UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Year Ended December 31, 2008
Commission
File Number 0-19065
SANDY SPRING BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
52-1532952
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
17801 Georgia Avenue, Olney,
Maryland
|
|
20832
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: 301-774-6400.
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
|
|
Name of each exchange on which
registered
|
Common
Stock, par value $1.00 per share
|
|
The
NASDAQ Stock Market,
LLC
|
Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
¨ Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨ Yes x No*
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes ¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer ¨ 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 Act). ¨ Yes x No
The
aggregate market value of the voting common stock of the registrant held by
nonaffiliates on June 30, 2008, the last day of the registrant’s most recently
completed second fiscal quarter, was approximately $264 million, based on the
closing sales price of $16.58 per share of the registrant's Common Stock on that
date.
As of the
close of business on February 28, 2009, 16,403,955 shares of the registrant's
Common Stock were outstanding.
Documents
Incorporated By Reference
Part III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on April 22, 2009 (the "Proxy Statement").
_________________
*
The registrant is required to file reports pursuant to Section 13 of the
Act.
SANDY
SPRING BANCORP, INC.
Table
of Contents
Forward-Looking
Statements
|
2
|
|
|
Form
10-K Cross Reference Sheet
|
3
|
|
|
Sandy
Spring Bancorp, Inc.
|
4
|
|
|
About
this Report
|
4
|
|
|
Five
Year Summary of Selected Financial Data
|
5
|
|
|
Securities
Listing, Prices and Dividends
|
6
|
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
8
|
|
|
Controls
and Procedures
|
25
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
26
|
|
|
Consolidated
Financial Statements
|
29
|
|
|
Notes
to the Consolidated Financial Statements
|
33
|
|
|
Other
Material Required by Form 10-K:
|
|
|
|
Description
of Business
|
64
|
|
|
Risk
Factors
|
72
|
|
|
Competition
|
75
|
|
|
Employees
|
76
|
|
|
Executive
Officers
|
76
|
|
|
Properties
|
77
|
|
|
Exhibits,
Financial Statements, and Reports on Form 8-K
|
77
|
|
|
Signatures
|
79
|
Forward-Looking
Statements
Sandy
Spring Bancorp, Inc. (the “Company”) makes forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this Annual Report on Form 10-K that are
subject to risks and uncertainties. These forward-looking statements include:
statements of goals, intentions, earnings expectations, and other expectations;
estimates of risks and of future costs and benefits; assessments of probable
loan and lease losses; assessments of market risk; and statements of the ability
to achieve financial and other goals. These forward-looking
statements are subject to significant uncertainties because they are based upon
or are affected by: management's estimates and projections of future interest
rates, market behavior, and other economic conditions; future laws and
regulations; and a variety of other matters which, by their nature, are subject
to significant uncertainties. Because of these uncertainties, the Company’s
actual future results may differ materially from those indicated. In
addition, the Company's past results of operations do not necessarily indicate
its future results. Please also see the discussion of “Risk Factors” on page
72.
SANDY
SPRING BANCORP, INC.
FORM
10-K CROSS REFERENCE SHEET OF MATERIAL INCORPORATED BY REFERENCE
The
following table shows the location in this Annual Report on Form 10-K or the
accompanying Proxy Statement of the information required to be disclosed by the
United States Securities and Exchange Commission (“SEC”) Form
10-K. Where indicated below, information has been incorporated by
reference in this Report from the Proxy Statement that accompanies
it. Other portions of the Proxy Statement are not included in this
Report. This Report is not part of the Proxy Statement. References
are to pages in this report unless otherwise indicated.
|
|
Item
of Form 10-K
|
|
Location
|
PART
I
|
|
|
|
|
Item
1.
|
|
Business
|
|
“Forward-Looking
Statements” on page 2, “Sandy Spring Bancorp, Inc.” and “About this
Report” on page 4, and “Description of Business” on pages 64 through
72.
|
Item
1A.
|
|
Risk
Factors
|
|
“Forward-Looking
Statements” on page 2, “Risk Factors” on pages 72 through
75.
|
Item
1B.
|
|
Unresolved
Staff Comments
|
|
Not
applicable.
|
Item
2.
|
|
Properties
|
|
“Properties”
on page 77.
|
Item
3.
|
|
Legal
Proceedings
|
|
Note
19 “Litigation” on page 56.
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders
|
|
Not
applicable. No matter was submitted to a vote of security holders during
the fourth quarter of 2008.
|
PART
II
|
|
|
|
|
Item
5.
|
|
Market
for Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
|
|
“Securities
Listing, Prices, and Dividends” on page 6 and “Equity Compensation Plans”
on page 7.
|
Item
6.
|
|
Selected
Financial Data
|
|
“Five
Year Summary of Selected Financial Data” on page 5.
|
Item
7.
|
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
“Forward-Looking
Statements” on page 2 and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” on pages 8 through
25.
|
Item
7A.
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
“Forward-Looking
Statements” on page 2 and “Market Risk Management” on pages 22 through
25.
|
Item
8.
|
|
Financial
Statements and Supplementary Data
|
|
Pages
29 through 64.
|
Item
9.
|
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
|
Not
applicable.
|
Item
9A.
|
|
Controls
and Procedures
|
|
“Controls
and Procedures” on page 25.
|
Item
9B.
|
|
Other
Information
|
|
Not
applicable.
|
PART
III
|
|
|
|
|
Item
10.
|
|
Directors,
Executive Officers and Corporate Governance
|
|
The
material labeled “Information as to Nominees and Incumbent Directors,”
“Corporate Governance,” “Code of Business Conduct,” “Compliance with
Section 16(a) of the Securities Exchange Act of 1934,” “Shareholder
Proposals and Communications,” and “Report of the Audit
Committee” in the Proxy Statement is incorporated in this Report by
reference. Information regarding executive officers is included under the
caption “Executive Officers” on page 77 of this Report.
|
Item
11.
|
|
Executive
Compensation
|
|
The
material labeled "Corporate Governance and Other Matters," "Executive
Compensation," and "Compensation Committee Report" in the Proxy Statement
is incorporated in this Report by reference.
|
Item
12.
|
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
|
|
The
material labeled “Owners of More than 5% of Bancorp’s Common Stock” and,
"Stock Ownership of Directors and Executive Officers" in the Proxy
Statement is incorporated in this Report by reference. Information
regarding securities authorized for issuance under equity compensation
plans is included under “Equity Compensation Plans” on page
7.
|
Item
13.
|
|
Certain
Relationships and Related Transactions and Director
Independence
|
|
The
material labeled “Director Independence” and "Transactions and
Relationships with Management" in the Proxy Statement is incorporated in
this Report by reference.
|
Item
14.
|
|
Principal
Accounting Fees and Services
|
|
The
material labeled Audit and Non-Audit Fees in the Proxy Statement is
incorporated in this Report by reference.
|
PART
IV
|
|
|
|
|
Item
15.
|
|
Exhibits,
Financial Statement Schedules
|
|
“Exhibits,
Financial Statement Schedules” on pages 77 and 78.
|
SIGNATURES
|
|
|
|
“Signatures”
on page
79.
|
Sandy
Spring Bancorp, Inc.
With $3.3
billion in assets, Sandy Spring Bancorp, Inc. is the holding company for Sandy
Spring Bank and its principal subsidiaries, Sandy Spring Insurance Corporation,
The Equipment Leasing Company, and West Financial Services,
Inc. Sandy Spring Bancorp, Inc. is the second largest publicly traded
banking company headquartered in Maryland. Sandy Spring Bank is a
community banking organization that focuses its lending and other services on
businesses and consumers in the local market area. Independent and
community-oriented, Sandy Spring Bank was founded in 1868 and offers a broad
range of commercial banking, retail banking, and trust services through 42
community offices in Anne Arundel, Carroll, Frederick, Howard, Montgomery, and
Prince George’s counties in Maryland, and Fairfax and Loudoun counties in
Virginia. Through its subsidiaries, Sandy Spring Bank also offers a
comprehensive menu of leasing, insurance, and investment management
services. Visit www.sandyspringbank.com to
locate an ATM near you or for more information about Sandy Spring
Bank.
About
This Report
This
report comprises the entire 2008 Form 10-K, other than exhibits, as filed with
the SEC. The 2008 annual report to shareholders, included in this
report, and the proxy materials for the 2009 annual meeting are being
distributed together to shareholders. See page 78 for information
regarding how to obtain copies of exhibits and additional copies of the Form
10-K.
This
report is provided along with the annual proxy statement for convenience of use
and to decrease costs, but is not part of the proxy materials.
The
SEC has not approved or disapproved this report or passed upon its accuracy or
adequacy.
FIVE
YEAR SUMMARY OF SELECTED FINANCIAL DATA
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent
interest income
|
|
$ |
173,389 |
|
|
$ |
186,481 |
|
|
$ |
159,686 |
|
|
$ |
129,288 |
|
|
$ |
117,137 |
|
Interest
expense
|
|
|
60,386 |
|
|
|
76,149 |
|
|
|
58,687 |
|
|
|
33,982 |
|
|
|
34,768 |
|
Tax-equivalent
net interest income
|
|
|
113,003 |
|
|
|
110,332 |
|
|
|
100,999 |
|
|
|
95,306 |
|
|
|
82,369 |
|
Tax-equivalent
adjustment
|
|
|
4,545 |
|
|
|
5,506 |
|
|
|
6,243 |
|
|
|
7,128 |
|
|
|
8,156 |
|
Provision
for loan and lease losses
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
|
|
2,600 |
|
|
|
0 |
|
Net
interest income after provision for loan and
lease losses
|
|
|
75,267 |
|
|
|
100,732 |
|
|
|
91,961 |
|
|
|
85,578 |
|
|
|
74,213 |
|
Noninterest
income
|
|
|
46,243 |
|
|
|
44,289 |
|
|
|
38,895 |
|
|
|
36,909 |
|
|
|
30,949 |
|
Noninterest
expenses
|
|
|
102,089 |
|
|
|
99,788 |
|
|
|
85,096 |
|
|
|
77,194 |
|
|
|
92,474 |
|
Income
before taxes
|
|
|
19,421 |
|
|
|
45,233 |
|
|
|
45,760 |
|
|
|
45,293 |
|
|
|
12,688 |
|
Income
tax expense (benefit)
|
|
|
3,642 |
|
|
|
12,971 |
|
|
|
12,889 |
|
|
|
12,195 |
|
|
|
(1,679 |
) |
Net
income
|
|
|
15,779 |
|
|
|
32,262 |
|
|
|
32,871 |
|
|
|
33,098 |
|
|
|
14,367 |
|
Net
income available to common shareholders
|
|
|
15,445 |
|
|
|
32,262 |
|
|
|
32,871 |
|
|
|
33,098 |
|
|
|
14,367 |
|
Per Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income- basic per share
|
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
|
$ |
2.26 |
|
|
$ |
0.99 |
|
Net
income – basic per common share
|
|
|
0.94 |
|
|
|
2.01 |
|
|
|
2.22 |
|
|
|
2.26 |
|
|
|
0.99 |
|
Net
income-diluted per share
|
|
|
0.96 |
|
|
|
2.01 |
|
|
|
2.20 |
|
|
|
2.24 |
|
|
|
0.98 |
|
Net
income – diluted per common share
|
|
|
0.94 |
|
|
|
2.01 |
|
|
|
2.20 |
|
|
|
2.24 |
|
|
|
0.98 |
|
Dividends
declared per common share
|
|
|
0.96 |
|
|
|
0.92 |
|
|
|
0.88 |
|
|
|
0.84 |
|
|
|
0.78 |
|
Book
value per common share (at year end)
|
|
|
19.05 |
|
|
|
19.31 |
|
|
|
16.04 |
|
|
|
14.73 |
|
|
|
13.34 |
|
Financial
Condition (at year end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,313,638 |
|
|
$ |
3,043,953 |
|
|
$ |
2,610,457 |
|
|
$ |
2,459,616 |
|
|
$ |
2,309,343 |
|
Deposits
|
|
|
2,365,257 |
|
|
|
2,273,868 |
|
|
|
1,994,223 |
|
|
|
1,803,210 |
|
|
|
1,732,501 |
|
Loans
and leases
|
|
|
2,490,646 |
|
|
|
2,277,031 |
|
|
|
1,805,579 |
|
|
|
1,684,379 |
|
|
|
1,445,525 |
|
Securities
|
|
|
492,491 |
|
|
|
445,273 |
|
|
|
540,908 |
|
|
|
567,432 |
|
|
|
666,108 |
|
Borrowings
|
|
|
522,658 |
|
|
|
426,525 |
|
|
|
351,540 |
|
|
|
417,378 |
|
|
|
361,535 |
|
Stockholders’
equity
|
|
|
391,862 |
|
|
|
315,640 |
|
|
|
237,777 |
|
|
|
217,883 |
|
|
|
195,083 |
|
Financial
Condition (average for the year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
3,152,586 |
|
|
|
2,935,451 |
|
|
|
2,563,673 |
|
|
|
2,352,061 |
|
|
|
2,406,318 |
|
Deposits
|
|
|
2,284,648 |
|
|
|
2,253,979 |
|
|
|
1,866,346 |
|
|
|
1,771,381 |
|
|
|
1,652,306 |
|
Loans
and leases
|
|
|
2,420,040 |
|
|
|
2,113,476 |
|
|
|
1,788,702 |
|
|
|
1,544,990 |
|
|
|
1,292,209 |
|
Securities
|
|
|
428,479 |
|
|
|
495,928 |
|
|
|
559,350 |
|
|
|
603,882 |
|
|
|
906,901 |
|
Borrowings
|
|
|
513,237 |
|
|
|
361,884 |
|
|
|
451,251 |
|
|
|
355,537 |
|
|
|
536,758 |
|
Stockholders’
equity
|
|
|
324,995 |
|
|
|
290,224 |
|
|
|
229,360 |
|
|
|
204,142 |
|
|
|
197,556 |
|
Performance
Ratios (for the year):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average common equity
|
|
|
4.84 |
% |
|
|
11.12 |
% |
|
|
14.33 |
% |
|
|
16.21 |
% |
|
|
7.27 |
% |
Return
on average assets
|
|
|
0.49 |
|
|
|
1.10 |
|
|
|
1.28 |
|
|
|
1.41 |
|
|
|
0.60 |
|
Yield
on average interest-earning assets
|
|
|
6.02 |
|
|
|
6.98 |
|
|
|
6.73 |
|
|
|
5.95 |
|
|
|
5.23 |
|
Rate
on average interest-bearing liabilities
|
|
|
2.56 |
|
|
|
3.50 |
|
|
|
3.08 |
|
|
|
2.02 |
|
|
|
1.94 |
|
Net
interest spread
|
|
|
3.46 |
|
|
|
3.48 |
|
|
|
3.65 |
|
|
|
3.93 |
|
|
|
3.29 |
|
Net
interest margin
|
|
|
3.92 |
|
|
|
4.13 |
|
|
|
4.26 |
|
|
|
4.39 |
|
|
|
3.68 |
|
Efficiency
ratio – GAAP (1)
|
|
|
65.99 |
|
|
|
66.92 |
|
|
|
63.67 |
|
|
|
61.71 |
|
|
|
87.93 |
|
Efficiency
ratio – Non-GAAP (1)
|
|
|
59.88 |
|
|
|
61.92 |
|
|
|
58.71 |
|
|
|
58.16 |
|
|
|
62.86 |
|
Dividends
declared per share to diluted net income per common
share
|
|
|
102.12 |
|
|
|
45.77 |
|
|
|
40.00 |
|
|
|
37.50 |
|
|
|
79.59 |
|
Capital
and Credit Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
equity to average assets
|
|
|
10.31 |
% |
|
|
9.89 |
% |
|
|
8.95 |
% |
|
|
8.68 |
% |
|
|
8.21 |
% |
Total
risk-based capital ratio
|
|
|
13.82 |
|
|
|
11.28 |
|
|
|
13.62 |
|
|
|
13.22 |
|
|
|
13.82 |
|
Allowance
for loan losses to loans and leases
|
|
|
2.03 |
|
|
|
1.10 |
|
|
|
1.08 |
|
|
|
1.00 |
|
|
|
1.01 |
|
Non-performing
assets to total assets
|
|
|
2.18 |
|
|
|
1.15 |
|
|
|
0.15 |
|
|
|
0.06 |
|
|
|
0.08 |
|
Net
charge-offs to average loans and leases
|
|
|
0.32 |
|
|
|
0.06 |
|
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.02 |
|
(1)
|
See
the discussion of the efficiency ratio in the section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations
entitled “Operating Expense
Performance.”
|
SECURITIES
LISTING, PRICES AND DIVIDENDS
Stock
Listing
Common
shares of Sandy Spring Bancorp, Inc. are traded on the NASDAQ Global Select
Market under the symbol SASR.
Transfer
Agent and Registrar
American
Stock Transfer and Trust Company, 59 Maiden Lane, New
York, New York 10038
Recent
Stock Prices and Dividends
Shareholders
received quarterly cash dividends totaling $15.8 million in 2008 and $15.0
million in 2007. Sandy Spring Bancorp, Inc. (the “Company”) has increased its
dividends per share each year for the past twenty-eight years. Since 2002,
dividends per share have risen at a compound annual growth rate of 5%. The
increase in dividends per share was 4% in 2008.
The ratio
of dividends per share paid on common stock to diluted net income available to
common shareholders per share was 102% in 2008, compared to 46% for 2007. The
dividend amount is established by the board of directors each quarter. In making
its decision on dividends, the board considers operating results, financial
condition, capital adequacy, regulatory requirements, shareholder returns, and
other factors.
Shares
issued under the employee stock purchase plan, which commenced on July 1, 2001,
totaled 32,891 in 2008 and 25,147 in 2007, while issuances pursuant to exercises
of stock options and grants of restricted stock were 22,546 and 84,342 in the
respective years. Shares issued under the director stock purchase plan totaled
1,479 shares in 2008 and 2,402 shares in 2007. There were no shares
issued in connection with acquisitions in 2008 and 1,577,036 shares were issued
in 2007.
The
Company has a stock repurchase program that permits the repurchase of up to 5%
(approximately 786,000 shares) of its outstanding common
stock. Repurchases are made in connection with shares expected to be
issued under the Company's stock option, benefit and compensation plans, as well
as for other corporate purposes. A total of 1,332,869 shares have
been repurchased since 1997, when stock repurchases began, through December 31,
2008 under the stock repurchase program. There were no shares repurchased in
2008 and 156,249 shares repurchased in 2007 under the stock repurchase program.
As a result of participating in the Department of the Treasury’s Troubled Asset
Relief Program (“TARP”) Capital Purchase Program, until December 5, 2011, the
Company may not repurchase any shares of its common stock, other than in
connection with the administration of an employee benefit plan, without the
consent of the Treasury Department.
The
number of common shareholders of record was approximately 2,600 as of February
27, 2009.
Quarterly
Stock Information
|
|
2008
|
|
|
2007
|
|
|
|
Stock Price Range
|
|
|
Per Share
|
|
|
Stock Price Range
|
|
|
Per Share
|
|
Quarter
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
1st
|
|
$ |
24.38 |
|
|
$ |
28.65 |
|
|
$ |
0.24 |
|
|
$ |
32.41 |
|
|
$ |
38.97 |
|
|
$ |
0.23 |
|
2nd
|
|
|
16.16 |
|
|
|
27.42 |
|
|
|
0.24 |
|
|
|
30.98 |
|
|
|
35.94 |
|
|
|
0.23 |
|
3rd
|
|
|
13.33 |
|
|
|
23.19 |
|
|
|
0.24 |
|
|
|
25.60 |
|
|
|
32.99 |
|
|
|
0.23 |
|
4th
|
|
|
14.82 |
|
|
|
22.46 |
|
|
|
0.24 |
|
|
|
26.00 |
|
|
|
31.57 |
|
|
|
0.23 |
|
Total
|
|
|
|
|
|
|
|
|
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
$ |
0.92 |
|
Issuer
Purchases of Equity Securities
Period
|
|
Total Number of
Shares Purchased (1)
|
|
|
Average Price
Paid per Share
|
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
|
|
|
Maximum Number that
May Yet Be Purchased
Under the Plans or
Programs (2)(3)
|
|
October
2008
|
|
|
0 |
|
|
|
N/A |
|
|
|
0 |
|
|
|
629,996 |
|
November
2008
|
|
|
0 |
|
|
|
N/A |
|
|
|
0 |
|
|
|
629,996 |
|
December
2008
|
|
|
0 |
|
|
|
N/A |
|
|
|
0 |
|
|
|
629,996 |
|
(1)
|
Includes
purchases of the Company’s stock made by or on behalf of the Company or
any affiliated purchasers of the Company as defined in SEC Rule
10b-18.
|
(2)
|
On
March 28, 2007, the Company’s board of directors approved a continuation
of the stock repurchase program that permits the repurchase of up to 5%,
or 786,245 shares, of its outstanding common stock. The current program
continued a similar plan that expired on March 31, 2007. Due to
its participation in the TARP, until December 5, 2011, the Company may not
repurchase any shares of its common stock, other than in connection with
the administration of an employees benefit plan, without the consent of
the Treasury
Department.
|
(3)
|
Indicates
the number of shares remaining under the plan at the end of the indicated
month.
|
The
following graph and table show the cumulative total return on the Common Stock
of Bancorp over the last five years, compared with the cumulative total return
of a broad stock market index (the Standard and Poor’s 500 Index or “S&P
500”), and a narrower index of Mid-Atlantic bank holding company peers with
assets of $2 billion to $7 billion. The cumulative total return on
the stock or the index equals the total increase in value since December 31,
2003, assuming reinvestment of all dividends paid into the stock or the index.
The graph and table were prepared assuming that $100 was invested on December
31, 2003, in the Common Stock and the securities included in the
indexes.
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandy
Spring Bancorp, Inc.
|
|
$ |
100.0 |
|
|
$ |
104.9 |
|
|
$ |
97.8 |
|
|
$ |
109.7 |
|
|
$ |
82.4 |
|
|
$ |
67.5 |
|
S&P
500 Index
|
|
$ |
100.0 |
|
|
$ |
110.9 |
|
|
$ |
116.3 |
|
|
$ |
134.7 |
|
|
$ |
142.1 |
|
|
$ |
89.5 |
|
Peer
Group Index
|
|
$ |
100.0 |
|
|
$ |
112.7 |
|
|
$ |
107.6 |
|
|
$ |
116.6 |
|
|
$ |
90.5 |
|
|
$ |
98.3 |
|
The Peer
Group Index includes twenty publicly traded bank holding companies, other than
Bancorp, headquartered in the Mid-Atlantic Region as noted and with assets of $2
billion to $7 billion. The companies included in this index
are: Carter Bank & Trust (VA); City Holding Company (WV);
Pennsylvania Commerce Bancorp, Inc. (PA); First Bancorp, Inc. (NC); First
Community Bancshares, Inc. (VA); Univest Corporation of Pennsylvania (PA); First
Commonwealth Financial Corporation (PA); First Financial Bancorp (OH); F.N.B.
