets increased by 11% versus the prior period
to $2.8 billion from $2.5 billion; while the average yield earned on those
assets decreased by 47 basis points to 6.48%. Comparing the first three months
of 2008 versus the same period in 2007, average total loans and leases grew
by
21% to $2.3 billion (83% of average earning assets, versus 76% a year ago),
while recording a 64 basis point decrease in average yield to 6.66%. Average
commercial loans and leases increased by 29% (due to increases in all categories
of commercial loans and leases); average consumer loans increased by 7%
(attributable primarily to home equity line growth); and residential real estate
loans increased by 14% (reflecting increases in both mortgage and construction
lending). Over the same period, average total securities decreased by 22% to
$427.8 million (15% of average earning assets, versus 22% a year ago), while
the
average yield earned on those assets decreased by 2 basis points to
5.84%.
Interest
expense for the first three months of the year decreased by $0.5 million or
2%
in 2008 compared to 2007. Average total interest-bearing liabilities increased
by 13% over the prior year period, while the average rate paid on these funds
decreased by 53 basis points to 3.01%. As shown in Table 4, all categories
of
interest-bearing liabilities showed decreases in the average rate as market
interest rates continued to decline.
Table
5 – Effect of Volume and Rate Changes on Net Interest Income
|
|
|
|
2008 vs. 2007
|
|
|
|
Increase
|
|
Due to Change
|
|
|
|
Or
|
|
In Average:*
|
|
(In
thousands and tax equivalent)
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
Interest
income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$
|
3,796
|
|
$
|
6,970
|
|
$
|
(3,174
|
)
|
Securities
|
|
|
(1,714
|
)
|
|
(1,689
|
)
|
|
(25
|
)
|
Other
earning assets
|
|
|
(199
|
)
|
|
29
|
|
|
(228
|
)
|
Total
interest income
|
|
|
1,883
|
|
|
5,310
|
|
|
(3,427
|
)
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(18
|
)
|
|
9
|
|
|
(27
|
)
|
Regular
savings deposits
|
|
|
(36
|
)
|
|
(9
|
)
|
|
(27
|
)
|
Money
market savings deposits
|
|
|
(307
|
)
|
|
1,291
|
|
|
(1,598
|
)
|
Time
deposits
|
|
|
(405
|
)
|
|
(41
|
)
|
|
(364
|
)
|
Total
borrowings
|
|
|
230
|
|
|
1,134
|
|
|
(904
|
)
|
Total
interest expense
|
|
|
(536
|
)
|
|
2,384
|
|
|
(2,920
|
)
|
Net
interest income
|
|
$
|
2,419
|
|
$
|
2,926
|
|
$
|
(507
|
)
|
*
Where volume and rate have a combined effect that cannot be separately
identified with either, the variance is allocated to volume and rate based
on
the relative size of the variance that can be separately identified with each.
Credit
Risk Management
The
Company’s loan and lease portfolio (the “credit portfolio”) is subject to
varying degrees of credit risk. Credit risk is mitigated through portfolio
diversification, limiting exposure to any single customer, industry or
collateral type. The Company maintains an allowance for loan and lease losses
(the “allowance”) to absorb possible losses in the loan and lease portfolio. The
allowance is based on careful, continuous review and evaluation of the loan
and
lease portfolio, along with ongoing, quarterly assessments of the probable
losses inherent in that portfolio. The allowance represents an estimation made
pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 5,
“Accounting for Contingencies” 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 credit portfolio, and involves
consideration of a number of factors, as outlined below, to establish a prudent
level. Determination of the allowance is inherently subjective and requires
significant estimates, including estimated losses on pools of homogeneous loans
and leases based on historical loss experience and consideration of current
economic trends, which may be susceptible to significant change. Loans and
leases deemed uncollectible are charged against the allowance, while recoveries
are credited to the allowance. Management adjusts the level of the allowance
through the provision for loan and lease losses, which is recorded as a current
period operating expense. The Company’s systematic methodology for assessing the
appropriateness of the allowance includes: (1) the general 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
general allowance, which is based upon historical loss factors, as adjusted,
establishes allowances for the major loan and lease categories based upon
adjusted historical loss experience over the prior eight quarters, weighted
so
that losses in the most recent quarters have the greatest effect. The factors
used to adjust the historical loss experience address various risk
characteristics of the Company’s loan and lease portfolio including: (1) trends
in delinquencies and other non-performing loans, (2) changes in the risk profile
related to large loans in the portfolio, (3) changes in the categories of loans
comprising the loan portfolio, (4) concentrations of loans to specific industry
segments, (5) changes in economic conditions on both a local and national level,
(6) changes in the Company’s credit administration and loan and lease portfolio
management processes, and (7) quality of the Company’s credit risk
identification processes.