Corporation (PA); Harleysville National Corporation (PA); Lakeland Bancorp, Inc.
(NJ); NewBridge Bancorp (NC); Peoples Bancorp, Inc. (OH); Stellar One
Corporation (VA); Sun Bancorp, Inc. (NJ); S&T Bancorp, Inc. (PA);
TowneBank (VA); Union Bankshares Corporation (VA); Virginia Commerce Bancorp,
Inc. (VA); Wesbanco, Inc. (WV). Returns are weighted according to the issuer’s
stock market capitalization at the beginning of each year shown.
Equity
Compensation Plans
The
following table presents disclosure regarding equity compensation plans in
existence at December 31, 2008, consisting only of the 1999 Stock Option Plan
(expired but with outstanding options that may still be exercised) and the 2005
Omnibus Stock Plan, each of which was approved by the shareholders.
Plan category
|
|
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
|
|
Weighted average exercise
price of outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for future
issuance under equity
compensation plans
excluding securities reflected
in column
|
|
Equity
compensation plans
approved
by security holders
|
|
|
973,730 |
|
|
$ |
33.47
|
|
|
|
1,296,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans not
approved
by security holders
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
|
|
|
973,730 |
|
|
$ |
33.47 |
|
|
|
1,296,853 |
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
Overview
Net
income available to common shareholders for Sandy Spring Bancorp, Inc. and
subsidiaries (the “Company”) for the year ended December 31, 2008, totaled $15.4
million ($0.94 per diluted common share), as compared to $32.3 million ($2.01
per diluted common share) for the prior year. These results reflect
the following events:
|
·
|
A
3% increase in net interest income due primarily to continued growth in
the loan portfolio, which was largely offset by a decrease in the net
interest margin from 4.13% in 2007 to 3.92% in
2008.
|
|
·
|
An
increase in the provision for loan and lease losses to $33.2 million in
2008 from $4.1 million in 2007 due mainly to higher charge-offs, increases
in internal risk rating downgrades and specific reserves on a higher level
of nonperforming loans in the residential real estate development
portfolio.
|
|
·
|
An
increase of 4% in noninterest income over the prior year due to increased
service charges on deposit accounts and higher fees on sales of investment
products, offset by decreases in gains on sales of mortgage loans and
insurance agency commissions.
|
|
·
|
An
increase of 2% in noninterest expenses compared to the prior year due
primarily to goodwill impairment charges totaling $4.2 million and a $1.3
million increase in FDIC insurance premiums compared to
2007.
|
The year
2008 brought about a severe decline in the national and regional economies as
well as market volatility of historic proportions. These forces exerted
extraordinary pressures on the interest rate performance, credit quality,
liquidity and capital adequacy of banks in general and Sandy Spring Bank was not
immune to the effects on these important banking performance metrics. Throughout
this year of unparalleled financial and market turmoil, the Company’s
experienced management team dealt with these critical risk factors with a view
to managing for the long term.
The net
interest margin declined to 3.92% in 2008 compared to 4.13% in 2007. Market
rates declined throughout the year causing loan yields to decrease faster than
the rates paid on deposits. In addition, the intense market competition for
deposits by local, regional and national banks forced many banks to pay higher
rates on deposits. The Company was required to sacrifice a measure of net
interest margin by offering higher rates on certificates of deposit and creating
new deposit products to maintain liquidity and market share.
The
Company addressed the added liquidity risk by the actions mentioned above and
also by the use of borrowing lines to lock in relatively low rates for longer
terms and by carefully managing lending volumes later in the year. In addition,
the Company restructured its primary borrowing lines with the Federal Home Loan
Bank of Atlanta and the Federal Reserve in order to maximize the amounts of such
available lines of credit.
The
Company experienced a higher level of credit risk than in prior years due
primarily to conditions in its residential real estate development portfolio. As
pressures mounted due to the state of the housing market, many residential real
estate developers could not survive the lack of sales and thus were unable to
service their bank debt. The Company saw nonperforming assets increase to $72.2
million in 2008 from $34.9 million in 2007 primarily due to conditions in its
residential real estate development portfolio. The Company has put into place
additional staff and reporting tools to enhance its ability to monitor credit
quality and identify problems expeditiously as they arise.
Lastly,
but certainly most importantly, is the issue of capital adequacy. Despite the
challenges discussed above, the Company has remained above all
“well-capitalized” regulatory requirement levels. To provide an added margin of
protection, the Company completed the sale of $83 million in preferred stock
under the U.S. Treasury’s Capital Purchase Program.
We will
discuss in further detail the Company’s response to each of the above mentioned
risk factors in the following segments of Management’s Discussion and
Analysis.
Comparing
December 31, 2008 balances to December 31, 2007, total assets increased 9% to
$3.3 billion. Loan balances increased by 9% over the prior year primarily due to
growth of 13% in commercial loans. The rate of loan growth declined
significantly over the second half of the year due to market conditions and
management’s decision to improve its overall liquidity position. Customer
funding sources, which include deposits plus other short-term borrowings from
core customers, increased 3% over 2007. This growth was accomplished due to
higher rates offered on select certificate of deposit accounts and the
introduction of new deposit products in response to intense competition for
deposits in the Company’s markets. During the same period, stockholders’ equity
increased to $391.9 million or 12% of total assets.
Net
interest income increased by $3.6 million, or 3%, mainly due to growth in
interest-earning assets. The net interest margin decreased from 4.13% for the
year 2007 to 3.92% for the year 2008. Noninterest income increased by 4% to
$46.2 million compared to the prior year. This increase was due primarily to an
increase of $1.6 million in service charges on deposit accounts and an increase
of $0.5 million in fees on sales of investment products, partially offset by a
decrease of $0.5 million in gains on sales of mortgage loans and $0.7 million in
insurance agency commissions. Expressed as a percentage of total revenue (net
interest income and noninterest income), noninterest income totaled
30%. Noninterest expenses grew by $2.3 million or 2% versus the prior
year primarily due to a pre-tax impairment charge of $4.2 million to write down
the remaining value of goodwill in the Company’s leasing subsidiary, The
Equipment Leasing Company. In addition, FDIC insurance premiums increased $1.3
million over the prior year. These increases were partially offset by
a prior service credit of $1.5 million relating to the Company’s pension plan
and by a decrease of $1.5 million in merger expenses incurred in
2007. Excluding the above mentioned one-time expenses, the Company’s
successful implementation of its Project LIFT (“Looking Inward For Tomorrow”)
initiative was primarily responsible for decreasing noninterest expense during
2008.
Non-performing
assets increased substantially to $72.2 million at December 31, 2008 compared to
$34.9 million at December 31, 2007. This increase was due primarily to the
effect of current market conditions on the Company’s residential real estate
development portfolio. Non-performing assets represented 2.18% of
total assets at year-end 2008, versus 1.15% at year-end 2007. The
ratio of net charge-offs to average loans and leases was 0.32% in 2008, compared
to 0.06% in 2007.
Critical
Accounting Policies
The
Company’s consolidated financial statements are prepared in accordance with
generally accepted accounting principles (“GAAP”) in the United States of
America and follow general practices within the industry in which it
operates. Application of these principles requires management to make
estimates, assumptions, and judgments that affect the amounts reported in the
financial statements and accompanying notes. These estimates,
assumptions, and judgments are based on information available as of the date of
the financial statements; accordingly, as this information changes, the
financial statements may reflect different estimates, assumptions, and
judgments. Certain policies inherently have a greater reliance on the
use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation allowance to be
established, or when an asset or liability must be recorded contingent upon a
future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility.
The fair
values and the information used to record valuation adjustments for certain
assets and liabilities are based either on quoted market prices or are provided
by other third-party sources, when readily available.
The
allowance for loan and lease losses is an estimate of the losses that may be
sustained in the loan and lease portfolio. The allowance is based on
two basic principles of accounting: (1) Statement of Financial Accounting
Standards (“SFAS”) No. 5, “Accounting for Contingencies,” which requires that
losses be accrued when they are probable of occurring and estimable, and (2)
SFAS No. 114, “Accounting by Creditors for Impairment of a Loan,” which requires
that losses be accrued when it is probable that the Company will not collect all
principal and interest payments according to the loan’s or lease’s contractual
terms.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses in the loan and lease
portfolio can vary significantly from the amounts actually observed. While
management uses available information to recognize probable losses, future
additions to the allowance may be necessary based on changes in the loans and
leases comprising the portfolio and changes in the financial condition of
borrowers, such as may result from changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
and independent consultants engaged by the Company, periodically review the loan
and lease portfolio and the allowance. Such review may result in
additional provisions based on their judgments of information available at the
time of each examination.
The
Company’s allowance for loan and lease losses has two basic components: the
formula allowance reflecting historical losses by loan category, as adjusted by
several factors whose effects are not reflected in historical loss ratios, and
specific allowances. Each of these components, and the systematic
allowance methodology used to establish them, are described in detail in Note 1
of the Notes to the Consolidated Financial Statements. The amount of
the allowance is reviewed monthly by the Senior Loan Committee, and reviewed and
approved quarterly by the board of directors.
The
portion of the allowance that is based upon historical loss factors, as
adjusted, establishes allowances for the major loan categories based upon
adjusted historical loss experience over the prior eight quarters, weighted so
that losses realized in the most recent quarters have the greatest
effect. The use of these historical loss factors is intended to
reduce the differences between estimated losses inherent in the loan and lease
portfolio and actual losses. The factors used to adjust the historical loss
ratios address changes in the risk characteristics of the Company’s loan and
lease portfolio that are related to (1) trends in delinquencies and other
non-performing loans, (2) changes in the risk level of the loan portfolio
related to large loans, (3) changes in the categories of loans
comprising the loan portfolio, (4) concentrations of loans to specific industry
segments, (5) changes in economic conditions on both a local and national level,
(6) changes in the Company’s credit administration and loan and lease portfolio
management processes, and (7) quality of the Company’s credit risk
identification processes. This component comprised 70% and 79% of the total
allowance at December 31, 2008 and 2007, respectively.
The
specific allowance is used primarily to establish allowances for risk-rated
credits on an individual or portfolio basis, and accounted for 30% and 21% of
the total allowance at December 31, 2008 and 2007, respectively. The
Company has historically had favorable credit quality. The actual
occurrence and severity of losses involving risk-rated credits can differ
substantially from estimates, and some risk-rated credits may not be
identified.
Table
1 – Consolidated Average Balances, Yields and Rates (1)
(Dollars
in thousands and tax equivalent)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
Average
|
|
|
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
|
Balance
|
|
|
Interest
|
|
|
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real
estate(3)
|
|
$ |
660,779 |
|
|
$ |
40,132 |
|
|
|
6.07 |
% |
|
$ |
586,141 |
|
|
$ |
37,441 |
|
|
|
6.39 |
% |
|
$ |
588,426 |
|
|
$ |
36,723 |
|
|
|
6.24 |
% |
Consumer
|
|
|
387,983 |
|
|
|
20,503 |
|
|
|
5.28 |
|
|
|
365,334 |
|
|
|
25,367 |
|
|
|
6.94 |
|
|
|
344,316 |
|
|
|
23,172 |
|
|
|
6.73 |
|
Commercial
loans and leases
|
|
|
1,371,278 |
|
|
|
88,565 |
|
|
|
6.46 |
|
|
|
1,162,001 |
|
|
|
90,730 |
|
|
|
7.81 |
|
|
|
855,960 |
|
|
|
66,657 |
|
|
|
7.79 |
|
Total
loans and leases
|
|
|
2,420,040 |
|
|
|
149,200 |
|
|
|
6.17 |
|
|
|
2,113,476 |
|
|
|
153,538 |
|
|
|
7.26 |
|
|
|
1,788,702 |
|
|
|
126,552 |
|
|
|
7.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
242,422 |
|
|
|
10,684 |
|
|
|
4.41 |
|
|
|
279,881 |
|
|
|
14,603 |
|
|
|
5.22 |
|
|
|
310,740 |
|
|
|
14,710 |
|
|
|
4.73 |
|
Nontaxable
|
|
|
186,057 |
|
|
|
12,838 |
|
|
|
6.90 |
|
|
|
216,047 |
|
|
|
15,060 |
|
|
|
6.97 |
|
|
|
248,610 |
|
|
|
17,220 |
|
|
|
6.93 |
|
Total
securities
|
|
|
428,479 |
|
|
|
23,522 |
|
|
|
5.49 |
|
|
|
495,928 |
|
|
|
29,663 |
|
|
|
5.98 |
|
|
|
559,350 |
|
|
|
31,930 |
|
|
|
5.71 |
|
Interest-bearing
deposits with banks
|
|
|
11,305 |
|
|
|
112 |
|
|
|
.99 |
|
|
|
21,600 |
|
|
|
1,123 |
|
|
|
5.20 |
|
|
|
2,501 |
|
|
|
123 |
|
|
|
4.92 |
|
Federal
funds sold
|
|
|
22,619 |
|
|
|
555 |
|
|
|
2.45 |
|
|
|
42,305 |
|
|
|
2,157 |
|
|
|
5.10 |
|
|
|
21,145 |
|
|
|
1,081 |
|
|
|
5.12 |
|
Total
earning assets
|
|
$ |
2,882,443 |
|
|
|
173,389 |
|
|
|
6.02 |
% |
|
$ |
2,673,309 |
|
|
|
186,481 |
|
|
|
6.98 |
% |
|
$ |
2,371,698 |
|
|
|
159,686 |
|
|
|
6.73 |
% |
Less:
allowances for loan and lease losses
|
|
|
(32,629
|
) |
|
|
|
|
|
|
|
|
|
|
(22,771 |
) |
|
|
|
|
|
|
|
|
|
|
(18,584
|
) |
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
49,981 |
|
|
|
|
|
|
|
|
|
|
|
54,294 |
|
|
|
|
|
|
|
|
|
|
|
46,741 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
53,207 |
|
|
|
|
|
|
|
|
|
|
|
52,604 |
|
|
|
|
|
|
|
|
|
|
|
45,980 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
199,584 |
|
|
|
|
|
|
|
|
|
|
|
178,015 |
|
|
|
|
|
|
|
|
|
|
|
117,838 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,152,586
|
|
|
|
|
|
|
|
|
|
|
$ |
2,935,451 |
|
|
|
|
|
|
|
|
|
|
$ |
2,563,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
242,848 |
|
|
$ |
671 |
|
|
|
0.28 |
% |
|
$ |
236,940 |
|
|
$ |
808 |
|
|
|
0.34 |
% |
|
$ |
226,699 |
|
|
$ |
657 |
|
|
|
0.29 |
% |
Regular
savings deposits
|
|
|
153,123 |
|
|
|
455 |
|
|
|
0.30 |
|
|
|
165,134 |
|
|
|
535 |
|
|
|
0.32 |
|
|
|
182,610 |
|
|
|
687 |
|
|
|
0.38 |
|
Money
market savings deposits
|
|
|
669,239 |
|
|
|
12,247 |
|
|
|
1.83 |
|
|
|
643,047 |
|
|
|
23,809 |
|
|
|
3.70 |
|
|
|
409,578 |
|
|
|
12,655 |
|
|
|
3.09 |
|
Time
deposits
|
|
|
777,979 |
|
|
|
29,443 |
|
|
|
3.78 |
|
|
|
768,005 |
|
|
|
34,764 |
|
|
|
4.53 |
|
|
|
631,712 |
|
|
|
25,335 |
|
|
|
4.01 |
|
Total
interest-bearing deposits
|
|
|
1,843,189 |
|
|
|
42,816 |
|
|
|
2.32 |
|
|
|
1,813,126 |
|
|
|
59,916 |
|
|
|
3.30 |
|
|
|
1,450,599 |
|
|
|
39,334 |
|
|
|
2.71 |
|
Short-term
borrowings
|
|
|
409,933 |
|
|
|
13,212 |
|
|
|
3.22 |
|
|
|
319,418 |
|
|
|
13,673 |
|
|
|
4.28 |
|
|
|
414,274 |
|
|
|
17,049 |
|
|
|
4.12 |
|
Long-term
borrowings
|
|
|
103,304 |
|
|
|
4,358 |
|
|
|
4.22 |
|
|
|
42,466 |
|
|
|
2,560 |
|
|
|
6.03 |
|
|
|
36,977 |
|
|
|
2,304 |
|
|
|
6.23 |
|
Total
interest-bearing liabilities
|
|
|
2,356,426 |
|
|
|
60,386 |
|
|
|
2.56 |
|
|
|
2,175,010 |
|
|
|
76,149 |
|
|
|
3.50 |
|
|
|
1,901,850 |
|
|
|
58,687 |
|
|
|
3.08 |
|
Net
interest income and spread
|
|
|
|
|
|
$ |
113,003 |
|
|
|
3.46 |
% |
|
|
|
|
|
$ |
110,332 |
|
|
|
3.48 |
% |
|
|
|
|
|
$ |
100,999 |
|
|
|
3.65 |
% |
Noninterest-bearing
demand deposits
|
|
|
441,459 |
|
|
|
|
|
|
|
|
|
|
|
440,853 |
|
|
|
|
|
|
|
|
|
|
|
415,747 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
29,706 |
|
|
|
|
|
|
|
|
|
|
|
29,364 |
|
|
|
|
|
|
|
|
|
|
|
16,716 |
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
324,995 |
|
|
|
|
|
|
|
|
|
|
|
290,224 |
|
|
|
|
|
|
|
|
|
|
|
229,360 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
3,152,586 |
|
|
|
|
|
|
|
|
|
|
$ |
2,935,451 |
|
|
|
|
|
|
|
|
|
|
$ |
2,563,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income/ earning
assets
|
|
|
|
|
|
|
|
|
|
|
6.02 |
% |
|
|
|
|
|
|
|
|
|
|
6.98 |
% |
|
|
|
|
|
|
|
|
|
|
6.73 |
% |
Interest
expense/ earning
assets
|
|
|
|
|
|
|
|
|
|
|
2.10 |
|
|
|
|
|
|
|
|
|
|
|
2.85 |
|
|
|
|
|
|
|
|
|
|
|
2.47 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
|
|
|
|
|
|
|
|
|
|
4.26 |
% |
(1)
|
Interest
income includes the effects of taxable-equivalent adjustments (reduced by
the nondeductible portion of interest expense) using the appropriate
marginal federal income tax rate of 35.00% and, where applicable, the
marginal state income tax rate of 7.51% (or a combined marginal federal
and state rate of 39.88%) for 2008, a marginal state income tax rate of
6.55% (or a combined federal and state rate of 39.26%) for 2007 and a
marginal state income tax rate of 7.00% (or a combined federal and state
rate of 39.55%) for 2006, to increase tax-exempt interest income to a
taxable-equivalent basis. The taxable-equivalent adjustment
amounts utilized in the above table to compute yields totaled to $4.5
million in 2008, $5.5 million in 2007, and $6.2 million in
2006.
|
(2)
|
Non-accrual
loans are included in the average
balances.
|
(3)
|
Includes
residential mortgage loans held for sale. Home equity loans and lines are
classified as consumer loans.
|
Net
Interest Income
The
largest source of the Company’s operating revenue is net interest income, which
is the difference between the interest earned on interest-earning assets and the
interest paid on interest-bearing liabilities.
Net
interest income for 2008 was $108.5 million, representing an increase of $3.6
million or 3% from 2007. Comparing 2007 to 2006, net interest income increased
11% to $104.8 million.
For
purposes of this discussion and analysis, the interest earned on tax-exempt
investment securities has been adjusted to an amount comparable to interest
subject to normal income taxes. The result is referred to as tax-equivalent
interest income and tax-equivalent net interest income.
The
tabular analysis of net interest income performance (entitled "Table 1 –
Consolidated Average Balances, Yields and Rates") shows a decrease in net
interest margin for 2008 of 21 basis points, or 5% when compared to
2007. Comparing the years 2008 and 2007 shown in Table 1, average
earning assets increased by 8%. Table 2 shows the extent to which
interest income, interest expense and net interest income were affected by rate
changes and volume changes. The decrease in tax-equivalent net
interest margin in 2008 resulted from increases in non-accrual loans coupled
with a decrease in interest income due to rapidly declining rates on earning
assets which were not offset entirely by declining interest rates on deposits
due to intense competition. While average noninterest bearing deposits remained
essentially level in 2008, the percentage of noninterest bearing deposits to
total deposits decreased to 19% in 2008 compared to 20% in 2007 and 22% in 2006.
The decrease in the tax-equivalent net interest margin in 2007 resulted mainly
from a higher yield on interest bearing deposits due to the existing flat yield
curve. Tax-equivalent net interest income increased by 2% in 2008 (to $113.0
million in 2008 from $110.3 million in 2007) and increased 9% in 2007 (from
$101.0 million in 2006). Pressure on the net interest margin in
recent years has been an industry-wide trend and a significant challenge for
management. It has led to greater sophistication in margin
management, heightened emphasis on noninterest revenues and improved control
over noninterest expenses. During 2008, margin compression continued
as a result of a flat yield curve environment and intense competition for
deposits among banks and other providers of financial services and the effect of
interest rate cuts by the Federal Reserve throughout 2008. The Company is
continuing its emphasis on producing consistent earnings results from its core
loan, deposit and noninterest income businesses while exercising greater control
over noninterest expenses.