The
specific allowance is used to allocate an allowance for internally risk rated
commercial loans where significant conditions or circumstances indicate that
a
loss may be imminent. Analysis resulting in specific allowances, including
those
on loans identified for evaluation of impairment, includes consideration of
the
borrower’s overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of collateral. These
factors are combined to estimate the probability and severity of inherent
losses. Then a specific allowance is established based on the Company’s
calculation of the potential loss imbedded in the individual loan. Allowances
are also established by application of credit risk factors to other internally
risk rated loans, individual consumer and residential loans and commercial
leases having reached nonaccrual or 90-day past due status. Each risk rating
category is assigned a credit risk factor based on management’s estimate of the
associated risk, complexity, and size of the individual loans within the
category. Additional allowances may also be established in special circumstances
involving a particular group of credits or portfolio within a risk category
when
management becomes aware that losses incurred may exceed those determined by
application of the risk factor alone.
The
amount of the allowance is reviewed monthly by the Senior Loan Committee, and
reviewed and approved quarterly by the Board of Directors.
The
provision for loan and lease losses totaled $2.7 million for the first three
months of 2008 compared to $0.8 million in the same period of 2007. The Company
experienced net recoveries during the first three months of 2008 of $128
thousand compared to net recoveries of $17 thousand for the first three months
of 2007.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses inherent in the credit
portfolio can vary significantly from the amounts actually observed. While
management uses available information to recognize probable losses, future
additions to the allowance may be necessary based on changes in the credits
comprising the portfolio and changes in the financial condition of borrowers,
such as may result from changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, and independent
consultants engaged by Sandy Spring Bank, periodically review the credit
portfolio and the allowance. Such review may result in additional provisions
based on these third-party judgments of information available at the time of
each examination. During the first three months of 2008, there were no changes
in estimation methods or assumptions that affected the allowance methodology.
The allowance for loan and lease losses was 1.18% of total loans and leases
at
March 31, 2008 and 1.10% at December 31, 2007. The allowance increased during
the first three months of 2008 by $2.8 million, to $27.9 million at March 31,
2008, from $25.1 million at December 31, 2007. The increase in the allowance
during the first three months of 2008 was due primarily to growth in the size
of
the loan portfolio and a higher level of nonperforming loans.
Nonperforming
loans and leases increased by $11.9 million to $46.3 million at March 31, 2008
from $34.4 million at December 31, 2007, while nonperforming assets increased
by
$12.0 million for the same period to $46.9 million at March 31, 2008. Expressed
as a percentage of total assets, nonperforming assets increased to 1.48% at
March 31, 2008 from 1.15% at December 31, 2007. The increase in non-accrual
loans and leases was mainly the result of two loans in the amount of $11.3
million which management believes are adequately reserved or well secured.
The
allowance for loan and lease losses represented 60% of nonperforming loans
and
leases at March 31, 2008, compared to coverage of 73% at December 31, 2007.
No
losses are expected in either of these two loans. Significant variation in
this
coverage ratio may occur from period to period because the amount of
nonperforming loans and leases depends largely on the condition of a small
number of individual credits and borrowers relative to the total loan and lease
portfolio. Other real estate owned was $0.7 million at March 31, 2008 and $0.5
million at December 31, 2007. The balance of impaired loans and leases was
$36.4
million at March 31, 2008, with specific reserves against those loans of $3.6
million, compared to $21.9 million at December 31, 2007, with specific reserves
of $935,000.