Table
2 – Effect of Volume and Rate Changes on Net Interest Income
|
|
|
|
|
2008 vs. 2007
|
|
|
|
|
|
2007 vs. 2006
|
|
|
|
Increase
|
|
|
Due
to Change
|
|
|
Increase
|
|
|
Due
to Change
|
|
|
|
Or
|
|
|
In
Average:*
|
|
|
Or
|
|
|
In
Average:*
|
|
(In thousands and tax
equivalent)
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
Interest
income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$ |
(4,338 |
) |
|
$ |
20,508 |
|
|
$ |
(24,846 |
) |
|
$ |
26,986 |
|
|
$ |
23,515 |
|
|
$ |
3,471 |
|
Securities
|
|
|
(6,141 |
) |
|
|
(3,832 |
) |
|
|
(2,309 |
) |
|
|
(2,267 |
) |
|
|
(3,742 |
) |
|
|
1,475 |
|
Other
investments
|
|
|
(2,613 |
) |
|
|
(1,129 |
) |
|
|
(1,484 |
) |
|
|
2,076 |
|
|
|
2,067 |
|
|
|
9 |
|
Total
interest income
|
|
|
(13,092 |
) |
|
|
15,547 |
|
|
|
(28,639 |
) |
|
|
26,795 |
|
|
|
21,840 |
|
|
|
4,955 |
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(137 |
) |
|
|
18 |
|
|
|
(155 |
) |
|
|
151 |
|
|
|
30 |
|
|
|
121 |
|
Regular
savings deposits
|
|
|
(80 |
) |
|
|
(43 |
) |
|
|
(37 |
) |
|
|
(152 |
) |
|
|
(62 |
) |
|
|
(90 |
) |
Money
market savings deposits
|
|
|
(11,562 |
) |
|
|
931 |
|
|
|
(12,493 |
) |
|
|
11,154 |
|
|
|
8,276 |
|
|
|
2,878 |
|
Time
deposits
|
|
|
(5,321 |
) |
|
|
451 |
|
|
|
(5,772 |
) |
|
|
9,429 |
|
|
|
5,906 |
|
|
|
3,523 |
|
Total
borrowings
|
|
|
1,337 |
|
|
|
5,785 |
|
|
|
(4,448 |
) |
|
|
(3,120 |
) |
|
|
(3,976 |
) |
|
|
856 |
|
Total
interest expense
|
|
|
(15,763 |
) |
|
|
7,142 |
|
|
|
(22,905 |
) |
|
|
17,462 |
|
|
|
10,174 |
|
|
|
7,288 |
|
Net
interest income
|
|
$ |
2,671 |
|
|
$ |
8,405 |
|
|
$ |
(5,734 |
) |
|
$ |
9,333 |
|
|
$ |
11,666 |
|
|
$ |
(2,333 |
) |
*
Where volume and rate have a combined effect that cannot be separately
identified with either, the variance is allocated to volume and rate based on
the relative size of the variance that can be separately identified with
each.
Interest
Income
The
Company's interest income decreased by $12.1 million or 7% in 2008, compared to
2007, preceded by an increase of $27.5 million or 18% over 2006. On a
tax-equivalent basis, the respective changes were a decrease of 7% in 2008, and
an increase of 17% in 2007. Table 2 shows that, in 2008, the decrease in
interest income resulted primarily from a decline in earning asset yields which
was partially offset by growth in average earning assets.
During
2008, average loans and leases, yielding 6.17% versus 7.26% a year earlier, grew
15% to $2.4 billion, due mainly to an 18% increase in average commercial loans
and leases. Average residential real estate loans increased 13% and average
consumer loans increased 6% due to growth in home equity lines, while the
increase in average commercial loans and leases reflected growth in all
categories of such loans. In 2008, average loans and leases comprised 84% of
average earning assets, compared to ratios of 79% in 2007 and 75% in 2006.
Average total securities, yielding 5.49% in 2008 versus 5.98% last year,
declined 14% to $428.5 million. Average non-taxable securities declined in 2008
by 14% compared to 2007. Average total securities comprised 15% of average
earning assets in 2008, compared to 19% in 2007 and 24% in 2006. This decline of
investment securities in 2008 was due mainly to the need to fund loans as a
result of the lack of deposit growth during much of the year, whereas the
declines for the prior years were consistent with the Company’s strategic plan
to migrate an increasing share of its assets from investment securities to its
commercial loan portfolio.
Interest
Expense
Interest
expense decreased by 21% or $15.8 million in 2008, compared to 2007, primarily
as a result of a 94 basis point decrease in the average rate paid on deposits
and borrowings (decreasing to 2.56% from 3.50%).
Deposit
and borrowing activity during 2008 was driven primarily by extremely volatile
market conditions due to the overall state of the national and regional economy.
This brought about an intensely competitive market for deposits as liquidity
became a major concern for most financial institutions. This lack of overall
liquidity in the banking system together with the intensely competitive market
for deposits caused the Company to pay somewhat higher rates on interest bearing
deposits than it otherwise might normally pay in such a declining rate
environment in order to maintain adequate liquidity levels.
In 2007,
interest expense increased due to a 42 basis point increase in the average rate
paid on deposits and borrowings and an increase of 25% or $362.5 million in
average interest bearing deposits. These increases were due in large part, to
the flat yield curve environment and a very competitive market for
deposits.
Interest
Rate Performance
The net
interest margin decreased by 21 basis points in 2008, as compared to a decrease
in net interest spread of 2 basis points. The difference between these two
indicators of interest rate performance is attributable primarily to a decrease
in the benefit of funding average earning assets from interest-free sources,
which is reflected in the net interest margin. During 2008, the Company
experienced virtually the same decrease in the funding rate compared to the
yield on earning assets, resulting in a greater decrease in the net interest
margin compared to the net interest spread.
In 2007
versus 2006, a greater relative increase in the funding rate compared to the
yield on earning assets resulted in a decrease in the net interest margin and
spread.
Noninterest
Income
Total
noninterest income was $46.2 million in 2008, a $2.0 million or 4% increase from
2007. The primary reasons for the increase in noninterest income for 2008, as
compared to 2007 were a $1.6 million increase in service charges on deposit
accounts, due primarily to higher overdraft fees and the growth in deposits due
to the acquisition of Potomac Bank of Virginia (“Potomac”) and County National
Bank (“County”) in 2007 and a $0.5 million increase in fees on sales of
investment products due to higher annuity sales. These increases were partially
offset by decreases in gains on sales of mortgage loans of $0.5 million due to
market conditions and insurance agency commissions of $0.7 million. Comparing
2007 to 2006, noninterest income increased $5.4 million or 14%. This increase
was mainly due to increases in service charges on deposit accounts from higher
overdraft fees and trust and investment management fees due to growth in assets
under management. These increases were partially offset by a decrease of $0.2
million in gains on sales of mortgage loans.
The
Company recognized securities gains of $0.7 million in 2008 compared to
virtually no securities gains in 2007 or 2006. The increase in 2008 was due
primarily to a $0.4 million gain on the sale of stock in Visa, Inc.
Service
charges on deposits totaled $12.8 million in 2008, an increase of $1.6 million
or 15% due primarily to higher overdraft fees.
Fees on
sales of investment products increased to $3.5 million from $3.0 million, an
increase of $0.5 million or 17% over 2007 due largely to increased sales of
annuities as
customers sought out a perceived higher level of safety for their
investments. Fees on sales of investment products remained virtually
level in 2007 compared to 2006. The lack of growth in 2007 was due primarily to
uncertain economic conditions and eroding consumer confidence at the
time.
Gains on
mortgage sales decreased by $0.5 million or 16% in 2008 compared to 2007, after
a decrease of 8% in 2007 compared to 2006. The Company achieved gains of $2.3
million on sales of $186.7 million in 2008 compared to $2.7 million on sales of
$286.4 million in 2007 and gains of $3.0 million on sales of $296.9 million in
2006. Insurance agency commissions decreased by $0.7 million or 11% in 2008
compared to 2007 after an increase of $0.1 million or 2% in 2007 compared to
2006. The decrease in 2008 was due to declines in commissions on commercial
lines and contingency fees.
Trust and
investment management fee income amounted to $9.5 million in 2008, a decrease of
$0.1 million or 1% compared to 2007, reflecting a decrease in assets under
management. During 2008, investment management fees in West Financial Services
decreased slightly to $4.6 million due to a decrease in assets under management
largely due to market conditions. Trust services fees also showed a small
decline to $4.9 million compared to the prior year due mainly to an 18% decrease
in assets under management. Trust and investment management fees of $9.6 million
for 2007 represented an increase of $0.8 million or 9% over 2006. This increase
was due primarily to growth in assets under management at both West Financial
Services and in the Company’s trust department. Total assets under management
for West Financial Services, trust and investment services decreased $300.3
million or 16% to $1.5 billion at December 31, 2008.
Income
from bank owned life insurance reflected an increase of $0.1 million or 3% in
2008 compared to 2007 and an increase of $0.5 million or 20% from 2007 to 2006.
The increase in 2007 was due primarily to higher rates and insurance policies
added from the two acquisitions. The Company invests in bank owned life
insurance products in order to better manage the cost of employee benefit plans.
Investments totaled $72.8 million at December 31, 2008 and were well diversified
by carrier in accordance with defined policies and practices. The average
tax-equivalent yield on these insurance contract assets was 6.78% for
2008.
Noninterest
Expenses
Noninterest
expenses increased $2.3 million or 2% in 2008, compared to 2007. The increase in
expenses in 2008 included goodwill impairment charges of $4.2 million and an
increase of $1.3 million in FDIC insurance premiums together with a pension
prior service credit of $1.5 million and a decrease of $1.5 million in merger
expenses incurred in 2007. Excluding these transactions, noninterest expenses
were virtually even with the prior year. Outside data services increased $0.4
million or 10% and intangibles amortization increased $0.4 million or 9%. These
increases were offset by decreases of $0.7 million or 1% in salaries and
benefits expenses, excluding the pension credit mentioned above, and $0.1
million or 3% in marketing expenses. Comparing 2007 to 2006, noninterest
expenses increased $14.7 million or 17% due primarily to a 9% increase in
salaries and employees benefits expenses and a 47% increase in other noninterest
expenses due largely to merger expenses mentioned above.
Salaries
and employee benefits, the largest component of noninterest expenses, decreased
$2.2 million or 4% in 2008. This decrease was due in part to the credit
recognized in the third quarter of $1.5 million for prior service credits
relating to the Company’s defined benefit pension plan. Excluding this credit,
salaries and benefits expenses decreased $0.7 million or 1% compared to 2007.
This decrease was largely due to a freeze of the defined benefit pension plan
effective January 1, 2008, termination of the Supplemental Executive Retirement
Agreements and to other elements of Project LIFT. Established at the end of
2007, Project LIFT was adopted by the Company primarily to implement stronger
control over operating expenses. Also contributing to the decline in this
category of expenses, commission compensation decreased 20% compared to 2007 due
to a lower volume of mortgage loan originations resulting from market
conditions. Average full-time equivalent employees decreased to 697 in 2008,
representing a decrease of 2% from 709 in 2007, which was 13% above the 626
full-time equivalent employees in 2006.
In 2008,
occupancy expense increased $0.4 million or 4%. This increase was due in part to
new branches acquired in the County National Bank acquisition which occurred in
May, 2007. The rate of increase was $1.9 million or 22% in 2007 over 2006 due to
rent increases on existing properties and the addition of acquired branches.
Equipment expenses decreased $0.4 million or 6% in 2008 compared to 2007. This
decrease was due mainly to lower negotiated software expenses and one time
expenses incurred in connection with the acquisition of Potomac Bank and County
National Bank in 2007. Marketing expense decreased by $0.1 million or 3% in 2008
following a decrease of $0.3 million or 13% in 2007. The decrease in 2007 was
due mainly to the Company’s efforts to better control its noninterest expenses
and was continued in 2008 under project LIFT.
Expenses
for outside data services increased $0.4 million or 10% in 2008 compared to 2007
due to the overall growth of the loan and deposit portfolios and the effect of a
full year of expense relating to the ten branches added from the acquisitions of
County and Potomac in 2007. Outside data services increased $0.8 million or 24%
in 2007 compared to 2006 due to growth in the loan and deposit portfolio
resulting from the two acquisitions.
As a
result of its annual assessment in September 2008, the Company determined that a
triggering event had occurred in The Equipment Leasing Company and, accordingly,
the Company began a two phase impairment analysis of goodwill. The Phase I
analysis utilized both the Income approach (discounted future cash flow
analysis) and the Market approach (using price to earnings multiples of
comparable companies). The results obtained from the Phase I analysis indicated
a potential impairment might exist and that a Phase II analysis was required to
determine the amount of the impairment. Based on its Phase I analysis the
Company recorded an estimated impairment charge of $2.3 million. Upon completion
of its Phase II analysis in the fourth quarter of 2008, the Company determined
that an additional impairment charge of $1.9 million was warranted. This
additional charge, which constituted the remaining goodwill in The Equipment
Leasing Company was recorded in the fourth quarter of 2008. The total impairment
charges of $4.2 million were recorded in the income statement under the caption
“Goodwill impairment loss”.
Other
noninterest expenses decreased $0.4 million or 2% compared to 2007. This
decrease was due primarily to merger expenses of $1.5 million recognized in 2007
which were largely offset by an increase of $1.3 million in FDIC insurance
premiums in 2008 and the control of discretionary expenses under Project LIFT.
Other noninterest expenses increased $5.5 million or 46% in 2007 compared to
2006 due mainly to merger expenses, higher consulting and professional fees and
an expense accrual for possible Visa, Inc. litigation costs.
Amortization
of intangible assets increased $0.4 million or 9% over 2007 due to the effect of
a full year of amortization relating to the two acquisitions in 2007. The
Company’s intangible assets are being amortized over relatively short
amortization periods averaging approximately five years at December 31, 2008.
Intangible assets arising from branch acquisitions were not classified as
goodwill and continue to be amortized since the acquisitions did not meet the
definition for business combinations.
In
October 2007, Sandy Spring Bank, as a member of Visa U.S.A. Inc. (“Visa
U.S.A.”), received shares of restricted stock in Visa, Inc. (“Visa”) as a result
of its participation in the global restructuring of Visa U.S.A., Visa Canada
Association, and Visa International Service Association in preparation for an
initial public offering. In November 2007, 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 has not reflected in its financial
statements 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,
in the first quarter of 2008, 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 at that time.
In
October 2008, Visa announced that it had agreed to settle litigation with
Discover Financial Services which involved a payment from the escrow account
mentioned above for approximately $1.7 billion, which exceeds the amount that
Visa had originally funded in the escrow account for this purpose. It is
currently intended that the Class B shareholders, such as the Company, will bear
this cost via a reduction in their number of shares received as a result of the
public offering. The Company recorded no additional expense as a result of this
settlement due to its immateriality. The Company currently has 15,890 class B
shares remaining that are subject to conversion by Visa prior to the above
adjustment in shares.
Operating
Expense Performance
Management
views the efficiency ratio as an important measure of expense performance and
cost management. The ratio expresses the level of noninterest expenses as a
percentage of total revenue (net interest income plus total noninterest income).
This is a GAAP financial measure. Lower ratios indicate improved
productivity.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure of operating expense control and efficiency of
operations. Management believes that its traditional ratio better focuses
attention on the operating performance of the Company over time than does a GAAP
ratio, and is highly useful in comparing period-to-period operating performance
of the Company’s core business operations. It is used by management as part of
its assessment of its performance in managing noninterest expenses. However,
this measure is supplemental, and is not a substitute for an analysis of
performance based on GAAP measures. The reader is cautioned that the non-GAAP
efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP
efficiency ratios reported by other financial institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of net
interest income plus noninterest income. Noninterest expenses used in the
calculation of the non-GAAP efficiency ratio exclude the goodwill impairment
loss in 2008, the amortization of intangibles, and non-recurring expenses.
Income for the non-GAAP ratio includes the favorable effect of tax-exempt income
(see Table 1), and excludes securities gains and losses, which vary widely from
period to period without appreciably affecting operating expenses, and
non-recurring gains. The measure is different from the GAAP efficiency ratio,
which also is presented in this report. The GAAP measure is calculated using
noninterest expense and income amounts as shown on the face of the Consolidated
Statements of Income. The GAAP and non-GAAP efficiency ratios are reconciled in
Table 3. As shown in Table 3, both efficiency ratios decreased in 2008. This
decrease was mainly the result of the decline in noninterest expenses in 2008
compared to 2007 coupled with the increase in net interest income in
2008.
Table
3 – GAAP and non-GAAP efficiency ratios
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
GAAP
Efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
102,089 |
|
|
$ |
99,788 |
|
|
$ |
85,096 |
|
|
$ |
77,194 |
|
|
$ |
92,474 |
|
Net
interest income plus noninterest income
|
|
|
154,702 |
|
|
|
149,115 |
|
|
|
133,651 |
|
|
|
125,087 |
|
|
|
105,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – GAAP
|
|
|
65.99 |
% |
|
|
66.92 |
% |
|
|
63.67 |
% |
|
|
61.71 |
% |
|
|
87.93 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
102,089 |
|
|
$ |
99,788 |
|
|
$ |
85,096 |
|
|
$ |
77,194 |
|
|
$ |
92,474 |
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
prior service credit
|
|
|
1,473 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
4,447 |
|
|
|
4,080 |
|
|
|
2,967 |
|
|
|
2,198 |
|
|
|
1,950 |
|
Goodwill
impairment loss
|
|
|
4,159 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,265 |
|
FHLB
prepayment penalties
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
18,363 |
|
Noninterest
expenses – as adjusted
|
|
$ |
94,956 |
|
|
$ |
95,708 |
|
|
$ |
82,129 |
|
|
$ |
74,996 |
|
|
$ |
70,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
4,545 |
|
|
|
5,506 |
|
|
|
6,243 |
|
|
|
7,128 |
|
|
|
8,156 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
663 |
|
|
|
43 |
|
|
|
1 |
|
|
|
3,262 |
|
|
|
540 |
|
Net
interest income plus noninterest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
– as adjusted
|
|
$ |
158,584 |
|
|
$ |
154,578 |
|
|
$ |
139,893 |
|
|
$ |
128,953 |
|
|
$ |
112,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – Non-GAAP
|
|
|
59.88 |
% |
|
|
61.92 |
% |
|
|
58.71 |
% |
|
|
58.16 |
% |
|
|
62.86 |
% |
Provision
for Income Taxes
The
Company had an income tax expense of $3.6 million in 2008, compared with an
income tax expense of $13.0 million in 2007 and $12.9 million in 2006. The
resulting effective tax rates were 19% for 2008, 29% for 2007, and 28% for 2006.
The decline in the effective tax rate for 2008 compared to 2007 was due to a
change in the amount of tax advantaged income as a percent of taxable
income.
Balance
Sheet Analysis
The
Company's total assets increased $269.7 million to $3.3 billion at December 31,
2008. Earning assets increased $303.2 million to $3.1 billion at December 31,
2008. These increases were mainly due to growth in the loan
portfolio.
Loans
and Leases
Residential
real estate loans, comprised of residential construction and permanent
residential mortgage loans, increased $23.5 million or 4%, during 2008 to $646.8
million at December 31, 2008. Residential construction loans increased to $189.2
million in 2008, an increase of $22.2 million or 13%. Permanent residential
mortgages, most of which are 1-4 family, remained virtually even with the prior
year at $457.6 million.
Over the
years, the Company’s commercial loan clients have come to represent a diverse
cross-section of small to mid-size local businesses, whose owners and employees
are often established Bank customers. The Company’s long-standing community
roots and extensive experience in this market segment make it a natural growth
area, while building and expanding such banking relationships are natural
results of the Company’s increased emphasis on client relationship
management.
Consistent
with this strategy, the Company has targeted growth in the commercial loan
portfolio as a central tenet of its long-term strategic plan. This involves a
planned migration of assets from the investment portfolio to the commercial loan
portfolio and emphasis on growth in related deposit accounts and other services
such as investment management and insurance services.
Commercial
loans and leases increased by $160.1 million or 13%, to $1.4 billion at December
31, 2008. Included in this category are commercial real estate loans, commercial
construction loans, equipment leases and other commercial loans.
In
general, the Company's commercial real estate loans consist of owner occupied
properties where an established banking relationship exists or, to a lesser
extent, involve investment properties for warehouse, retail, and office space
with a history of occupancy and cash flow. Commercial mortgages rose $184.6
million or 28% during 2008, to $847.5 million at year-end. Commercial
construction loans decreased $39.7 million or 15% during the year, to $223.2
million at December 31, 2008. While the Company follows generally very
conservative underwriting guidelines, it has not been immune to the continued
rapid deterioration in the national and regional economy, and particularly its
effect on the real estate market. The state of the economy and its effect on
builders and developers is the primary reason for the decrease in this loan
sector. Other commercial loans increased $17.7 million or 6% during 2008 to
$333.8 million at year-end.
The
Company's equipment leasing business provides leases for essential commercial
equipment used by small to medium sized businesses. Equipment leasing is
conducted through vendor relations and direct solicitation to end-users located
primarily in states along the east coast from New Jersey to Florida. The typical
lease is “small ticket” by industry standards, averaging less than $100
thousand, with individual leases generally not exceeding $500 thousand. The
leasing portfolio decreased $2.5 million or 7% in 2008, to $33.2 million at
year-end due in large part to market conditions and their effect on small and
medium-sized businesses.
Consumer
lending continues to be important to the Company’s full-service, community
banking business. This category of loans includes primarily home equity loans
and lines of credit. The consumer loan portfolio increased 8% or $29.9 million,
to $406.2 million at December 31, 2008. This growth was driven largely by an
increase of $43.4 million or 14% in home equity lines and loans during 2008 to
$352.0 million at year-end. This increase was a result of growth in the volume
of such lines and a higher utilization rate.
Table
4 – Analysis of Loans and Leases
This
table presents the trends in the composition of the loan and lease portfolio
over the previous five years.
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
457,571 |
|
|
$ |
456,305 |
|
|
$ |
390,852 |
|
|
$ |
413,324 |
|
|
$ |
371,924 |
|
Residential
construction
|
|
|
189,249 |
|
|
|
166,981 |
|
|
|
151,399 |
|
|
|
155,379 |
|
|
|
137,800 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
847,452 |
|
|
|
662,837 |
|
|
|
509,726 |
|
|
|
415,983 |
|
|
|
386,911 |
|
Commercial
construction
|
|
|
223,169 |
|
|
|
262,840 |
|
|
|
192,547 |
|
|
|
178,764 |
|
|
|
88,974 |
|
Leases
|
|
|
33,220 |
|
|
|
35,722 |
|
|
|
34,079 |
|
|
|
23,644 |
|
|
|
15,618 |
|
Other
commercial
|
|
|
333,758 |
|
|
|
316,051 |
|
|
|
182,159 |
|
|
|
162,036 |
|
|
|
135,116 |
|
Consumer
|
|
|
406,227 |
|
|
|
376,295 |
|
|
|
344,817 |
|
|
|
335,249 |
|
|
|
309,102 |
|
Total
loans and leases
|
|
$ |
2,490,646 |
|
|
$ |
2,277,031 |
|
|
$ |
1,805,579 |
|
|
$ |
1,684,379 |
|
|
$ |
1,445,525 |
|
Table
5 – Loan Maturities and Interest Rate Sensitivity
|
|
At
December 31, 2008
|
|
|
|
Remaining Maturities of Selected Credits in
Years
|
|
(In thousands)
|
|
1 or less
|
|
|
Over 1-5
|
|
|
Over 5
|
|
|
Total
|
|
Residential
construction loans
|
|
$ |
189,093 |
|
|
$ |
142 |
|
|
$ |
14 |
|
|
$ |
189,249 |
|
Commercial
construction loans
|
|
|
202,361 |
|
|
|
5,328 |
|
|
|
15,480 |
|
|
|
223,169 |
|
Commercial
loans not secured by real estate
|
|
|
234,806 |
|
|
|
78,569 |
|
|
|
20,383 |
|
|
|
333,758 |
|
Total
|
|
$ |
626,260 |
|
|
$ |
84,039 |
|
|
$ |
35,877 |
|
|
$ |
746,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
Terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$ |
38,344 |
|
|
$ |
73,933 |
|
|
$ |
20,383 |
|
|
$ |
132,660 |
|
Variable
or adjustable
|
|
|
587,916 |
|
|
|
10,106 |
|
|
|
15,494 |
|
|
|
613,516 |
|
Total
|
|
$ |
626,260 |
|
|
$ |
84,039 |
|
|
$ |
35,877 |
|
|
$ |
746,176 |
|
Securities
The
investment portfolio, consisting of available-for-sale, held-to-maturity and
other equity securities, increased 11% or $47.2 million to $492.5 million at
December 31, 2008, from $445.3 million at December 31, 2007. This increase was
due primarily to the investment of the proceeds of the Company’s sale of
preferred stock to the U.S. Treasury under the TARP. Such proceeds were received
late in the fourth quarter of 2008 and were added to the investment portfolio as
a conservative, temporary and non-leveraged selection of investments until such
time that economic conditions permit a prudent migration of such funds to the
loan portfolio. Excluding the investment of the TARP proceeds, the investment
portfolio decreased $35.9 million or 8% compared to 2007. This decline was due
to the maturity of securities, which provided liquidity needed to fund loan
growth in 2008.
As
investments mature or are called, the proceeds will be reinvested to further
reduce duration and interest rate risk by reducing the heavy concentration in
municipal bonds and restructuring into shorter duration U.S. agencies or U.S.
agency mortgage-backed securities, whichever exhibits higher yields at a value
price. These strategies will be executed with consideration given to interest
rate trends and the structure of the yield curve with constant due diligence of
economic projections and analysis.
Table
6 – Analysis of Securities
The
composition of securities at December 31 for each of the latest three years
was:
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Available-for-Sale:
(1)
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
0 |
|
|
$ |
2,973 |
|
|
$ |
597 |
|
U.S.
Agencies and Corporations
|
|
|
137,320 |
|
|
|
139,310 |
|
|
|
243,089 |
|
State
and municipal
|
|
|
2,700 |
|
|
|
2,761 |
|
|
|
2,390 |
|
Mortgage-backed
(2)
|
|
|
145,076 |
|
|
|
32,356 |
|
|
|
1,577 |
|
Trust
preferred
|
|
|
6,281 |
|
|
|
9,051 |
|
|
|
8,992 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
350 |
|
|
|
200 |
|
Total
|
|
|
291,727 |
|
|
|
186,801 |
|
|
|
256,845 |
|
Held-to-Maturity
and Other Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
0 |
|
|
|
34,419 |
|
|
|
34,408 |
|
State
and municipal
|
|
|
170,871 |
|
|
|
199,427 |
|
|
|
232,936 |
|
Mortgage-backed
(2)
|
|
|
747 |
|
|
|
860 |
|
|
|
0 |
|
Other
equity securities
|
|
|
29,146 |
|
|
|
23,766 |
|
|
|
16,719 |
|
Total
|
|
|
200,764 |
|
|
|
258,472 |
|
|
|
284,063 |
|
Total
securities (3)
|
|
$ |
492,491 |
|
|
$ |
445,273 |
|
|
$ |
540,908 |
|
(1)
|
At
estimated fair value.
|
(2)
|
Issued
by a U. S. Government Agency or secured by U.S. Government Agency
collateral.
|
(3)
|
The
outstanding balance of no single issuer, except for U.S. Government Agency
securities, exceeded ten percent of stockholders' equity at December 31,
2008, 2007 or 2006.
|
Maturities
and weighted average yields for debt securities available for sale and held to
maturity at December 31, 2008 are presented in Table 7. Amounts appear in the
table at amortized cost, without market value adjustments, by stated maturity
adjusted for estimated calls.
Table
7 – Maturity Table for Debt Securities at December 31, 2008
|
|
Years
to Maturity
|
|
|
|
Within
|
|
|
Over
1
|
|
|
Over
5
|
|
|
Over
|
|
|
|
|
|
|
|
|
|
1
|
|
|
Through
5
|
|
|
Through
10
|
|
|
10
|
|
|
|
|
|
|
|
(In
thousands)
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Total
|
|
|
Yield
|
|
Debt
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Agencies and Corporations
|
|
$ |
91,536 |
|
|
|
3.22 |
|
|
$ |
43,883 |
|
|
|
3.34 |
|
|
$ |
0 |
|
|
|
0.00 |
|
|
$ |
0 |
|
|
|
0.00 |
|
|
$ |
135,419 |
|
|
|
3.26 |
|
State and municipal
(2)
|
|
|
0 |
|
|
|
0.00 |
|
|
|
2,066 |
|
|
|
7.42 |
|
|
|
597 |
|
|
|
6.01 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
2,663 |
|
|
|
7.10 |
|
Mortgage-backed
|
|
|
4,589 |
|
|
|
5.35 |
|
|
|
139,571 |
|
|
|
4.61 |
|
|
|
478 |
|
|
|
5.80 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
144,638 |
|
|
|
4.64 |
|
Corporate
debt
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
Trust
preferred
|
|
|
3,107 |
|
|
|
9.41 |
|
|
|
4,782 |
|
|
|
9.23 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
0 |
|
|
|
0.00 |
|
|
|
7,889 |
|
|
|
9.30 |
|
Total
|
|
$ |
99,232 |
|
|
|
3.51 |
% |
|
$ |
190,302 |
|
|
|
4.46 |
% |
|
$ |
1,075 |
|
|
|
5.92 |
% |
|
$ |
0 |
|
|
|
0.00 |
% |
|
$ |
290,609 |
|
|
|
4.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
$ |
55,231 |
|
|
|
7.10 |
% |
|
$ |
107,659 |
|
|
|
6.82 |
% |
|
$ |
1,997 |
|
|
|
6.24 |
% |
|
$ |
5,984 |
|
|
|
7.33 |
% |
|
$ |
170,871 |
|
|
|
6.92 |
% |
Mortgage-backed
|
|
|
0 |
|
|
|
0.00 |
|
|
|
747 |
|
|
|
8.51 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
0 |
|
|
|
0.00 |
% |
|
|
747 |
|
|
|
8.51 |
% |
Total
|
|
$ |
55,231 |
|
|
|
7.10 |
% |
|
$ |
108,406 |
|
|
|
6.81 |
% |
|
$ |
1,997 |
|
|
|
6.24 |
% |
|
$ |
5,984 |
|
|
|
7.33 |
% |
|
$ |
171,618 |
|
|
|
6.91 |
% |
(1)
|
At
cost, adjusted for amortization and accretion of purchase premiums and
discounts, respectively.
|
(2)
|
Yields
on state and municipal securities have been calculated on a tax-equivalent
basis using the applicable federal income tax rate of
35%.
|
Other
Earning Assets
Residential
mortgage loans held for sale increased $4.3 million to $11.4 million as of
December 31, 2008 from $7.1 million as of December 31, 2007. Originations and
sales of these loans and the resulting gains on sales decreased during 2008 due
to the deteriorating state of the national and regional economy throughout the
year.
The
aggregate of federal funds sold and interest-bearing deposits with banks
increased $38.1 million to $60.5 million in 2008.
Bank
owned life insurance increased $2.9 million or 4% to $72.8 million as of
December 31, 2008 due to the increase in cash surrender value of the underlying
policies.
Deposits
and Borrowings
Total
deposits were $2.4 billion at December 31, 2008, increasing $91.4 million or 4%
from $2.3 billion at December 31, 2007. Year-end balances for
noninterest-bearing demand deposits increased $27.5 million or 6% over the prior
year. For the same period, interest-bearing deposits grew $63.9 million or 3%,
attributable in large part to an increase in certificates of deposit, which
increased 21% (up $144.5 million). This increase was somewhat offset by a
decline in money market savings, which decreased 9% (down $61.8 million). In
addition, demand deposits decreased 4% (down $10.9 million) and regular savings
decreased by 5% (down $7.8 million). When deposits are combined with short-term
borrowings from core customers, such growth in customer funding sources totaled
3% over the prior year.
Total
borrowings increased by $96.1 million or 23% during 2008, to $522.7 million at
December 31, 2008, primarily to fund loan growth.
Capital
Management
Management
monitors historical and projected earnings, dividends and asset growth, as well
as risks associated with the various types of on- and off-balance sheet assets
and liabilities, in order to determine appropriate capital levels. During 2008,
total stockholders' equity increased 24% or $76.3 million to $391.9 million at
December 31, 2008, from $315.6 million at December 31, 2007.
On
December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Letter Agreement, and the related
Securities Purchase Agreement – Standard Terms (collectively, the “Purchase
Agreement”) , with the United States Department of the Treasury (“Treasury”),
pursuant to which the Company issued (i) 83,094 shares of Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, liquidation preference $1,000 per share
(“Series A preferred stock”), and (ii) a warrant to purchase 651,547 shares of
the Company’s common stock, par value $1.00 per share, for an aggregate purchase
price of $83,094,000 in cash.
The
Series A preferred stock qualifies as Tier 1 capital and pays cumulative
dividends at a rate of 5% per annum until February 15, 2014. Beginning February
16, 2014, the dividend rate will increase to 9% per annum. On and after February
15, 2012, the Company may, at its option, redeem shares of Series A preferred
stock, in whole or in part at any time and from time to time, for cash at a per
share amount equal to the sum of the liquidation preference per share plus any
accrued and unpaid dividends to date but excluding the redemption date. Prior to
February 15, 2012, the company may redeem shares of Series A only if it has
received aggregate gross proceeds of not less than $20,773,500 from one or more
qualified equity offerings, and the aggregate redemption price may not exceed
the net proceeds received by the Company from such offerings. The redemption of
the Series A preferred stock requires prior regulatory approval. The
restrictions on redemption are set forth in the Articles Supplementary to the
Company’s Articles of Incorporation.The warrant is exercisable at $19.13 per
share at any time on or before December 5, 2018. The number of shares of common
stock issuable upon exercise of the warrant and the exercise price per share
will be adjusted if specific events occur. Treasury has agreed not to exercise
voting power with respect to any shares of common stock issued upon exercise of
the warrant.
The
Series A preferred stock and the warrant were issued in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended. The Company has registered the Series A preferred stock, the warrant,
and the shares of common stock underlying the warrant (the “warrant shares”).
Neither the Series A preferred stock nor the warrant will be subject to any
contractual restrictions on transfer, except that Treasury may not transfer a
portion of the warrant with respect to, or exercise the warrant for, more than
one-half of the warrant shares prior to the earlier of (a) the date on which the
Company has received aggregate gross proceeds of not less than $83,094,000 from
one or more qualified equity offerings and (b) December 31, 2009.
The
Purchase Agreement also subjects the Company to certain of the executive
compensation limitations included in the Emergency Economic Stabilization Act of
2008 (the “EESA”). As a condition to the closing of the transaction, the
Company’s Senior Executive Officers, as defined in the Purchase Agreement each:
(i) voluntarily waived any claim against the Treasury or the Company for any
change to such Senior Executive Officer’s compensation or benefits that are
required to comply with the regulation issued by the Treasury under the TARP
Capital Purchase Program as published in the Federal Register on October 20,
2008 and acknowledging that the regulation may require modification of the
compensation, bonus incentive and other benefit plans, arrangements and policies
and agreements ( including so-called “golden parachute” agreements) as they
related to the period the Treasury holds any equity or debt securities of the
Company acquired through the TARP Capital Purchase Program; and (ii) entered
into an amendment to the Senior Executive Officer’s employment agreement that
provides that any severance payments made to the Senior Executive Officer will
be reduced, as necessary, so as to comply with the requirements of the TARP
Capital Purchase Program.
Pursuant
to the terms of the Purchase Agreement, prior to the earlier of (i) December 5,
2011 or (ii) the date on which the Series A preferred stock has been redeemed in
full or Treasury has transferred all of the Series A preferred stock to
non-affiliates, the Company cannot increase its quarterly cash dividend above
$0.24 per share or repurchase any shares of its common stock or other capital
stock or equity securities or trust preferred securities without the consent of
the Treasury.
In
addition, pursuant to the Articles Supplementary, so long as any shares of
Series A preferred stock remain outstanding, the Company may not declare or pay
any dividends or distributions on the Company’s common stock or any class or
series of the Company’s equity securities ranking junior, as to dividends and
upon liquidation, to the Series A preferred stock (“junior stock”) (other than
dividends payable solely in shares of common stock) or any other class or series
of the Company’s equity securities ranking, as to dividends and upon
liquidation, on a parity with the Series A preferred stock (“parity stock”), and
may not repurchase or redeem any common stock, junior stock or parity stock,
unless all accrued and unpaid dividends for past dividend periods, including the
latest completed dividend period, have been paid or have been declared and a
sufficient sum has been set aside for the benefit of the holders of the Series A
preferred stock.
The
recently enacted American Recovery and Reinvestment Act of 2009 requires the
Department of the Treasury to establish additional standards for executive
compensation for participants in the TARP Capital Purchase Program. These
standards must include a prohibition on making any severance payment to a named
executive officer or any of the next five most highly compensated employees and
a prohibition on paying or accruing any bonus, retention award or incentive
compensation to, in the case of the Company, at least the five most highly
compensated employees, other than certain restricted stock awards. This
legislation also permits participants in the TARP Capital Purchase Program to
redeem the preferred shares issued to the Treasury without regard to the
limitations in the Articles Supplementary described above.
External
capital formation, resulting from exercises of stock options, vesting of
restricted stock and from stock issuances under the employee and director stock
purchase plans totaled $0.8 million during 2008. The ratio of average equity to
average assets was 10.31% for 2008, as compared to 9.89% for 2007 and 8.95% for
2006.
Stockholders’
equity was also affected by an increase of $6.5 million in accumulated other
comprehensive loss (comprised of net unrealized gains and losses on
available-for-sale securities after tax effects and an adjustment to reflect
activity in the Company’s defined benefit pension plan, net of tax effect) from
($1.1 million) at December 31, 2007 to ($7.6 million) at December 31,
2008.
Bank
holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. These
guidelines are commonly known as Risk-Based Capital guidelines. On December 31,
2008, the Company exceeded all applicable capital requirements, with a total
risk-based capital ratio of 13.82%, a Tier 1 risk-based capital ratio of 12.56%,
and a leverage ratio of 11.00%. Tier 1 capital of $346.3 million and total
qualifying capital of $380.9 million each included $35.0 million in trust
preferred securities as permitted under Federal Reserve Guidelines (see “Note
11—Long-term Borrowings” of the Notes to the Consolidated Financial Statements).
Trust preferred securities are considered regulatory capital for purposes of
determining the Company’s Tier 1 capital ratio. In addition, Tier 1 capital
included $83.1 million in preferred stock which was sold to the U.S. Treasury
under the TARP Capital Purchase Program as described above. As of December 31,
2008, the Bank met the criteria for classification as a "well-capitalized"
institution under the prompt corrective action rules of the Federal Deposit
Insurance Act. Designation as a well-capitalized institution under these
regulations is not a recommendation or endorsement of the Company or the Bank by
federal bank regulators. Additional information regarding regulatory capital
ratios is included in “Note 22—Regulatory Matters” of the Notes to the
Consolidated Financial Statements.
Credit
Risk Management
The
Company’s loan and lease portfolio is subject to varying degrees of credit risk.
Credit risk is mitigated through portfolio diversification, which limits
exposure to any single customer, industry or collateral type. The Company
maintains an allowance for loan and lease losses (the “allowance”) to absorb
estimated losses in the loan and lease portfolio. The allowance is based on
consistent, continuous review and evaluation of the loan and lease portfolio,
along with ongoing, quarterly assessments of the probable losses in that
portfolio. The methodology for assessing the appropriateness of the allowance
includes: (1) the formula allowance reflecting historical losses, as adjusted,
by credit category, and (2) the specific allowance for risk-rated credits on an
individual or portfolio basis. This systematic allowance methodology is further
described in the section entitled “Critical Accounting Policies” and in “Note 1
– Significant Accounting Policies” of the Notes to the Consolidated Financial
Statements. The amount of the allowance is reviewed monthly by the Senior Loan
Committee, and reviewed and approved quarterly by the board of
directors.
The
allowance is increased by provisions for loan and lease losses, which are
charged to expense. Charge-offs of loan and lease amounts determined by
management to be uncollectible or impaired decrease the allowance, while
recoveries of previous charge-offs are added back to the allowance. The Company
makes provisions for loan and lease losses in amounts necessary to maintain the
allowance at an appropriate level, as established by use of the allowance
methodology. Provisions amounted to $33.2 million in 2008, $4.1 million in 2007
and $2.8 million in 2006. Net charge-offs of $7.8 million, $1.3 million and $0.2
million, were recorded in 2008, 2007 and 2006, respectively. The ratio of net
charge-offs to average loans and leases was 0.32% in 2008, 0.06% in 2007 and
0.01% in 2006. At December 31, 2008, the allowance for loan and lease losses was
$50.5 million, or 2.03% of total loans and leases, compared to $25.1 million, or
1.10% of total loans and leases, at December 31, 2007.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses in the loan and lease
portfolio can vary significantly from the amounts actually observed. While
management uses available information to recognize probable losses, future
additions to the allowance may be necessary based on changes in the credits
comprising the portfolio and changes in the financial condition of borrowers,
such as may result from changes in economic conditions. In addition, federal and
state regulatory agencies, as an integral part of their examination process, and
independent consultants engaged by the Bank, periodically review the loan and
lease portfolio and the allowance. Such reviews may result in adjustments to the
provision based upon their judgments of information available at the time of
each examination.
Table 8
presents a five-year history for the allocation of the allowance, reflecting
consistent use of the methodology outlined above, along with the credit mix
(year-end loan and lease balances by category as a percent of total loans and
leases). The allowance is allocated in the following table to various loan and
lease categories based on the methodology used to estimate loan losses; however,
the allocation does not restrict the usage of the allowance for any specific
loan or lease category.
Table
8 – Allowance for Loan and Lease Losses
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
%
of
Loans
and
|
|
|
|
|
|
%
of
Loans
and
|
|
|
|
|
|
%
of
Loans
and
|
|
|
|
|
|
%
of
Loans
and
|
|
|
|
|
|
%
of
Loans
and
|
|
(In thousands)
|
|
Amount
|
|
|
Leases
|
|
|
Amount
|
|
|
Leases
|
|
|
Amount
|
|
|
Leases
|
|
|
Amount
|
|
|
Leases
|
|
|
Amount
|
|
|
Leases
|
|
Amount
applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
4,330 |
|
|
|
18 |
% |
|
$ |
3,807 |
|
|
|
20 |
% |
|
$ |
2,411 |
|
|
|
22 |
% |
|
$ |
2,896 |
|
|
|
24 |
% |
|
$ |
2,571 |
|
|
|
26 |
% |
Residential
construction
|
|
|
2,747 |
|
|
|
8 |
|
|
|
1,639 |
|
|
|
7 |
|
|
|
1,616 |
|
|
|
8 |
|
|
|
1,754 |
|
|
|
9 |
|
|
|
1,520 |
|
|
|
10 |
|
Total
|
|
|
7,077 |
|
|
|
26 |
|
|
|
5,446 |
|
|
|
27 |
|
|
|
4,027 |
|
|
|
30 |
|
|
|
4,650 |
|
|
|
33 |
|
|
|
4,091 |
|
|
|
36 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
19,527 |
|
|
|
34 |
|
|
|
7,854 |
|
|
|
29 |
|
|
|
5,461 |
|
|
|
28 |
|
|
|
4,119 |
|
|
|
25 |
|
|
|
4,722 |
|
|
|
27 |
|
Commercial
construction
|
|
|
13,046 |
|
|
|
9 |
|
|
|
4,092 |
|
|
|
12 |
|
|
|
2,197 |
|
|
|
11 |
|
|
|
2,152 |
|
|
|
11 |
|
|
|
834 |
|
|
|
6 |
|
Other
commercial
|
|
|
7,174 |
|
|
|
14 |
|
|
|
5,317 |
|
|
|
14 |
|
|
|
4,857 |
|
|
|
10 |
|
|
|
2,587 |
|
|
|
10 |
|
|
|
1,918 |
|
|
|
9 |
|
Subtotal
|
|
|
39,747 |
|
|
|
57 |
|
|
|
17,263 |
|
|
|
55 |
|
|
|
12,515 |
|
|
|
49 |
|
|
|
8,858 |
|
|
|
46 |
|
|
|
7,474 |
|
|
|
42 |
|
Leases
|
|
|
908 |
|
|
|
1 |
|
|
|
525 |
|
|
|
2 |
|
|
|
364 |
|
|
|
2 |
|
|
|
298 |
|
|
|
1 |
|
|
|
128 |
|
|
|
1 |
|
Total
|
|
|
40,655 |
|
|
|
58 |
|
|
|
17,788 |
|
|
|
57 |
|
|
|
12,879 |
|
|
|
51 |
|
|
|
9,156 |
|
|
|
47 |
|
|
|
7,602 |
|
|
|
43 |
|
Consumer
|
|
|
2,794 |
|
|
|
16 |
|
|
|
1,858 |
|
|
|
16 |
|
|
|
2,586 |
|
|
|
19 |
|
|
|
3,080 |
|
|
|
20 |
|
|
|
2,961 |
|
|
|
21 |
|
Unallocated
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
Total
allowance
|
|
$ |
50,526 |
|
|
|
|
|
|
$ |
25,092 |
|
|
|
|
|
|
$ |
19,492 |
|
|
|
|
|
|
$ |
16,886 |
|
|
|
|
|
|
$ |
14,654 |
|
|
|
|
|
During
2008, there were no changes in estimation methods that affected the allowance
methodology. Significant variation can occur over time in the methodology’s
assessment of the adequacy of the allowance as a result of the credit
performance of a small number of borrowers. The unallocated allowance at
year-end 2008, when measured against the total allowance, was 0%, as it was in
2007. The total allowance at December 31, 2008, was within the desirable range
under the Company’s policy guidelines derived from the allowance
methodology.