Table
6 – Analysis of Credit Risk
(Dollars
in thousands)
Activity
in the allowance for credit losses is shown below:
|
|
Three Months Ended
March 31, 2008
|
|
Twelve Months Ended
December 31, 2007
|
|
Balance,
January 1
|
|
$
|
25,092
|
|
$
|
19,492
|
|
Allowance
acquired from acquisition
|
|
|
0
|
|
|
2,798
|
|
Provision
for loan and lease losses
|
|
|
2,667
|
|
|
4,094
|
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0
|
|
|
0
|
|
Commercial
loans and leases
|
|
|
(166
|
)
|
|
(1,103
|
)
|
Consumer
|
|
|
(28
|
)
|
|
(341
|
)
|
Total
charge-offs
|
|
|
(194
|
)
|
|
(1,444
|
)
|
Loan
recoveries:
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
2
|
|
|
12
|
|
Commercial
loans and leases
|
|
|
320
|
|
|
110
|
|
Consumer
|
|
|
0
|
|
|
30
|
|
Total
recoveries
|
|
|
322
|
|
|
152
|
|
Net
recoveries (charge-offs)
|
|
|
128
|
|
|
(1,292
|
)
|
Balance,
period end
|
|
$
|
27,887
|
|
$
|
25,092
|
|
Net
charge-offs (recoveries) to average loans and leases
(annual basis)
|
|
|
(0.02
|
)%
|
|
0.06
|
%
|
Allowance
to total loans and leases
|
|
|
1.18
|
%
|
|
1.10
|
%
|
The
following table presents nonperforming assets at the dates
indicated:
|
|
March 31, 2008
|
|
December 31, 2007
|
|
Non-accrual
loans and leases
|
|
$
|
37,353
|
|
$
|
23,040
|
|
Loans
and leases 90 days past due
|
|
|
8,244
|
|
|
11,362
|
|
Restructured
loans and leases
|
|
|
655
|
|
|
0
|
|
Total
nonperforming loans and leases*
|
|
|
46,252
|
|
|
34,402
|
|
Other
real estate owned, net
|
|
|
661
|
|
|
461
|
|
Total
nonperforming assets
|
|
$
|
46,913
|
|
$
|
34,863
|
|
Nonperforming
assets to total assets
|
|
|
1.48
|
%
|
|
1.15
|
%
|
*
Those
performing loans and leases considered potential problem credits (which the
Company classifies as substandard), as defined and identified by management,
amounted to approximately $7.1 million at March 31, 2008, compared to $3.0
million at December 31, 2007. These are credits where known information about
the borrowers' possible credit problems causes management to have doubts as
to
their ability to comply with the present repayment terms. This could result
in
their reclassification as nonperforming credits in the future, however most
are
well collateralized and are not believed to present significant risk of loss.
Loans classified for regulatory purposes not included in either non-performing
or potential problem loans consist only of "other loans especially mentioned"
and do not, in management's opinion, represent or result from trends or
uncertainties reasonably expected to materially impact future operating results,
liquidity or capital resources, or represent material credits where known
information about the borrowers' possible credit problems causes management
to
have doubts as to the borrowers' ability to comply with the loan repayment
terms.
Noninterest
Income and Expenses
Total
noninterest income was $12.7 million for the three month period ended March
31,
2008, a 16% or $1.8 million increase from the same period of 2007. The increase
in noninterest income for the first three months of 2008 was due primarily
to an
increase of $0.7 million or 31% in service charges on deposits due to higher
overdraft fees and an increase of $0.1 million or 18% in Visa check fees
reflecting continued growth in electronic transactions. In addition, securities
gains increased $0.6 million due primarily to a gain of $0.4 million which
was
realized from the redemption of stock in Visa, Inc. Other noninterest income
increased $0.7 million or 81% due largely to the timing of accrued gains on
mortgage commitments resulting from the adoption of SFAS No. 159. Insurance
agency commissions decreased $0.6 million or 22% due to lower fees on commercial
lines and reduced contingency fees.
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 were 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 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 did not reflect in its financial
statements as of December 31, 2007 any value for its membership interest in
Visa
as a result of the Visa reorganization. The anticipated IPO was completed during
the first quarter of 2008, and as a result, a portion of the Company’s shares in
Visa were redeemed for a total of $0.4 million reported as a gain on securities
sold. In addition, the Company reversed the liability of $0.2 million mentioned
above due to the fact that Visa had funded an escrow account with an amount
deemed sufficient to fund any potential losses resulting from the litigation.
The Company has 15,890 class B shares remaining that are subject to conversion
by VISA according to terms.