The
allowance increased by $25.4 million or 101% during 2008, which was the amount
of the provision for 2008 less the net charge-offs for the year. The required
allowance for commercial real estate and other commercial loans and leases
increased by $22.9 million, reflective of the significant growth in such loan
balances and the increase in nonperforming loans in the commercial portfolio.
The required allowance for consumer and residential loans increased $2.5 million
during the year, mainly due to an increase in residential mortgage
loans.
The
increase in the provision for loan and lease losses and the related allowance
for 2008 compared to 2007 was due to internal risk rating downgrades,
charge-offs and additional specific reserves primarily related to loans in the
residential real estate development portfolio. As stated previously, the severe
decline in the national and regional economies served to exert extraordinary
pressures on the housing market. As a result, many residential real estate
developers could not survive the greatly diminished cash flows due to lack of
sales and thus were unable to service their bank debt.
At
December 31, 2008, total non-performing loans and leases were $69.4 million, or
2.79% of total loans and leases, compared to $34.4 million, or 1.51% of total
loans and leases, at December 31, 2007. The increase in
non-performing loans and leases was due primarily to six residential real estate
development loans totaling $22.6 million, three commercial loans totaling $4.2
million and one commercial residential real estate loan for $1.0 million. The
allowance represented 73% of non-performing loans and leases at both December
31, 2008 and 2007. Significant variation in the coverage ratio may
occur from year to year because the amount of non-performing loans and leases
depends largely on the condition of a small number of individual credits and
borrowers relative to the total loan and lease portfolio. Other real
estate owned totaled $2.9 million at December 31, 2008 and was $0.5 at December
31, 2007.
The
balance of impaired loans was $52.6 million at December 31, 2008, with reserves
of $13.8 million against those loans, compared to $21.9 million at December 31,
2007, with reserves of $0.9 million.
The
Company's borrowers are concentrated in six counties in Maryland and two
counties in Virginia. Commercial and residential mortgages, including
home equity loans and lines, represented 67% of total loans and leases at
December 31, 2008, compared to 63% at December 31,
2007. Historically, the Company has experienced low loss levels with
respect to such loans through various economic cycles and
conditions. Risk inherent in this loan concentration is mitigated by
the nature of real estate collateral, the Company’s substantial experience in
most of the markets served, and its lending practices.
Certain
loan terms may create concentrations of credit risk and increase the lender’s
exposure to loss. These include terms that permit the deferral of principal
payments or payments that are smaller than normal interest accruals (negative
amortization); loans with high loan-to-value ratios; loans, such as option
adjustable-rate mortgages, that may expose the borrower to future increases in
repayments that are in excess of increases that would result solely from
increases in market interest rates; and interest-only loans. The
Company does not make loans that provide for negative amortization. The Company
originates option adjustable-rate mortgages infrequently and sells all of them
in the secondary market.
At
December 31, 2008, the Company had a total of $48.2 million in residential real
estate loans and $2.7 million in consumer loans with a loan to value ratio
(“LTV”) greater than 90%. The Company also had an additional $79.2 million in
residential lot loans owned by individuals with an LTV greater than
75%. Commercial loans, with an LTV greater than 75% to 85%, depending
on the type of property, totaled $94.2 million at December 31, 2008. The Company
had interest-only loans totaling $101.7 million in its loan portfolio at
December 31, 2008. In addition, virtually all of the Company’s equity
lines of credit, $268.9 million at December 31, 2008, which were included in the
consumer loan portfolio, were made on an interest-only basis. The
aggregate of all loans with these terms was $594.9 million at December 31, 2008
which represented 24% of total loans and leases outstanding at that
date. The Company is of the opinion that its loan underwriting
procedures are structured to adequately mitigate any additional risk that the
above types of loans might present.
Table
9 – Summary of Loan and Lease Loss Experience
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Balance
of loan and lease loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance,
January 1,
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
$ |
16,886 |
|
|
$ |
14,654 |
|
|
$ |
14,880 |
|
Provision
for loan and lease losses
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
|
|
2,600 |
|
|
|
0 |
|
Allowance
acquired from acquisitions
|
|
|
0 |
|
|
|
2,798 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Loan
and lease charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(4,798 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(109 |
) |
Commercial
loans and leases
|
|
|
(2,677 |
) |
|
|
(1,103 |
) |
|
|
(230 |
) |
|
|
(491 |
) |
|
|
(173 |
) |
Consumer
|
|
|
(988 |
) |
|
|
(341 |
) |
|
|
(85 |
) |
|
|
(44 |
) |
|
|
(214 |
) |
Total
charge-offs
|
|
|
(8,463 |
) |
|
|
(1,444 |
) |
|
|
(315 |
) |
|
|
(535 |
) |
|
|
(496 |
) |
Loan
and lease recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
21 |
|
|
|
12 |
|
|
|
0 |
|
|
|
64 |
|
|
|
54 |
|
Commercial
loans and leases
|
|
|
475 |
|
|
|
110 |
|
|
|
89 |
|
|
|
89 |
|
|
|
169 |
|
Consumer
|
|
|
209 |
|
|
|
30 |
|
|
|
37 |
|
|
|
14 |
|
|
|
47 |
|
Total
recoveries
|
|
|
705 |
|
|
|
152 |
|
|
|
126 |
|
|
|
167 |
|
|
|
270 |
|
Net
charge-offs
|
|
|
(7,758 |
) |
|
|
(1,292 |
) |
|
|
(189 |
) |
|
|
(368 |
) |
|
|
(226 |
) |
Balance
of loan and lease allowance, December 31
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
$ |
16,886 |
|
|
$ |
14,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans and leases
|
|
|
0.32 |
% |
|
|
0.06 |
% |
|
|
0.01 |
% |
|
|
0.02 |
% |
|
|
0.02 |
% |
Allowance
to total loans and leases
|
|
|
2.03 |
% |
|
|
1.10 |
% |
|
|
1.08 |
% |
|
|
1.00 |
% |
|
|
1.01 |
% |
Table
10 – Analysis of Credit Risk
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Non-accrual
loans and leases (1)
|
|
$ |
67,950 |
|
|
$ |
23,040 |
|
|
$ |
1,910 |
|
|
$ |
437 |
|
|
$ |
746 |
|
Loans
and leases 90 days past due
|
|
|
1,038 |
|
|
|
11,362 |
|
|
|
1,823 |
|
|
|
958 |
|
|
|
1,043 |
|
Restructured
loans and leases
|
|
|
395 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
non-performing loans and leases (2)
|
|
|
69,383 |
|
|
|
34,402 |
|
|
|
3,733 |
|
|
|
1,395 |
|
|
|
1,789 |
|
Other
real estate owned, net
|
|
|
2,860 |
|
|
|
461 |
|
|
|
182 |
|
|
|
0 |
|
|
|
0 |
|
Total
non-performing assets
|
|
$ |
72,243 |
|
|
$ |
34,863 |
|
|
$ |
3,915 |
|
|
$ |
1,395 |
|
|
$ |
1,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans and leases to total loans and leases
|
|
|
2.79
|
% |
|
|
1.51
|
% |
|
|
0.21
|
% |
|
|
0.08
|
% |
|
|
0.12
|
% |
Allowance
for loan and lease losses to non-performing loans and
leases
|
|
|
73
|
% |
|
|
73
|
% |
|
|
522
|
% |
|
|
1,210
|
% |
|
|
819
|
% |
Non-performing
assets to total assets
|
|
|
2.18
|
% |
|
|
1.15
|
% |
|
|
0.15
|
% |
|
|
0.06
|
% |
|
|
0.08
|
% |
(1)
|
Gross
interest income that would have been recorded in 2008 if non-accrual loans
and leases shown above had been current and in accordance with their
original terms was $4.0 million, while interest actually recorded on such
loans was $0. Please see Note 1 of the Notes to Consolidated Financial
Statements for a description of the Company’s policy for placing loans on
non-accrual status.
|
(2)
|
Performing
loans considered potential problem loans, as defined and identified by
management, amounted to $125.7 million at December 31, 2008. Although
these are loans where known information about the borrowers' possible
credit problems causes management to have doubts as to the borrowers'
ability to comply with the loan repayment terms, most are well
collateralized and are not believed to present significant risk of
loss. Loans classified for regulatory purposes not included in
either non-performing or potential problem loans consist only of "other
loans especially mentioned" and do not, in management's opinion, represent
or result from trends or uncertainties reasonably expected to materially
impact future operating results, liquidity or capital resources, or
represent material credits where known information about the borrowers'
possible credit problems causes management to have doubts as to the
borrowers' ability to comply with the loan repayment
terms.
|
Market
Risk Management
The
Company's net income is largely dependent on its net interest
income. Net interest income is susceptible to interest rate risk to
the extent that interest-bearing liabilities mature or re-price on a different
basis than interest-earning assets. When interest-bearing liabilities
mature or re-price more quickly than interest-earning assets in a given period,
a significant increase in market rates of interest could adversely affect net
interest income. Similarly, when interest-earning assets mature or
re-price more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income. Net interest income is also
affected by changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds, such as
noninterest-bearing deposits and stockholders' equity.
The
Company’s interest rate risk management goals are (1) to increase net interest
income at a growth rate consistent with the growth rate of total assets, and (2)
to minimize fluctuations in net interest margin as a percentage of earning
assets. Management attempts to achieve these goals by balancing,
within policy limits, the volume of floating-rate liabilities with a similar
volume of floating-rate assets; by keeping the average maturity of fixed-rate
asset and liability contracts reasonably matched; by maintaining a pool of
administered core deposits; and by adjusting pricing rates to market conditions
on a continuing basis.
The
Company’s board of directors has established a comprehensive interest rate risk
management policy, which is administered by management’s Asset Liability
Management Committee (“ALCO”). The policy establishes limits of risk, which are
quantitative measures of the percentage change in net interest income (a measure
of net interest income at risk) and the fair value of equity capital (a measure
of economic value of equity or “EVE” at risk) resulting from a hypothetical
change in U.S. Treasury interest rates for maturities from one day to thirty
years. The Company measures the potential adverse impacts that changing interest
rates may have on its short-term earnings, long-term value, and liquidity by
employing simulation analysis through the use of computer modeling. The
simulation model captures optionality factors such as call features and interest
rate caps and floors imbedded in investment and loan portfolio contracts. As
with any method of gauging interest rate risk, there are certain shortcomings
inherent in the interest rate modeling methodology used by the Company. When
interest rates change, actual movements in different categories of
interest-earning assets and interest-bearing liabilities, loan prepayments, and
withdrawals of time and other deposits, may deviate significantly from
assumptions used in the model. Finally, the methodology does not measure or
reflect the impact that higher rates may have on adjustable-rate loan customers’
ability to service their debts, or the impact of rate changes on demand for
loan, lease, and deposit products.
The
Company prepares a current base case and eight alternative simulations at least
once a quarter, and reports the analysis to the board of
directors. In addition, more frequent forecasts are produced when
interest rates are particularly uncertain or when other business conditions so
dictate.
The
balance sheet is subject to quarterly testing for eight alternative interest
rate shock possibilities to indicate the inherent interest rate
risk. Average interest rates are shocked by +/- 100, 200, 300, and
400 basis points (“bp”), although the Company may elect not to use particular
scenarios that it determines are impractical in a current rate
environment. It is management’s goal to structure the balance sheet
so that net interest earnings at risk over a twelve-month period and the
economic value of equity at risk do not exceed policy guidelines at the various
interest rate shock levels.
The
Company augments its quarterly interest rate shock analysis with alternative
external interest rate scenarios on a monthly basis. These alternative interest
rate scenarios may include non-parallel rate ramps and non-parallel yield curve
twists. If a measure of risk produced by the alternative simulations
of the entire balance sheet violates policy guidelines, ALCO is required to
develop a plan to restore the measure of risk to a level that complies with
policy limits within two quarters.
Analysis
Measures
of net interest income at risk produced by simulation analysis are indicators of
an institution’s short-term performance in alternative rate
environments. These measures are typically based upon a relatively
brief period, usually one year. They do not necessarily indicate the
long-term prospects or economic value of the institution.
Table
11 - Estimated Changes in Net Interest Income
CHANGE IN
INTEREST RATES:
|
|
|
+400 bp
|
|
|
|
+300 bp
|
|
|
|
+200 bp
|
|
|
|
+100 bp
|
|
|
|
-100 bp
|
|
|
|
-200 bp
|
|
|
|
-300 bp
|
|
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
25 |
% |
|
|
20 |
% |
|
|
17.5 |
% |
|
|
12.5 |
% |
|
|
12.5 |
% |
|
|
17.5 |
% |
|
|
20 |
% |
|
|
25 |
% |
December
2008
|
|
|
4.19 |
|
|
|
4.81 |
|
|
|
4.35 |
|
|
|
2.80 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
December
2007
|
|
|
-14.82 |
|
|
|
-10.47 |
|
|
|
-6.12 |
|
|
|
-1.91 |
|
|
|
-0.68 |
|
|
|
-1.01 |
|
|
|
-2.84 |
|
|
|
N/A |
|
As shown
above, measures of net interest income at risk decreased from December 31, 2007
at all interest rate shock levels. All measures remained well within
prescribed policy limits. The sensitivity of net interest income
indicated by this analysis is consistent with management’s decision to position
the balance sheet in anticipation of the rising interest rates expected in the
future when the economic recovery begins. The net interest income at risk
position improved in all scenarios. All measures are now positive and well
within the Company’s prescribed policy limits.
The risk
position improves substantially in the rising rate scenarios because of the
increase in volume of securities due to the $83.1 million in additional
securities from the utilization of TARP funds and shorter durations
on the entire investment portfolio. There is a larger percentage of securities
that will reprice to higher rates in each of the shock bands.
The
measures of equity value at risk indicate the ongoing economic value of the
Company by considering the effects of changes in interest rates on all of the
Company’s cash flows, and discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity,
which, in theory, approximates the fair value of the Company’s net
assets.
Table
12 - Estimated Changes in Economic Value of Equity (EVE)
CHANGE IN
INTEREST RATES:
|
|
|
+400 bp
|
|
|
|
+300 bp
|
|
|
|
+200 bp
|
|
|
|
+100 bp
|
|
|
|
-100 bp
|
|
|
|
-200 bp
|
|
|
|
-300 bp
|
|
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
40 |
% |
|
|
30 |
% |
|
|
22.5 |
% |
|
|
10 |
% |
|
|
12.5 |
% |
|
|
22.5 |
% |
|
|
30 |
% |
|
|
40 |
% |
December
2008
|
|
|
-4.80 |
|
|
|
1.92 |
|
|
|
3.61 |
|
|
|
1.59 |
|
|
|
N/A |
|
|
|
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 decreased over year-end 2007 in
all interest rate shock levels. The economic value of equity exposure at +200 bp
is now 3.61% compared to –1.44% at year-end 2007, and is well within the policy
limit of 22.5%, as are measures at all other shock levels.
The level
of equity as well as the market value of portfolio equity has increased
significantly due to the infusion of TARP funds into capital in the form of
preferred stock. The EVE at risk decreased in all rate shock bands. Due largely
to the investment of the TARP proceeds, the duration of the investment portfolio
has shortened due to the lower market interest rates and therefore are causing
higher market values in the shock bands.
Liquidity
Liquidity
is measured by a financial institution's ability to raise funds through loan and
lease repayments, maturing investments, deposit growth, borrowed funds, capital
and the sale of highly marketable assets such as investment securities and
residential mortgage loans. The Company's liquidity position, considering both
internal and external sources available, exceeded anticipated short-term and
long-term needs at December 31, 2008. Management considers core
deposits, defined to include all deposits other than time deposits of $100
thousand or more, to be a relatively stable funding source. Core deposits
equaled 65% of total earning assets at December 31, 2008. In
addition, loan and lease payments, maturities, calls and pay downs of
securities, deposit growth and earnings contribute a flow of funds available to
meet liquidity requirements. In assessing liquidity, management considers
operating requirements, the seasonality of deposit flows, investment, loan and
deposit maturities and calls, expected funding of loans and deposit withdrawals,
and the market values of available-for-sale investments, so that sufficient
funds are available on short notice to meet obligations as they arise and to
ensure that the Company is able to pursue new business
opportunities.
Liquidity
is measured using an approach designed to take into account, in addition to
factors already discussed above, the Company’s growth and mortgage banking
activities. Also considered are changes in the liquidity of the
investment portfolio due to fluctuations in interest rates. Under
this approach, implemented by the Funds Management Subcommittee of ALCO under
formal policy guidelines, the Company’s liquidity position is measured weekly,
looking forward at thirty day intervals from thirty (30) to one hundred eighty
(180) days. The measurement is based upon the projection of funds
sold or purchased position, along with ratios and trends developed to measure
dependence on purchased funds and core growth. Resulting projections
as of December 31, 2008, show short-term investments exceeding short-term
borrowings by $110.1 million over the subsequent 180 days. This
projected excess of liquidity versus requirements provides the Company with
flexibility in how it funds loans and other earning assets.
The
Company also has external sources of funds, which can be drawn upon when
required. The main sources of external liquidity are available lines
of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve.
The line of credit with the Federal Home Loan Bank of Atlanta totaled $957.0
million, of which $591.8 million was available for borrowing based on pledged
collateral, with $412.6 million borrowed against it as of December 31, 2008. The
line of credit at the Federal Reserve totaled $514.4 million, all of which was
available for borrowing based on pledged collateral, with no borrowings against
it as of December 31, 2008. Other external sources of liquidity
available to the Company in the form of secured lines of credit granted by
correspondent banks totaled $40.0 million at December 31, 2008, against which
there were no outstanding borrowings. In addition, the Company had an
unsecured line of credit with a correspondent bank of $20.0 million as of
December 31, 2008. Based upon its liquidity analysis, including external sources
of liquidity available, management believes the liquidity position was
appropriate at December 31, 2008.
The
Company's time deposits of $100 thousand or more represented 15.71% of total
deposits at December 31, 2008 and are shown by maturity in the table
below.
|
|
Months to Maturity
|
|
|
|
3 or
|
|
|
Over 3
|
|
|
Over 6
|
|
|
Over
|
|
|
|
|
(In thousands)
|
|
Less
|
|
|
to 6
|
|
|
To 12
|
|
|
12
|
|
|
TOTAL
|
|
Time
deposits—$100 thousand or more
|
|
$ |
53,991 |
|
|
$ |
48,117 |
|
|
$ |
173,215 |
|
|
$ |
96,306 |
|
|
$ |
371,629 |
|
The
Company has various contractual obligations that affect its cash flows and
liquidity. For information regarding material contractual
obligations, please see “Market Risk Management” above, “Contractual
Obligations” below, and “Note 7-Premises and Equipment,” “Note 11-Long-term
Borrowings,” “Note 14-Pension, Profit Sharing and Other Employee Benefit Plans,”
“Note 18-Financial Instruments with Off-balance Sheet Risk and Derivatives,” and
“Note 20-Fair Value of Financial Instruments” of the Notes to the Consolidated
Financial Statements.
Off-Balance
Sheet Arrangements
With the
exception of the Company’s obligations in connection with its trust preferred
securities, irrevocable letters of credit, and loan commitments, the Company has
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company’s financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources, that is material to
investors. The trust preferred securities were issued by Sandy Spring
Capital Trust II (the “Trust”), a subsidiary of the Company created for the
purpose of issuing the trust preferred securities and purchasing the Company’s
junior subordinated debentures, which are its sole assets. These
long-term borrowings bear a maturity date of October 7, 2034, which may be
shortened, subject to conditions, to a date no earlier than October 7, 2009. The
Company owns all of the Trust’s outstanding securities. The Company
and the Trust believe that, taken together, the Company’s obligations under the
junior subordinated debentures, the Indenture, the Trust Agreement, and the
Guarantee entered into in connection with the issuance of the trust preferred
securities and the debentures, in the aggregate constitute a full, irrevocable
and unconditional guarantee of the Trust’s obligations. For
additional information on off-balance sheet arrangements, please see “Note
18-Financial Instruments with Off-balance Sheet Risk and Derivatives” and “Note
11-Long-term Borrowings” of the Notes to the Consolidated Financial Statements,
and “Capital Management” and “Securities”.
Contractual
Obligations
The
Company enters into contractual obligations in the normal course of
business. Among these obligations are long-term FHLB advances,
operating leases related to branch and administrative facilities, a long-term
contract with a data processing provider and purchase contracts related to
construction of new branch offices. Payments required under these
obligations, are set forth in the table below as of December 31,
2008.
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
(In thousands)
|
|
Total
|
|
|
1 year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations
|
|
$ |
66,584 |
|
|
$ |
0 |
|
|
$ |
65,476 |
|
|
$ |
1,108 |
|
|
$ |
0 |
|
Operating
lease obligations
|
|
|
24,022 |
|
|
|
4,746 |
|
|
|
7,873 |
|
|
|
5,140 |
|
|
|
6,263 |
|
Preferred
stock dividends
(1)
|
|
|
34,853 |
|
|
|
3,924 |
|
|
|
8,309 |
|
|
|
8,309 |
|
|
|
14,311 |
|
Purchase
obligations
(2)
|
|
|
24,696 |
|
|
|
2,423 |
|
|
|
2,495 |
|
|
|
6,254 |
|
|
|
13,524 |
|
Total
|
|
$ |
150,155 |
|
|
$ |
11,093 |
|
|
$ |
84,153 |
|
|
$ |
20,811 |
|
|
$ |
34,098 |
|
(1)
|
Assumed
a seven year term for purposes of this
table.
|
(2)
|
Represents
payments required under contract, based on average monthly charges for
2008 and assuming a growth rate of 3%, with the Company’s current data
processing service provider that expires in September
2014.
|
CONTROLS
AND PROCEDURES
Disclosure
Controls and Procedures
As
required by SEC rules, the Company’s management evaluated the effectiveness of
the Company’s disclosure controls and procedures as of December 31,
2008. The Company’s chief executive officer and chief financial
officer participated in the evaluation. Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of December 31,
2008.
Internal
Control Over Financial Reporting
Management’s
Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. As required by SEC rules,
the Company’s management evaluated the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008. The
Company’s chief executive officer and chief financial officer participated in
the evaluation, which was based upon the criteria for effective internal control
over financial reporting included in the “Internal Control-Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, the Company’s chief executive
officer and chief financial officer concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2008.
The
attestation report by the Company’s independent registered public accounting
firm, Grant Thornton, on the Company’s internal control over financial reporting
begins on the following page.
Fourth
Quarter 2008 Changes In Internal Controls Over Financial Reporting
No change
occurred during the fourth quarter of 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited Sandy Spring Bancorp, Inc. (a Maryland corporation) and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Sandy Spring Bancorp, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal controls over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Sandy Spring Bancorp, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2008 based on criteria established in Internal Control-Integrated Framework
issued by COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Sandy Spring
Bancorp, Inc. and subsidiaries as of December 31, 2008, and the related
consolidated statements of income, stockholders’ equity and cash flows for the
year then ended and our audit report dated March 16, 2009 expressed an
unqualified opinion.
Philadelphia,
Pennsylvania
March 16,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited the accompanying consolidated balance sheet of Sandy Spring Bancorp,
Inc. (a Maryland corporation) and subsidiaries as of December 31, 2008, and the
related consolidated statements of income, stockholders’ equity and cash flows
for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provided a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sandy Spring Bancorp, Inc.
and subsidiaries as of December 31, 2008, and the results of their operations
and their cash flows for each of the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sandy Spring Bancorp, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
our report dated March 16, 2009 expressed an unqualified opinion.
Philadelphia,
Pennsylvania
March 16,
2009
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited the accompanying consolidated balance sheet of Sandy Spring Bancorp,
Inc.
and
Subsidiaries as of December 31, 2007, and the related consolidated statements of
income, changes in stockholders’ equity and cash flows for each of the two years
in the period ended December 31, 2007. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sandy Spring Bancorp,
Inc. and Subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 to the consolidated financial statements, in 2006 Sandy
Spring Bancorp, Inc. and Subsidiaries adopted “Statement of Financial Accounting
Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.”
Frederick,
Maryland
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share data)
|
|
December 31,
|
|
|
2008
|
|
2007
|
Assets
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
44,738 |
|
|
$ |
63,432 |
|
Federal
funds sold
|
|
|
1,110 |
|
|
|
22,055 |
|
Interest-bearing
deposits with banks
|
|
|
59,381 |
|
|
|
0 |
|
Cash
and cash equivalents
|
|
|
105,229 |
|
|
|
85,487 |
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits with banks
|
|
|
0 |
|
|
|
365 |
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
11,391 |
|
|
|
7,089 |
|
Investments
available for sale (at fair value)
|
|
|
291,727 |
|
|
|
186,801 |
|
Investments
held to maturity – fair value of $175,908 (2008) and
$240,995 (2007)
|
|
|
171,618 |
|
|
|
234,706 |
|
Other
equity securities
|
|
|
29,146 |
|
|
|
23,766 |
|
|
|
|
|
|
|
|
|
|
Total
loans and leases
|
|
|
2,490,646 |
|
|
|
2,277,031 |
|
Less:
allowance for loan and lease losses
|
|
|
(50,526
|
) |
|
|
(25,092
|
) |
Net
loans and leases
|
|
|
2,440,120 |
|
|
|
2,251,939 |
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
51,410 |
|
|
|
54,457 |
|
Other
real estate owned
|
|
|
2,860 |
|
|
|
461 |
|
Accrued
interest receivable
|
|
|
11,810 |
|
|
|
14,955 |
|
Goodwill
|
|
|
76,248 |
|
|
|
76,585 |
|
Other
intangible assets, net
|
|
|
12,183 |
|
|
|
16,630 |
|
Other
assets
|
|
|
109,896 |
|
|
|
90,712 |
|
Total
assets
|
|
$ |
3,313,638 |
|
|
$ |
3,043,953 |
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
461,517 |
|
|
$ |
434,053 |
|
Interest-bearing
deposits
|
|
|
1,903,740 |
|
|
|
1,839,815 |
|
Total
deposits
|
|
|
2,365,257 |
|
|
|
2,273,868 |
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
|
421,074 |
|
|
|
373,972 |
|
Long-term
borrowings
|
|
|
66,584 |
|
|
|
17,553 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
35,000 |
|
Accrued
interest payable and other liabilities
|
|
|
33,861 |
|
|
|
27,920 |
|
Total
liabilities
|
|
|
2,921,776 |
|
|
|
2,728,313 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Notes 2, 7, 10, 11, 18 and 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock – par value $1.00 (liquidation preference of $1,000 per
share)
|
|
|
|
|
|
|
|
|
shares authorized
83,094 and 0, respectively; shares issued and outstanding
|
|
|
|
|
|
|
|
|
83,094
and 0, respectively (discount of $3,654 and 0,
respectively)
|
|
|
79,440 |
|
|
|
0 |
|
Common
stock-par value $1.00; shares authorized 49,916,906 and
50,000,000,
|
|
|
|
|
|
|
|
|
respectively;
shares issued and outstanding 16,398,523 (2008) and 16,349,317
(2007)
|
|
|
16,399 |
|
|
|
16,349 |
|
Warrants
|
|
|
3,699 |
|
|
|
0 |
|
Additional
paid in capital
|
|
|
85,486 |
|
|
|
83,970 |
|
Retained
earnings
|
|
|
214,410 |
|
|
|
216,376 |
|
Accumulated
other comprehensive loss
|
|
|
(7,572
|
) |
|
|
(1,055
|
) |
Total
stockholders’ equity
|
|
|
391,862 |
|
|
|
315,640 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
3,313,638 |
|
|
$ |
3,043,953 |
|
See
Notes to Consolidated Financial Statements.
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(In
thousands, except per share data)
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
148,765 |
|
|
$ |
152,723 |
|
|
$ |
125,813 |
|
Interest
on loans held for sale
|
|
|
436 |
|
|
|
815 |
|
|
|
739 |
|
Interest
on deposits with banks
|
|
|
112 |
|
|
|
1,123 |
|
|
|
123 |
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
10,177 |
|
|
|
13,989 |
|
|
|
14,132 |
|
Exempt
from federal income taxes
|
|
|
8,800 |
|
|
|
10,168 |
|
|
|
11,555 |
|
Interest
on federal funds sold
|
|
|
555 |
|
|
|
2,157 |
|
|
|
1,081 |
|
Total
interest income
|
|
|
168,845 |
|
|
|
180,975 |
|
|
|
153,443 |
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
42,816 |
|
|
|
59,916 |
|
|
|
39,334 |
|
Interest
on short-term borrowings
|
|
|
13,212 |
|
|
|
13,673 |
|
|
|
17,049 |
|
Interest
on long-term borrowings
|
|
|
4,358 |
|
|
|
2,560 |
|
|
|
2,304 |
|
Total
interest expense
|
|
|
60,386 |
|
|
|
76,149 |
|
|
|
58,687 |
|
Net
interest income
|
|
|
108,459 |
|
|
|
104,826 |
|
|
|
94,756 |
|
Provision
for loan and lease losses
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
Net
interest income after provision
for loan and lease losses
|
|
|
75,267 |
|
|
|
100,732 |
|
|
|
91,961 |
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
663 |
|
|
|
43 |
|
|
|
1 |
|
Service
charges on deposit accounts
|
|
|
12,778 |
|
|
|
11,148 |
|
|
|
7,903 |
|
Gains
on sales of mortgage loans
|
|
|
2,288 |
|
|
|
2,739 |
|
|
|
2,978 |
|
Fees
on sales of investment products
|
|
|
3,475 |
|
|
|
2,989 |
|
|
|
2,960 |
|
Trust
and investment management fees
|
|
|
9,483 |
|
|
|
9,588 |
|
|
|
8,762 |
|
Insurance
agency commissions
|
|
|
5,908 |
|
|
|
6,625 |
|
|
|
6,477 |
|
Income
from bank owned life insurance
|
|
|
2,902 |
|
|
|
2,829 |
|
|
|
2,350 |
|
Visa
check fees
|
|
|
2,875 |
|
|
|
2,784 |
|
|
|
2,381 |
|
Other
income
|
|
|
5,871 |
|
|
|
5,544 |
|
|
|
5,083 |
|
Total
noninterest income
|
|
|
46,243 |
|
|
|
44,289 |
|
|
|
38,895 |
|
Noninterest
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
53,015 |
|
|
|
55,207 |
|
|
|
50,518 |
|
Occupancy
expense of premises
|
|
|
10,762 |
|
|
|
10,360 |
|
|
|
8,493 |
|
Equipment
expenses
|
|
|
6,156 |
|
|
|
6,563 |
|
|
|
5,476 |
|
Marketing
|
|
|
2,163 |
|
|
|
2,237 |
|
|
|
2,583 |
|
Outside
data services
|
|
|
4,373 |
|
|
|
3,967 |
|
|
|
3,203 |
|
Amortization
of intangible assets
|
|
|
4,447 |
|
|
|
4,080 |
|
|
|
2,967 |
|
Goodwill
impairment loss
|
|
|
4,159 |
|
|
|
0 |
|
|
|
0 |
|
Other
expenses
|
|
|
17,014 |
|
|
|
17,374 |
|
|
|
11,856 |
|
Total
noninterest expenses
|
|
|
102,089 |
|
|
|
99,788 |
|
|
|
85,096 |
|
Income
before income taxes
|
|
|
19,421 |
|
|
|
45,233 |
|
|
|
45,760 |
|
Income
tax expense
|
|
|
3,642 |
|
|
|
12,971 |
|
|
|
12,889 |
|
Net
income
|
|
|
15,779 |
|
|
|
32,262 |
|
|
|
32,871 |
|
Preferred
stock dividends and discount accretion
|
|
|
334 |
|
|
|
0 |
|
|
|
0 |
|
Net
income available to common shareholders
|
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Basic
net income per share
|
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
Basic
net income per common share
|
|
$ |
0.94 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
Diluted
net income per share
|
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.20 |
|
Diluted
net income per common share
|
|
$ |
0.94 |
|
|
$ |
2.01 |
|
|
$ |
2.20 |
|
Dividends
declared per common share
|
|
$ |
0.96 |
|
|
$ |
0.92 |
|
|
$ |
0.88 |
|
See
Notes to Consolidated Financials Statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
15,779 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
10,837 |
|
|
|
10,648 |
|
|
|
8,859 |
|
Goodwill
impairment loss
|
|
|
4,159 |
|
|
|
0 |
|
|
|
0 |
|
Provision
for loan and lease losses
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
Stock
option expense
|
|
|
772 |
|
|
|
1,128 |
|
|
|
624 |
|
Deferred
income taxes benefits
|
|
|
(10,517 |
) |
|
|
(2,721 |
) |
|
|
(986 |
) |
Origination
of loans held for sale
|
|
|
(188,899 |
) |
|
|
(280,152 |
) |
|
|
(294,027 |
) |
Proceeds
from sales of loans held for sale
|
|
|
186,723 |
|
|
|
286,398 |
|
|
|
296,916 |
|
Gains
on sales of loans
|
|
|
(2,126 |
) |
|
|
(2,739 |
) |
|
|
(2,978 |
) |
Securities
gains
|
|
|
(663 |
) |
|
|
(43 |
) |
|
|
(1 |
) |
Losses
(gains) on sales of premises and equipment
|
|
|
46 |
|
|
|
(289 |
) |
|
|
0 |
|
Net
decrease (increase) in accrued interest receivable
|
|
|
3,145 |
|
|
|
2,020 |
|
|
|
(2,056 |
) |
Net
increase in other assets
|
|
|
(8,647 |
) |
|
|
(4,931 |
) |
|
|
(3,913 |
) |
Net
increase (decrease) in accrued interest payable and other
Liabilities
|
|
|
8,620 |
|
|
|
(2,913 |
) |
|
|
5,485 |
|
Other-net
|
|
|
(10,368 |
) |
|
|
3,861 |
|
|
|
(341 |
) |
Net
cash provided by operating activities
|
|
|
42,053 |
|
|
|
46,623 |
|
|
|
43,248 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in interest-bearing deposits with
banks
|
|
|
0 |
|
|
|
2,609 |
|
|
|
(2,223 |
) |
Purchases
of other equity securities
|
|
|
(5,379 |
) |
|
|
(4,548 |
) |
|
|
(1,506 |
) |
Purchases
of investments available for sale
|
|
|
(295,661 |
) |
|
|
(83,440 |
) |
|
|
(94,984 |
) |
Proceeds
from redemption of VISA stock
|
|
|
429 |
|
|
|
0 |
|
|
|
0 |
|
Proceeds
from maturities, calls and principal payments of investments held to
maturity
|
|
|
63,105 |
|
|
|
36,038 |
|
|
|
27,936 |
|
Proceeds
from maturities, calls and principal payments of investments available for
sale
|
|
|
189,569 |
|
|
|
208,555 |
|
|
|
95,396 |
|
Proceeds
from sales of other real estate owned
|
|
|
240 |
|
|
|
(179 |
) |
|
|
0 |
|
Proceeds
from sales of premises and equipment
|
|
|
0 |
|
|
|
650 |
|
|
|
0 |
|
Net
increase in loans and leases receivable
|
|
|
(224,095 |
) |
|
|
(178,172 |
) |
|
|
(187,578 |
) |
Purchase
of loans and leases
|
|
|
0 |
|
|
|
0 |
|
|
|
(2,148 |
) |
Proceeds
from sale of loans and leases
|
|
|
0 |
|
|
|
0 |
|
|
|
68,087 |
|
Contingent
consideration payout
|
|
|
(3,915 |
) |
|
|
(1,491 |
) |
|
|
0 |
|
Acquisition
of business activity, net
|
|
|
0 |
|
|
|
(15,729 |
) |
|
|
(1,900 |
) |
Expenditures
for premises and equipment
|
|
|
(2,250 |
) |
|
|
(4,780 |
) |
|
|
(6,674 |
) |
Net
cash (used in) investing activities
|
|
|
(277,957 |
) |
|
|
(40,487 |
) |
|
|
(105,594 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
91,389 |
|
|
|
(57,031 |
) |
|
|
191,013 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
36,133 |
|
|
|
39,932 |
|
|
|
(65,838 |
) |
Proceeds
from issuance of long-term borrowings
|
|
|
60,000 |
|
|
|
10,000 |
|
|
|
|
|
Repayment
of long-term borrowings
|
|
|
0 |
|
|
|
(64 |
) |
|
|
0 |
|
Proceeds
from issuance of preferred stock and warrants
|
|
|
83,094 |
|
|
|
0 |
|
|
|
0 |
|
Common
stock purchased and retired
|
|
|
0 |
|
|
|
(4,354 |
) |
|
|
(866 |
) |
Proceeds
from issuance of common stock under share-based plans
|
|
|
743 |
|
|
|
1,823 |
|
|
|
1,424 |
|
Excess
tax benefit from stock options exercised
|
|
|
51 |
|
|
|
110 |
|
|
|
121 |
|
Dividends
paid
|
|
|
(15,764 |
) |
|
|
(14,988 |
) |
|
|
(13,028 |
) |
Net
cash provided by (used in) by financing activities
|
|
|
255,646 |
|
|
|
(24,572 |
) |
|
|
112,826 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
19,742 |
|
|
|
(18,436 |
) |
|
|
50,480 |
|
Cash
and cash equivalents at beginning of year
|
|
|
85,487 |
|
|
|
103,923 |
|
|
|
53,443 |
|
Cash
and cash equivalents at end of year
|
|
$ |
105,229 |
|
|
$ |
85,487 |
|
|
$ |
103,923 |
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
59,902 |
|
|
$ |
76,000 |
|
|
$ |
57,535 |
|
Income
tax payments
|
|
|
21,404 |
|
|
|
14,149 |
|
|
|
10,400 |
|
Non-cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers
from loans to other real estate owned
|
|
$ |
2,723 |
|
|
$ |
90 |
|
|
$ |
182 |
|
Reclassification
of borrowings from long-term to short-term
|
|
|
10,969 |
|
|
|
808 |
|
|
|
350 |
|
Details
of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$ |
0 |
|
|
$ |
417,434 |
|
|
$ |
297 |
|
Fair
value of liabilities assumed
|
|
|
0 |
|
|
|
(365,709 |
) |
|
|
(287 |
) |
Stock
issued for acquisition
|
|
|
0 |
|
|
|
(58,916 |
) |
|
|
0 |
|
Purchase
price in excess of net assets acquired
|
|
|
0 |
|
|
|
62,600 |
|
|
|
1,890 |
|
Cash
paid for acquisitions
|
|
|
0 |
|
|
|
55,409 |
|
|
|
1,900 |
|
Cash
and cash equivalents acquired with acquisitions
|
|
|
0 |
|
|
|
39,680 |
|
|
|
0 |
|
Acquisition
of business activity, net
|
|
$ |
0 |
|
|
$ |
15,729 |
|
|
$ |
1,900 |
|
See
Notes to Consolidated Financial Statements.
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars
in thousands, except share and per share data)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Warrants
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Total
Stockholders’
Equity
|
|
Balances
at December 31, 2005, as previously reported
|
|
$ |
- |
|
|
$ |
14,794 |
|
|
$ |
- |
|
|
$ |
26,599 |
|
|
$ |
177,084 |
|
|
$ |
(594 |
) |
|
$ |
217,883 |
|
Adjustment
to reflect adoption of SAB 108 effective January 1, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,175 |
|
|
|
|
|
|
|
2,175 |
|
Balance
as of January 1, 2006 following adoption of SAB 108
|
|
|
|
|
|
|
14,794 |
|
|
|
|
|
|
|
26,599 |
|
|
|
179,259 |
|
|
|
(594 |
) |
|
|
220,058 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,871 |
|
|
|
|
|
|
|
32,871 |
|
Other
comprehensive income (loss) , net of tax effects of $243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unrealized
gains on securities of $619, adjusted for a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for gains of $1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375 |
|
|
|
375 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,246 |
|
Cash
dividends- $0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,028 |
) |
|
|
|
|
|
|
(13,028 |
) |
Stock
Compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624 |
|
|
|
|
|
|
|
|
|
|
|
624 |
|
Stock
repurchases- 25,000 shares
|
|
|
|
|
|
|
(25 |
) |
|
|
|
|
|
|
(841 |
) |
|
|
|
|
|
|
|
|
|
|
(866 |
) |
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan- 35,998 shares
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
824 |
|
|
|
|
|
|
|
|
|
|
|
860 |
|
Employee
stock purchase plan- 19,439 shares
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
582 |
|
|
|
|
|
|
|
|
|
|
|
601 |
|
Director
Stock purchase plan- 2,381 shares
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
84 |
|
Adjustment
to initially apply FASB Statement No. 158, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax
effects of $2,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,802 |
) |
|
|
(3,802 |
) |
Balance
at December 31, 2006
|
|
|
|
|
|
|
14,827 |
|
|
|
|
|
|
|
27,869 |
|
|
|
199,102 |
|
|
|
(4,021 |
) |
|
|
237,777 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,262 |
|
|
|
|
|
|
|
32,262 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains on securities of $2,141 adjusted for a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for gains of $43, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effects
of $837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,261 |
|
|
|
1,261 |
|
Change
in funded status of defined benefit pension, net of tax
effects of $1,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,705 |
|
|
|
1,705 |
|
Total
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,228 |
|
Cash
dividends- $0.92 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,988 |
) |
|
|
|
|
|
|
(14,988 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,128 |
|
|
|
|
|
|
|
|
|
|
|
1,128 |
|
Stock
repurchases- 156,249 shares
|
|
|
|
|
|
|
(156 |
) |
|
|
|
|
|
|
(4,198 |
) |
|
|
|
|
|
|
|
|
|
|
(4,354 |
) |
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Potomac Bank- 886,989
|
|
|
|
|
|
|
887 |
|
|
|
|
|
|
|
32,190 |
|
|
|
|
|
|
|
|
|
|
|
33,077 |
|
Acquisition
of CN Bancorp, Inc- 690,047
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
25,149 |
|
|
|
|
|
|
|
|
|
|
|
25,839 |
|
Stock
option plan- 68,098 shares (78,264 shares issued less 10,166 shares
Retired)
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
1,095 |
|
|
|
|
|
|
|
|
|
|
|
1,163 |
|
Director
Stock Purchase Plan- 2,402 shares
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
77 |
|
Employee
Stock Purchase Plan- 25,147 shares
|
|
|
|
|
|
|
25 |
|
|
|
|
|
|
|
662 |
|
|
|
|
|
|
|
|
|
|
|
687 |
|
Restricted
Stock- 6,078 shares
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Balances
at December 31, 2007
|
|
|
|
|
|
|
16,349 |
|
|
|
|
|
|
|
83,970 |
|
|
|
216,376 |
|
|
|
(1,055 |
) |
|
|
315,640 |
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,779 |
|
|
|
|
|
|
|
15,779 |
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
losses on securities of $965 adjusted for a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reclassification
adjustment for losses of $235, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
effects
of $385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(581 |
) |
|
|
(581 |
) |
Change
in funded status of defined benefit pension, net of tax effects of $3,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,936 |
) |
|
|
(5,936 |
) |
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,262 |
|
Cash
dividends – $0.96 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,764 |
) |
|
|
|
|
|
|
(15,764 |
) |
Preferred
stock dividends - $3.48 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(289 |
) |
|
|
|
|
|
|
(289 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
772 |
|
|
|
|
|
|
|
|
|
|
|
772 |
|
Warrants
issued
|
|
|
|
|
|
|
|
|
|
|
3,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699 |
|
Preferred
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARP
– 83,094 shares issues
|
|
|
83,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,094 |
|
Discount
from issuance of preferred stock
|
|
|
(3,699 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,699 |
) |
Discount
accretion
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
0 |
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
stock purchase plan – 1,479 shares
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Stock
option plan – 9,127 shares (16,837 shares issued less 7,710
shares retired)
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Employee
stock purchase plan – 32,891 shares
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
609 |
|
|
|
|
|
|
|
|
|
|
|
642 |
|
Restricted
Stock –5,709 shares
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Balances
at December 31, 2008
|
|
$ |
79,440 |
|
|
$ |
16,399 |
|
|
$ |
3,699 |
|
|
$ |
85,486 |
|
|
$ |
214,410 |
|
|
$ |
(7,572 |
) |
|
$ |
391,862 |
|
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – Significant Accounting Policies
The
accounting and reporting policies of the Company, which include Sandy Spring
Bancorp, Inc. and its wholly-owned subsidiary, Sandy Spring Bank (the "Bank"),
together with the Bank’s subsidiaries, Sandy Spring Insurance Corporation, The
Equipment Leasing Company, and West Financial Services, Inc., conform to
accounting principles generally accepted in the United States and to general
practice within the financial services industry.