Total
noninterest expenses were $24.7 million for the three month period ended March
31, 2008, a 5% or $1.1 million increase from the same period in 2007. Salaries
and employee benefits increased $0.3 million or 2% during the first three months
of 2008 due in part to the acquisition of Potomac Bank in February 2007, as
well
as growth in the number of full-time equivalent employees. These increases
were
largely offset by a freeze of the defined benefit pension plan effective January
1, 2008, a termination of the Supplemental Executive Retirement Agreements
and
the elimination of an executive medical plan for non-retired employees. Outside
data services grew by $0.2 million or 21% while occupancy and equipment expenses
increased $0.2 million or 5% due to growth in the branch network. Amortization
of intangible assets increased $0.3 million or 40% due to the two acquisitions
completed in the first and second quarters of 2007. Average full-time equivalent
employees increased to 706 during the first three months of 2008, from 681
during the like period in 2007, a 4% increase. The ratio of net income per
average full-time-equivalent employee after completion of the first three months
of the year was $12,000 in 2008 and $11,000 in 2007.
Income
Taxes
The
effective tax rate increased to 31.1% for the three month period ended March
31,
2008, from 27.9% for the prior year period. This increase was primarily due
to
the decline in the tax-advantaged investment portfolio and an increase in the
Maryland statutory state income tax rate.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See
“Financial Condition - Market Risk and Interest Rate Sensitivity” in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, above, which is incorporated herein by reference. Management has
determined that no additional disclosures are necessary to assess changes in
information about market risk that have occurred since December 31,
2007.
Item
4. CONTROLS AND PROCEDURES
The
Company’s management, under the supervision and with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of
the last day of the period covered by this report, the effectiveness of the
design and operation of the Company’s disclosure controls and procedures, as
defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on
that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company’s disclosure controls and procedures were effective. There were
no significant changes in the Company’s internal controls over financial
reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during
the quarter ended March 31, 2008, that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II -
OTHER INFORMATION
Item
1A.
RISK FACTORS
There
have been no material changes in the risk factors as disclosed in the 2007
Annual Report on Form 10-K.
Item
2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The
following table provides information on the Company’s purchases of its common
stock during the three months ended March 31, 2008.
Issuer
Purchases of Equity Securities (1)
Period
|
|
(a) Total Number of
Shares Purchased
|
|
(b) Average Price
Paid per Share
|
|
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
(d) Maximum
Number that May Yet
Be Purchased Under
the Plans or Programs
(2)(3)
|
|
January
2008
|
|
|
0
|
|
|
NA
|
|
|
0
|
|
|
629,996
|
|
February
2008
|
|
|
0
|
|
|
NA
|
|
|
0
|
|
|
629,996
|
|
March
2008
|
|
|
0
|
|
|
NA
|
|
|
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 Securities and Exchange
Commission Rule 10b-18.
(2)
On
March 28, 2007, the Company’s board of directors approved a continuation of the
stock repurchase program that permits the repurchase of up to 5%, or
approximately 786,000 shares, of its outstanding common stock. The current
program continued a similar plan that expired on March 31, 2007. Repurchases
under the program may be made on the open market and in privately negotiated
transactions from time to time until March 31, 2009, or earlier termination
of
the program by the Board. The repurchases are made in connection with shares
expected to be issued under the Company’s various benefit plans, as well as for
other corporate purposes. At March 31, 2008, a total of 629,996 shares remained
under the plan.
(3)
Indicates the number of shares remaining under the plan at the end of the
indicated month.
Item
6.
EXHIBITS
Exhibit 31(a)
|
Certification
of Chief Executive Officer
|
Exhibit 31(b)
|
Certification
of Chief Financial Officer
|
Exhibit 32
(a)
|
Certification
of Chief Executive Officer pursuant to 18 U.S. Section
1350
|
Exhibit 32
(b)
|
Certification
of Chief Financial Officer pursuant to 18 U.S. Section
1350
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SANDY
SPRING BANCORP, INC.
(Registrant)
By:
|
/S/
HUNTER R. HOLLAR
|
|
Hunter
R. Hollar
|
|
Chief
Executive Officer
|
Date:
May
7, 2008
By:
|
/S/
PHILIP J. MANTUA
|
|
Philip
J. Mantua
|
|
Executive
Vice President and Chief Financial
Officer
|
Date:
May
7, 2008