Nature
of Operations
Through
its subsidiary bank, the Company conducts a full-service commercial banking,
mortgage banking and trust business. Services to individuals and businesses
include accepting deposits, extending real estate, consumer and commercial loans
and lines of credit, equipment leasing, general insurance, personal trust, and
investment and wealth management services. The Company operates in the six
Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery, and
Prince George's, and in Fairfax and Loudoun counties in Virginia. The Company
offers investment and wealth management services through the Bank’s subsidiary,
West Financial Services Inc., located in McLean, Virginia. Insurance
products are available to clients through Chesapeake Insurance Group, and Neff
& Associates, which are agencies of Sandy Spring Insurance
Corporation. The Equipment Leasing Company provides leasing for
primarily technology-based equipment for retail businesses.
Policy
for Consolidation
The
consolidated financial statements include the accounts of Sandy Spring Bancorp,
Inc. and the Bank. Consolidation has resulted in the elimination of all
significant inter-company balances and transactions. The financial statements of
Sandy Spring Bancorp, Inc. (Parent Only) include its investment in the Bank
under the equity method of accounting.
Use
of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Examples of such
estimates that could change significantly relate to the provision for loan and
lease losses and the related allowance, estimates with respect to other than
temporary impairment involving investment securities and projections of pension
expense and the related liability.
Assets
Under Management
Assets
held for others under fiduciary and agency relationships are not included in the
accompanying balance sheets since they are not assets of the Company or its
subsidiaries. Trust department income and investment management fees
are presented on an accrual basis.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks, federal funds sold and interest-bearing deposits with banks (items
with an original maturity of three months or less).
Residential
Mortgage Loans Held for Sale
The
Company engages in sales of residential mortgage loans originated by the
Bank. Loans held for sale are carried at the lower of aggregate cost
or fair value. Fair value is derived from secondary market quotations for
similar instruments. Gains and losses on sales of these loans are recorded as a
component of noninterest income in the Consolidated Statements of
Income. The Company's current practice is to sell such loans on a
servicing released basis.
During
2006, the Company sold $68.6 million in residential mortgage loans from its loan
portfolio on a servicing retained basis. The Company has recorded an
intangible asset for the value of such servicing totaling $0.3 million and $0.4
million at December 31, 2008 and 2007, respectively.
Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through sale of financial assets. Purchased servicing
rights are capitalized at the cost to acquire the rights. For sales
of mortgage loans, a portion of the cost of originating the loan is allocated to
the servicing right based on relative fair value. Fair value is based
on market prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Servicing assets are evaluated for
impairment based upon the fair value of the rights as compared to amortized
cost. Impairment is determined by stratifying rights into tranches
based on predominant characteristics, such as interest rate, loan type and
investor type. Impairment is recognized through a valuation allowance
for an individual tranche, to the extent that fair value is less than the
capitalized amount for the tranches. If the Company later determines
that all or a portion of the impairment no longer exists for a particular
tranche, a reduction of the allowance may be recorded as an increase to
income. Capitalized servicing rights are reported in other assets and
are amortized into noninterest income in proportion to, and over the period of,
the estimated future net servicing income of the underlying financial
assets.
Servicing
fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal and are
recorded as income when earned. The amortization of mortgage
servicing rights is netted against loan servicing fee income.
Derivative
Financial Instruments
Derivative
Loan Commitments
Mortgage
loan commitments are referred to as derivative loan commitments if the loan that
will result from exercise of the commitment will be held for sale upon
funding. Loan commitments that are derivatives are recognized at fair
value on the consolidated balance sheet in other assets or other liabilities
with changes in their fair values recorded in net gain on sale of
loans.
The
Company records a zero value for the loan commitment at inception (at the time
the commitment is issued to a borrower (“the time of rate lock”), consistent
with Emerging Issues Task Force (“EITF”) 02-3, Issues Involved in Accounting for
Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy
Trading and Risk Management Activities, and SEC Staff Accounting Bulletin
No. 105, Application of
Accounting Principles to Loan Commitments, and, accordingly, does not
recognize the value of the expected normal servicing rights until the underlying
loan is sold. Subsequent to inception, changes in the fair value of
the loan commitment are recognized based on changes in the fair value of the
underlying mortgage loan due to interest rate changes, changes in the
probability the derivative loan commitment will be exercised, and the passage of
time. In estimating fair value, the Company assigns a probability to
a loan commitment based on an expectation that it will be exercised and the loan
will be funded.
Forward
Loan Sale Commitments
The
Company carefully evaluates all loan sales agreements to determine whether they
meet the definition of a derivative under Statement of Financial Standards
“SFAS” No. 133 as facts and circumstances may differ significantly. If
agreements qualify, to protect against the price risk inherent in derivative
loan commitments, the Company utilizes both “mandatory delivery” and “best
efforts” forward loan sale commitments to mitigate the risk of potential
decreases in the values of loans that would result from the exercise of the
derivative loan commitments. Mandatory delivery contracts are accounted for as
derivative instruments. Generally, the Company’s best efforts contracts also
meet the definition of derivative instruments after the loan to the borrower has
closed. Accordingly, forward loan sale commitments that economically
hedge the closed loan inventory are recognized at fair value on the consolidated
balance sheet in other assets and other liabilities with changes in their fair
values recorded in net gain on sale of loans. The Company estimates
the fair value of its forward loan sales commitments using a methodology similar
to that used for derivative loan commitments.
Interest
Rate Swap Agreements
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. The swaps are
reported at fair value in other assets or other liabilities. The accounting for
changes in the fair value of a swap depends on whether it has been designated
and qualifies as part of a hedging relationship. The Company's swaps qualify as
derivatives, but are not designated as hedging instruments, thus any gain or
loss resulting from changes in the fair value is recognized in current net
income. Further discussion of the Company's financial derivatives is
set forth in Footnote 18 to the consolidated financial statements.
Investments
Held to Maturity and Other Equity Securities
Investments
held to maturity are those securities which the Company has the ability and
positive intent to hold until maturity. Securities so classified at the time of
purchase are recorded at cost. The carrying values of securities held to
maturity are adjusted for premium amortization to the earlier of the maturity or
expected call date and discount accretion to the maturity
date. Related interest and dividends are included in interest income.
Declines in the fair value of individual held-to-maturity securities below their
cost that are other than temporary result in write-downs of the individual
securities to their fair value. Factors affecting the determination
of whether an other-than-temporary impairment has occurred include a downgrading
of the security by the rating agency, a significant deterioration in the
financial condition of the issuer, or that management would not have the ability
to hold a security for a period of time sufficient to allow for any anticipated
recovery in fair value. Other equity securities represent Federal Reserve Bank,
Federal Home Loan Bank of Atlanta stock and Atlantic Central Banker’s Bank stock
which are considered restricted as to marketability and are recorded at
cost.
Investments
Available for Sale
Marketable
equity securities and debt securities not classified as held to maturity or
trading are classified as available for sale. Securities available for sale are
acquired as part of the Company's asset/liability management strategy and may be
sold in response to changes in interest rates, loan demand, changes in
prepayment risk and other factors. Securities available for sale are carried at
fair value, with unrealized gains or losses based on the difference between
amortized cost and fair value, reported net of deferred tax, as accumulated
other comprehensive income (loss), a separate component of stockholders' equity.
The carrying values of securities available for sale are adjusted for premium
amortization to the earlier of the maturity or expected call date and discount
accretion to the maturity date. Realized gains and losses, using the specific
identification method, are included as a separate component of noninterest
income. Related interest and dividends are included in interest
income. Declines in the fair value of individual available-for-sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. Factors affecting
the determination of whether an other-than-temporary impairment has occurred
include a downgrading of the security by a rating agency, a significant
deterioration in the financial condition of the issuer, or that management would
not have the intent and ability to hold a security for a period of time
sufficient to allow for any anticipated recovery in fair value.
Loans
and Leases
Loans are
stated at their principal balance outstanding net of any deferred fees and
costs. Interest income on loans is accrued at the contractual rate based on the
principal outstanding. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method. Lease financing assets, all of which are direct
financing leases, include aggregate lease rentals, net of related unearned
income. Leasing income is recognized on a basis that achieves a
constant periodic rate of return on the outstanding lease financing balances
over the lease terms. The Company generally places loans and leases,
except for consumer loans, on non-accrual when any portion of the principal or
interest is ninety days past due and collateral is insufficient to discharge the
debt in full. Interest accrual may also be discontinued earlier if, in
management's opinion, collection is unlikely. Generally, consumer installment
loans are not placed on non-accrual, but are charged off when they are five
months past due. All interest accrued but not collected for loans
that are placed on non-accrual or charged-off is reversed against interest
income. Interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual
status. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
Loans are
considered impaired when, based on current information, it is probable that the
Company will not collect all principal and interest payments according to
contractual terms. Generally, loans are considered impaired once principal and
interest payments are past due and they are placed on non-accrual. Management
also considers the financial condition of the borrower, cash flows of the loan
and the value of the related collateral. Impaired loans do not include large
groups of smaller balance homogeneous credits such as residential real estate,
consumer installment loans, and commercial leases, which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (usually ninety
days or less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company measures impairment on such loans by reference to the
fair value of the collateral. Income on impaired loans is recognized similar to
the method followed on nonaccrual loans.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses (“allowance”) represents an amount which, in
management's judgment, is adequate to absorb estimated losses on outstanding
loans and leases. The allowance represents an estimation made pursuant to SFAS
No. 5, “Accounting for Contingencies,” and SFAS No. 114, “Accounting by
Creditors for Impairment of a Loan.” The adequacy of the allowance is
determined through careful and continuous evaluation of the loan and lease
portfolio, and involves consideration of a number of factors, as outlined below,
to establish a prudent level. Determination of the allowance is
inherently subjective and requires significant estimates, including estimated
losses on pools of homogeneous loans based on historical loss experience and
consideration of current economic trends, which may be susceptible to
significant change. Loans and leases deemed uncollectible are charged
against the allowance, while recoveries are credited to the
allowance. Management adjusts the level of the allowance through the
provision for loan and lease losses, which is recorded as a current period
operating expense. The Company’s systematic methodology for assessing
the appropriateness of the allowance includes: (1) the formula
allowance reflecting historical losses, as adjusted, by credit category, and (2)
the specific allowance for risk-rated credits on an individual or portfolio
basis.
The
formula allowance is based upon historical loss factors, as adjusted, and
establishes allowances for the major loan categories based upon adjusted
historical loss experience over the prior eight quarters, weighted so that
losses realized in the most recent quarters have the greatest
effect. The factors used to adjust the historical loss experience
address various risk characteristics of the Company’s loan portfolio including:
(1) trends in delinquencies and other non-performing loans, (2) changes in the
risk profile related to large loans in the portfolio, (3) changes in the
categories of loans comprising the loan portfolio, (4) concentrations of loans
to specific industry segments, (5) changes in economic conditions on both a
local and national level, (6) changes in the Company’s credit administration and
loan portfolio management processes, and (7) quality of the Company’s credit
risk identification processes.
The
specific allowance is used to allocate an allowance for impaired loans as
defined in SFAS No. 114. Analysis resulting in specific allowances, including
those on loans identified for evaluation of impairment, includes consideration
of the borrower’s overall financial condition, resources and payment record,
support available from financial guarantors and the sufficiency of
collateral. These factors are combined to estimate the probability
and severity of potential losses. Then a specific allowance is
established based on the Company’s calculation of the potential loss imbedded in
the individual loan. Allowances are also established by application
of credit risk factors to other internally risk-rated loans, individual consumer
and residential loans and commercial leases having reached non-accrual or 90-day
past due status. Each risk rating category is assigned a credit risk
factor based on management’s estimate of the associated risk, complexity, and
size of the individual loans within the category. Additional
allowances may also be established in special circumstances involving a
particular group of credits or portfolio within a risk category when management
becomes aware that losses incurred may exceed those determined by application of
the risk factor alone.
Premises
and Equipment
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization, computed using the straight-line method. Premises and equipment
are depreciated over the useful lives of the assets, which generally range from
3 to 10 years for furniture, fixtures and equipment, 3 to 5 years for computer
software and hardware, and 10 to 40 years for buildings and building
improvements. Leasehold improvements are amortized over the terms of
the respective leases or the estimated useful lives of the improvements,
whichever is shorter. The costs of major renewals and betterments are
capitalized, while the costs of ordinary maintenance and repairs are included in
noninterest expense.
Other
Real Estate Owned (“OREO”)
OREO,
which is included in other assets in the consolidated balance sheets, is
comprised of properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at the lower of cost, or fair value less
estimated costs of disposal, on the date acquired. Losses arising at the time of
acquisition of such properties are charged against the allowance for loan and
lease losses. Subsequent write-downs that may be required are added to a
valuation reserve. Gains and losses realized from the sale of OREO, as well as
valuation adjustments, are included in noninterest income. Expenses of operation
are included in noninterest expense.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with a related
contract, asset, or liability. Under the provisions of FAS No. 142,
“Goodwill and Other Intangible
Assets”, goodwill is not amortized over an estimated life, but rather is
tested at least annually for impairment.
Intangible
assets that have finite lives are amortized over their estimated useful lives
and also continue to be subject to impairment testing. All of the
Company’s other intangible assets have finite lives and are being amortized on a
straight-line basis over varying periods that initially did not exceed 15
years.
Note 8
includes a summary of the Company’s goodwill and other intangible
assets. The unidentifiable Intangible Assets Resulting from Branch
Acquisitions resulted from two transactions: the purchase of a commercial bank
in 1996 and the purchase of seven commercial bank branches in a single
transaction in 1999. No goodwill was recorded as a result of these branch
acquisitions. SFAS No. 147, “Acquisitions of Certain Financial
Institutions” addresses unidentifiable intangible assets resulting from
acquisitions of entire or less-than-whole financial institutions where the fair
value of liabilities assumed exceeds the fair value of tangible and identifiable
intangible assets acquired. The Statement provides for the recognition of
goodwill where the transaction in which an unidentifiable intangible asset arose
was a business combination. The transitional provisions of SFAS No. 147 allow
for the reclassification of unidentifiable intangible assets that meet certain
criteria to goodwill and the restatement of earnings for any amortization of the
reclassified goodwill that occurred since SFAS No. 142 was adopted. After
completing its analysis of the transactions identified above, the Company
determined that neither branch acquisition met the definition of a business for
purposes of SFAS No. 147 under EITF 98-3, “Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a Business.”
Accordingly, the Company has continued to amortize these unidentifiable
intangible assets without change in method.
Valuation
of Long-Lived Assets
The
Company accounts for the valuation of long-lived assets under Statement of
Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.” SFAS No. 144 requires that
long-lived assets and certain identifiable intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
the long-lived asset is measured by a comparison of the carrying amount of the
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the estimated fair value of the assets. Assets to be
disposed of are reportable at the lower of the carrying amount or the fair
value, less costs to sell.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Insurance
Commissions and Fees
Commission
revenue is recognized the date the customer is billed. The Company
also receives contingent commissions from insurance companies as additional
incentive for achieving specified premium volume goals and/or the loss
experience of the insurance placed by the Company. Contingent commissions from
insurance companies are recognized when determinable, which is generally when
such commissions are received.
Advertising
Costs
Advertising
costs are expensed as incurred and included in noninterest
expenses.
Earnings
per Common Share
Basic
earnings per common share is derived by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding, and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per share is derived by dividing net income by
the weighted-average number of shares outstanding, adjusted for the dilutive
effect of outstanding stock options as well as any adjustment to income that
would result from the assumed issuance. The number of potential
shares issued pursuant to the stock option plans was determined using the
treasury stock method.
Income
Taxes
Income
tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Deferred income tax assets and
liabilities are determined using the liability method. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
The
Company does not have uncertain tax positions that are deemed material, and did
not recognize any adjustments for unrecognized tax benefits. The Company’s
policy is to recognize interest and penalties on income taxes in other
noninterest expenses. The Company remains subject to examination for income tax
returns for the years ending after December 31, 2006.
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 was effective for fiscal years beginning after December 15, 2006,
with earlier adoption permitted. The adoption of this Statement did not
have a material impact on the Company’s financial position, results of
operations or cash flows.
In
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 was
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. A company was
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. The required disclosures
related to the Company’s defined benefit pension plan are included in Note 14 to
the Consolidated Financial Statements.
At its
September 2006 meeting, the EITF reached a final consensus on EITF No. 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. EITF No. 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 $21.7
million as of December 31, 2008 and recorded a liability and a corresponding
reduction of retained earnings of $1.6 million on January 1, 2008.
The
Company has adopted SEC Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 states that registrants must quantify the
impact of correcting all misstatements, including both the carryover (iron
curtain method) and reversing (rollover method) effects of prior-year
misstatements on the current-year financial statements, and by evaluating the
misstatements quantified under each method in light of quantitative and
qualitative factors. In adopting the requirements of SAB 108, the
Company adjusted Net Deferred Tax Assets, disclosed in Note 15, and included in
Other Assets in the consolidated financial statements, which had been
understated by $2.2 million as of January 1, 2006. Such
understatement resulted from the over accrual of
income tax expense in years prior to 2002, which were previously evaluated as
being immaterial under the rollover method. The
Company has reported the cumulative effect of the initial application of SAB 108
by adjusting retained earnings as of January 1, 2006 with a credit of $2.2
million. The adjustment of the quarterly consolidated financial
results for 2006 was accomplished by adjusting the applicable financial
statement line items when such information was next
presented. Reports previously filed with the SEC will not be
amended.
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 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.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Principles.” This statement identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (“GAAP”)
in the United States. The Statement is directed to entities rather than auditors
because entities are responsible for the selection of accounting principles for
financial statements that are presented in conformity with GAAP. This Statement
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.” 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
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active.” The FSP
applies to financial assets that are in the scope of SFAS No. 157, “Fair Value
Measurements”, to clarify its application in an inactive market. The FSP
addresses how management’s internal assumptions should be considered when
measuring fair value in cases where relevant observable data does not exist, how
observable market information in inactive markets should be considered when
measuring fair value and how the use of market quotes should be considered when
assessing the relevance of observable and unobservable data available to measure
fair value. The FSP clarifies that in inactive markets there may be more
reliance placed upon the use of management’s internal assumptions (Level 3 fair
value measurement), but regardless of the valuation technique, the entity should
include the appropriate risk adjustments that market participants would make for
nonperformance and liquidity risks. The FSP is effective upon issuance,
including prior periods for which financial statements have not been issued. The
FSP is consistent with the Company’s application of SFAS No. 157, therefore the
issuance of the standard did not impact the Company’s financial position or
results of operations for the Year ended December 31, 2008.
In
January 2009, the FASB issued proposed FSP EITF 99-20-1, “Amendments to the Impairment and
Interest Income Measurement Guidance of EITF Issue No. 99-20.” The
purpose of this FSP is to achieve more consistent determinations as to whether
other-than-temporary impairments of available-for-sale or held-to-maturity debt
securities have occurred by aligning the impairment guidance in Issue 99-20,
“Recognition of Interest Income and Impairment on Purchased Beneficial Interests
and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets”, with that of SFAS No 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The FSP is effective for financial
statements issued for interim and annual reporting periods ending after December
15, 2008, and shall be applied prospectively. The Company does not expect that
the adoption of this FSP will have a material impact on its financial position,
results of operations or cash flows.
Pending
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”. This
Statement replaces SFAS No. 141, “Business
Combinations”. 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.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” The FSP concludes that unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities that should be included in the earnings allocation in
computing earnings per share under the two class method. The FSP is effective
for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those years. All prior period per share data
presented must be adjusted retrospectively. The Company is
currently assessing the impact of adopting FSP No. EITF 03-6-1.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets.” This FSP amends SFAS No. 132(revised
2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits”, to provide guidance on
an employer’s disclosures about plan assets of a defined benefit pension or
other postretirement plan. The FSP requires employers to disclose
information about fair value measurements of plan assets that would be similar
to the disclosures about fair value measurements required by SFAS No. 157, “Fair
Value Measurements.” These disclosures are as follows:
|
·
|
Information
about how investment allocation decisions are made, including the factors
that are pertinent to an understanding of investment policies and
strategies.
|
|
·
|
Disclose
the fair value of each major category of plan assets as of each annual
reporting date. Asset categories shall be based on the nature and risks of
assets in an employer’s plan.
|
|
·
|
The
inputs and valuation techniques used to measure the fair value of plan
assets.
|
|
·
|
The
effect of fair value measurements using significant unobservable inputs
(Level 3) on changes in plan assets for the
period.
|
|
·
|
Significant
concentrations of risk within plan
assets.
|
The FSP
is effective for financial statements issued for fiscal years ending after
December 15, 2009. The Company does not expect that the adoption of this FSP
will have a material impact on its financial position, results of operations or
cash flows.
Reclassifications
Certain
amounts in the accompanying consolidated financial statements have been
reclassified to conform with the 2008 presentation.
Note
2 – Acquisitions
In
January 2006, the Company completed the acquisition of Neff & Associates
(“Neff”), an insurance agency located in Ocean City, Maryland. Under
the terms of the acquisition agreement, the Company purchased Neff for cash
totaling approximately $1.9 million. Additional contingent payments may be made
and recorded in 2008 based on the financial results attained by Neff in that
year. In the transaction, $0.3 million of assets were acquired, primarily
accounts receivable, and $0.3 million of liabilities were assumed, primarily
operating payables. The acquisition resulted in the recognition of
$0.5 million of goodwill, which will not be amortized, and $1.4 million of
identified intangible assets which are being amortized on a straight-line basis
over a period of 5 to 10 years. This acquisition was considered immaterial and ,
accordingly, no pro forma results of operations are provided for the
pre-acquisition periods.
On
February 15, 2007, the Company completed the acquisition of Potomac Bank of
Virginia (“Potomac”), a bank headquartered in Fairfax,
Virginia. Potomac operated five branch offices in the Northern
Virginia metropolitan market at the time of the acquisition. The
primary reason for the merger with Potomac was to gain entry into the northern
Virginia high growth market. The total consideration paid to Potomac
shareholders and related merger costs in connection with the acquisition was
$68.2 million. The results of Potomac’s operations have been included
in the Company’s consolidated financial results subsequent to February 15, 2007.
The assets and liabilities of Potomac were recorded on the Consolidated Balance
Sheet at their respective fair values. The fair values were
determined as of February 15, 2007 and are not subject to further refinements.
The transaction resulted in total assets acquired as of February 15, 2007 of
$252.5 million, including approximately $196.0 million of loans and leases;
liabilities assumed were $224.3 million, including $197.0 million of deposits.
Additionally, the Company recorded $40.0 million of goodwill, $5.1 million of
core deposit intangibles (“CDI”) and $0.3 million of other intangibles. CDI’s
are subject to amortization and are being amortized over seven years on a
straight-line basis.
On May
31, 2007, the Company completed the acquisition of CN Bancorp Inc. (“CNB”) and
it’s wholly owned subsidiary, County National Bank (“County”). County
was headquartered in Glen Burnie, Maryland, and had four full-service branches
located in Anne Arundel County, Maryland at the time of the acquisition. The
total consideration paid to CNB shareholder’s and related merger costs in
connection with the acquisition was $46.1 million. The results of
CNB’s operations have been included in the Company’s consolidated financial
results subsequent to May 31, 2007. The assets and liabilities
of CNB were recorded on the Consolidated Balance Sheet at their respective fair
values. The fair values were determined as of May 31, 2007 and are
not subject to further refinements. The transaction resulted in total assets
acquired as of May 31, 2007 of $164.9 million, including approximately $98.7
million of loans; liabilities assumed were $141.4 million, including $138.4
million of deposits. Additionally, the Company recorded $22.6 million
of goodwill, $4.6 million of CDI’s and $0.1 million of other
intangibles. CDI’s are subject to amortization and are being
amortized over seven years on a straight-line basis.
The
acquisitions of Potomac and CNB, individually and in the aggregate, were not
considered material acquisitions for purposes of the pro forma disclosures
required by SFAS No. 141, “Business
Combinations.”
Note
3 – Cash and Due from Banks
Regulation
D of the Federal Reserve Act requires that banks maintain reserve balances with
the Federal Reserve Bank based principally on the type and amount of their
deposits. At its option, the Company maintains additional balances to compensate
for clearing and safekeeping services. In November 2008, the Federal Reserve
Bank began paying interest on excess balances maintained. The average balance
maintained in 2008 was $10.2 million and in 2007 was $2.1 million.
Note
4 – Investments Available for Sale
The
amortized cost and estimated fair values of investments available for sale at
December 31 are as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
2,953 |
|
|
$ |
20 |
|
|
$ |
0 |
|
|
$ |
2,973 |
|
U.S.
Agencies and Corporations
|
|
|
135,418 |
|
|
|
2,003 |
|
|
|
(101 |
) |
|
|
137,320 |
|
|
|
139,057 |
|
|
|
352 |
|
|
|
(99 |
) |
|
|
139,310 |
|
State
and municipal
|
|
|
2,663 |
|
|
|
78 |
|
|
|
(41 |
) |
|
|
2,700 |
|
|
|
2,660 |
|
|
|
101 |
|
|
|
0 |
|
|
|
2,761 |
|
Mortgage-backed
|
|
|
144,638 |
|
|
|
1,358 |
|
|
|
(920 |
) |
|
|
145,076 |
|
|
|
32,160 |
|
|
|
243 |
|
|
|
(47 |
) |
|
|
32,356 |
|
Trust
preferred
|
|
|
7,890 |
|
|
|
24 |
|
|
|
(1,633 |
) |
|
|
6,281 |
|
|
|
7,887 |
|
|
|
1,164 |
|
|
|
0 |
|
|
|
9,051 |
|
Total
debt securities
|
|
|
290,609 |
|
|
|
3,463 |
|
|
|
(2,695 |
) |
|
|
291,377 |
|
|
|
184,717 |
|
|
|
1,880 |
|
|
|
(146 |
) |
|
|
186,451 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
0 |
|
|
|
0 |
|
|
|
350 |
|
|
|
350 |
|
|
|
0 |
|
|
|
0 |
|
|
|
350 |
|
Total
investments available for sale
|
|
$ |
290,959 |
|
|
$ |
3,463 |
|
|
$ |
(2,695 |
) |
|
$ |
291,727 |
|
|
$ |
185,067 |
|
|
$ |
1,880 |
|
|
$ |
(146 |
) |
|
$ |
186,801 |
|
Gross
unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss position
at December 31, 2008 and 2007 are as follows:
(In
thousands)
|
|
|
|
|
|
|
|
Continuous
unrealized losses existing for:
|
|
|
|
|
Available
for sale as of December 31, 2008
|
|
Number
of
securities
|
|
|
Fair
Value
|
|
|
Less
than 12
months
|
|
|
More
than 12 months
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
2 |
|
|
$ |
14,898 |
|
|
$ |
101 |
|
|
$ |
0 |
|
|
$ |
101 |
|
Mortgage-backed
|
|
|
30 |
|
|
|
66,640 |
|
|
|
911 |
|
|
|
9 |
|
|
|
920 |
|
Trust
preferred
|
|
|
6 |
|
|
|
4,950 |
|
|
|
1,633 |
|
|
|
0 |
|
|
|
1,633 |
|
State
and municipal
|
|
|
4 |
|
|
|
1,131 |
|
|
|
41 |
|
|
|
0 |
|
|
|
41 |
|
|
|
|
42 |
|
|
$ |
87,619 |
|
|
$ |
2,686 |
|
|
$ |
9 |
|
|
$ |
2,695 |
|
(In
thousands)
|
|
|
|
|
|
|
|
Continuous
unrealized losses existing for:
|
|
|
|
|
Available
for sale as of December 31, 2007
|
|
Number
of
securities
|
|
|
Fair
Value
|
|
|
Less
than 12
months
|
|
|
More
than 12 months
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
2 |
|
|
$ |
20,925 |
|
|
$ |
0 |
|
|
$ |
99 |
|
|
$ |
99 |
|
Mortgage-backed
|
|
|
14 |
|
|
|
12,554 |
|
|
|
43 |
|
|
|
4 |
|
|
|
47 |
|
|
|
|
16 |
|
|
$ |
33,479 |
|
|
$ |
43 |
|
|
$ |
103 |
|
|
$ |
146 |
|
Approximately
94% and 100% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of December 31, 2008 and 2007 are rated
AAA. Approximately 4% of the bonds carried in the available-for-sale
investment portfolio are rated B1 and 2% are not rated as of December 31, 2008.
The securities representing the unrealized losses in the available-for-sale
portfolio as of December 31, 2008 and 2007 all have modest duration risk (2.41
years in 2008 and 1.14 years in 2007), low credit risk, and minimal
loss (approximately 2.98% in 2008 and .43% in 2007) when compared to book
value. The unrealized losses that exist are the result of changes in
market interest rates since the original purchase. These factors
coupled with the fact that the Company has both the intent and ability to hold
these investments for a sufficient period of time, which may be maturity, to
allow for any anticipated recovery in fair value substantiates that the
unrealized losses in the available-for-sale portfolio are
temporary.
The
amortized cost, and estimated fair values, of debt securities available for sale
at December 31 by contractual maturity are shown below. The Company has
allocated mortgage-backed securities into the four maturity groupings shown
using the expected average life of the individual securities based upon
statistics provided by independent third party industry
sources. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
|
|
2008
|
|
2007
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
(In
thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
Due
in one year or less
|
|
$ |
99,232 |
|
|
|
$ |
99,677 |
|
|
|
$ |
145,952 |
|
|
|
$ |
146,531 |
|
Due
after one year through five years
|
|
|
190,302 |
|
|
|
|
190,625 |
|
|
|
|
32,990 |
|
|
|
|
34,095 |
|
Due
after five years through ten years
|
|
|
1,075 |
|
|
|
|
1,075 |
|
|
|
|
5,775 |
|
|
|
|
5,825 |
|
Due
after ten years
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
0 |
|
|
|
|
0 |
|
Total
debt securities available for sale
|
|
$ |
290,609 |
|
|
|
$ |
291,377 |
|
|
|
$ |
184,717 |
|
|
|
$ |
186,451 |
|
There
were no sales of investments available for sale during 2008, 2007 and
2006.
At
December 31, 2008 and 2007, investments available for sale with a book value of
$217.2 million and $173.9 million, respectively, were pledged as collateral for
certain government deposits and for other purposes as required or permitted by
law. The outstanding balance of no single issuer, except for U.S. Agencies and
Corporations securities, exceeded ten percent of stockholders' equity at
December 31, 2008 and 2007.
Note
5 – Investments Held to Maturity and Other Equity Securities
The
amortized cost and estimated fair values of investments held to maturity at
December 31 are as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
U.S.
Agencies and Corporations
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
34,419 |
|
|
$ |
74 |
|
|
$ |
0 |
|
|
$ |
34,493 |
|
Mortgage-backed
|
|
|
747 |
|
|
|
34 |
|
|
|
0 |
|
|
|
781 |
|
|
|
860 |
|
|
|
14 |
|
|
|
0 |
|
|
|
874 |
|
State
and municipal
|
|
|
170,871 |
|
|
|
4,415 |
|
|
|
(159 |
) |
|
|
175,127 |
|
|
|
199,427 |
|
|
|
6,233 |
|
|
|
(32 |
) |
|
|
205,628 |
|
Total
investments held to maturity
|
|
$ |
171,618 |
|
|
$ |
4,449 |
|
|
$ |
(159 |
) |
|
$ |
175,908 |
|
|
$ |
234,706 |
|
|
$ |
6,321 |
|
|
$ |
(32 |
) |
|
$ |
240,995 |
|
Gross
unrealized losses and fair value by length of time that the individual
held-to-maturity securities have been in a continuous unrealized loss position
at December 31, 2008 and 2007 are as follows:
(In
thousands)
|
|
|
|
|
|
|
|
Continuous
unrealized losses existing for:
|
|
|
|
|
Held
to Maturity as of December
31, 2008
|
|
Number
of
securities
|
|
|
Fair
Value
|
|
|
Less
than 12
months
|
|
|
More
than 12
months
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
0 |
|
|
$ |
159 |
|
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
0 |
|
|
$ |
159 |
|
(In
thousands)
|
|
|
|
|
|
|
|
Continuous
unrealized losses existing for:
|
|
|
|
|
Held
to Maturity as of December
31, 2007
|
|
Number
of
securities
|
|
|
Fair
Value
|
|
|
Less
than 12
months
|
|
|
More
than 12 months
|
|
|
Total
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
7 |
|
|
$ |
3,340 |
|
|
$ |
1 |
|
|
$ |
31 |
|
|
$ |
32 |
|
|
|
|
7 |
|
|
$ |
3,340 |
|
|
$ |
1 |
|
|
$ |
31 |
|
|
$ |
32 |
|
Approximately
16% and 92% of the bonds carried in the held-to-maturity investment portfolio
experiencing continuous unrealized losses as of December 31, 2008 and 2007, are
rated AAA and 84% and 8% as of December 31, 2008 and 2007 respectively, are
rated AA and AA1, respectively. The securities representing the
unrealized losses in the held-to-maturity portfolio all have modest duration
risk (6.27 years in 2008 and 4.69 years in 2007), low credit risk, and minimal
losses (approximately 1.47% in 2008 and 1% in 2007) when compared to book
value. The unrealized losses that exist are the result of changes in
market interest rates since the original purchase. These
factors coupled with the Company’s intent and ability to hold these investments
for a sufficient period of time, which may be maturity, to allow for any
anticipated recovery in fair value substantiates that the unrealized losses in
the held-to-maturity portfolio are temporary.
The
amortized cost and estimated fair values of debt securities held to maturity at
December 31 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In
thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
55,231 |
|
|
$ |
55,941 |
|
|
$ |
79,970 |
|
|
$ |
80,493 |
|
Due
after one year through five years
|
|
|
108,406 |
|
|
|
111,718 |
|
|
|
136,614 |
|
|
|
141,547 |
|
Due
after five years through ten years
|
|
|
1,997 |
|
|
|
2,043 |
|
|
|
11,757 |
|
|
|
12,108 |
|
Due
after ten years
|
|
|
5,984 |
|
|
|
6,206 |
|
|
|
6,365 |
|
|
|
6,847 |
|
Total
debt securities held to maturity
|
|
$ |
171,618 |
|
|
$ |
175,908 |
|
|
$ |
234,706 |
|
|
$ |
240,995 |
|
At
December 31, 2008 and 2007, investments held to maturity with a book value of
$140.6 million and $166.3 million, respectively, were pledged as collateral for
certain government deposits and for other purposes as required or permitted by
law. The outstanding balance of no single issuer, except for U.S.
Agency and Corporations securities, exceeded ten percent of stockholders' equity
at December 31, 2008 or 2007.
Other
equity securities at December 31 are as follows:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Federal
Reserve Bank stock
|
|
$ |
5,037 |
|
|
$ |
5,033 |
|
Federal
Home Loan Bank of Atlanta stock
|
|
|
24,034 |
|
|
|
18,658 |
|
Atlantic
Central Bank stock
|
|
|
75 |
|
|
|
75 |
|
Total
|
|
$ |
29,146 |
|
|
$ |
23,766 |
|
Note
6 – Loans and Leases
Major
categories at December 31 are presented below:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Residential
real estate:
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
457,571 |
|
|
$ |
456,305 |
|
Residential
construction
|
|
|
189,249 |
|
|
|
166,981 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
Commercial
real estate
|
|
|
847,452 |
|
|
|
662,837 |
|
Commercial
construction
|
|
|
223,169 |
|
|
|
262,840 |
|
Leases
|
|
|
33,220 |
|
|
|
35,722 |
|
Other
commercial
|
|
|
333,758 |
|
|
|
316,051 |
|
Consumer
|
|
|
406,227 |
|
|
|
376,295 |
|
Total
loans and leases
|
|
|
2,490,646 |
|
|
|
2,277,031 |
|
Less:
allowance for loan and lease losses
|
|
|
(50,526 |
) |
|
|
(25,092 |
) |
Net
loans and leases
|
|
$ |
2,440,120 |
|
|
$ |
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; loans, such as option
adjustable-rate mortgages, that may expose the borrower to future increases in
repayments that are in excess of increases that would result solely from
increases in market interest rates; and interest-only loans. The
Company does not make loans that provide for negative amortization. The Company
originates option adjustable-rate mortgages infrequently and sells all of them
in the secondary market.
At
December 31, 2008, the Company had a total of $48.2 million in residential real
estate loans and $2.7 million in consumer loans with a loan to value ratio
(“LTV”) greater than 90%. The Company also had an additional $79.2 million in
residential lot loans owned by individuals with an LTV greater than
75%. Commercial loans, with an LTV greater than 75% to 85%, depending
on the type of property, totaled $94.2 million at December 31, 2008. The Company
had interest-only loans totaling $101.8 million in its loan portfolio at
December 31, 2008. In addition, virtually all of the Company’s equity lines of
credit, $268.9 million at December 31, 2008, which were included in the consumer
loan portfolio, were made on an interest-only basis. The aggregate of
all loans with these terms was $493.2 million at December 31, 2008 which
represented 20% of total loans and leases outstanding at that
date. The Company is of the opinion that its loan underwriting
procedures are structured to adequately mitigate any additional risk that the
above types of loans might present.
Activity
in the allowance for loan and lease losses for the preceding three years ended
December 31 is shown below:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Balance
at beginning of year
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
$ |
16,886 |
|
Allowance
acquired with acquisition of other institutions
|
|
|
0 |
|
|
|
2,798 |
|
|
|
0 |
|
Provision
for loan and lease losses
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
Loan
and lease charge-offs
|
|
|
(8,463 |
) |
|
|
(1,444 |
) |
|
|
(315 |
) |
Loan
and lease recoveries
|
|
|
705 |
|
|
|
152 |
|
|
|
126 |
|
Net
charge-offs
|
|
|
(7,758 |
) |
|
|
(1,292 |
) |
|
|
(189 |
) |
Balance
at year end
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
Information
regarding impaired loans at December 31, and for the respective years then
ended, is as follows:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Impaired
loans with a valuation allowance
|
|
$ |
45,525 |
|
|
$ |
5,710 |
|
|
$ |
286 |
|
Impaired
loans without a valuation allowance
|
|
|
7,098 |
|
|
|
16,174 |
|
|
|
0 |
|
Total
impaired loans
|
|
$ |
52,623 |
|
|
$ |
21,884 |
|
|
$ |
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses related to impaired
loans
|
|
$ |
13,803 |
|
|
$ |
936 |
|
|
$ |
118 |
|
Allowance
for loan and lease losses related to other than impaired
loans
|
|
|
36,723 |
|
|
|
24,156 |
|
|
|
19,374 |
|
Total
allowance for loan and lease losses
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
impaired loans for the year
|
|
$ |
45,947 |
|
|
$ |
14,496 |
|
|
$ |
250 |
|
Interest
income on impaired loans recognized on a cash basis
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Non-accrual
loans and leases including the impaired loans reflected in the preceding table,
totaled $68.0 million and $23.0 million at December 31, 2008 and 2007
respectively. Gross interest income that would have been recorded in
2008 if non-accrual loans and leases had been current and, in accordance with
their original terms, was $4.0 million, while interest actually recorded on such
loans was $0. The Company’s policy is to continue accrual of interest
on loans over 90 days delinquent unless the specific circumstances of the loan
dictate otherwise. In those cases, such loans are then classified as
non-accrual loans. At December 31, 2008 such loans 90 days past due and still
accruing interest totaled $1.0 million.
Other
real estate owned totaled $2.9 million at December 31, 2008 and $0.5 million at
December 31, 2007.
Note
7 – Premises and Equipment
Premises
and equipment at December 31 consist of:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Land
|
|
$ |
9,954 |
|
|
$ |
9,954 |
|
Buildings
and leasehold improvements
|
|
|
56,707 |
|
|
|
56,582 |
|
Equipment
|
|
|
35,272 |
|
|
|
33,839 |
|
Total
premises and equipment
|
|
|
101,933 |
|
|
|
100,375 |
|
Less:
accumulated depreciation and amortization
|
|
|
(50,523
|
) |
|
|
(45,918
|
) |
Net
premises and equipment
|
|
$ |
51,410 |
|
|
$ |
54,457 |
|
Depreciation
and amortization expense for premises and equipment amounted to $5.0 million for
2008, $4.9 million for 2007 and $4.2 million for 2006. There were no
contractual commitments at December 31, 2008 to construct branch
facilities.
Total
rental expense (net of rental income) of premises and equipment for the three
years ended December 31 was $5.9 million (2008), $5.7 million (2007) and $4.5
million (2006). Lease commitments entered into by the Company bear initial terms
varying from 3 to 15 years, or they are 20-year ground leases, and are
associated with premises.
Future
minimum lease payments, including any additional rents due to escalation
clauses, as of December 31, 2008 for all non-cancelable operating leases
are:
|
|
Operating
|
|
(In
thousands)
|
|
Leases
|
|
2009
|
|
$ |
4,746 |
|
2010
|
|
|
4,179 |
|
2011
|
|
|
3,694 |
|
2012
|
|
|
3,000 |
|
2013
|
|
|
2,140 |
|
Thereafter
|
|
|
6,263 |
|
Total
minimum lease payments
|
|
$ |
24,022 |
|
Note
8 – Goodwill and Other Intangible Assets
Goodwill
is tested for impairment annually or more frequently if events or circumstances
indicate a possible impairment. Under the provisions of SFAS No. 144,
the acquired intangible assets apart from goodwill are reviewed for impairment
annually and are being amortized over their remaining estimated lives. As a
result of its annual assessment in September 2008, the Company determined that a
triggering event had occurred in The Equipment Leasing Company and, accordingly,
the Company began a two phase impairment analysis of goodwill. The Phase I
analysis utilized both the Income approach (discounted future cash flow
analysis) and the Market approach (using price to earnings multiples of
comparable companies). The results obtained from the Phase I analysis indicated
a potential impairment might exist and that a Phase II analysis was required to
determine the amount of the impairment. Based on its Phase I analysis the
Company recorded an estimated impairment charge of $2.3 million. Upon completion
of its Phase II analysis in the fourth quarter of 2008, the Company determined
that an additional impairment charge of $1.9 million was warranted. This charge,
which constituted the remaining goodwill in The Equipment Leasing Company was
recorded in the fourth quarter of 2008.
The
significant components of goodwill and acquired intangible assets are as
follows:
(Dollars
in thousands)
|
|
Goodwill
|
|
|
Unidentifiable
Intangible
Assets
Resulting
From
Branch
Acquisitions
|
|
|
Other
Identifiable
Intangibles
|
|
|
Core
Deposit
Intangible
Assets
|
|
|
Total
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
77,694 |
|
|
$ |
17,854 |
|
|
$ |
8,301 |
|
|
$ |
9,716 |
|
|
$ |
113,565 |
|
Purchase
price adjustment
|
|
|
3,822 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
3,822 |
|
Impairment
losses
|
|
|
(4,159 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(4,159 |
) |
Accumulated
amortization*
|
|
|
(1,109 |
) |
|
|
(16,549 |
) |
|
|
(4,727 |
) |
|
|
(2,412 |
) |
|
|
(24,797 |
) |
Net
carrying amount
|
|
$ |
76,248 |
|
|
$ |
1,305 |
|
|
$ |
3,574 |
|
|
$ |
7,304 |
|
|
$ |
88,431 |
|
Weighted
average remaining life
|
|
|
|
|
|
|
0.8 |
|
|
|
5.7 |
|
|
|
5.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
13,603 |
|
|
$ |
17,854 |
|
|
$ |
7,959 |
|
|
$ |
0 |
|
|
$ |
39,416 |
|
Purchase
price adjustment
|
|
|
1,491 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,491 |
|
Acquired
during the year
|
|
|
62,600 |
|
|
|
0 |
|
|
|
342 |
|
|
|
9,716 |
|
|
|
72,658 |
|
Accumulated
amortization
|
|
|
(1,109 |
) |
|
|
(14,809 |
) |
|
|
(3,408 |
) |
|
|
(1,024 |
) |
|
|
(20,350 |
) |
Net
carrying amount
|
|
$ |
76,585 |
|
|
$ |
3,045 |
|
|
$ |
4,893 |
|
|
$ |
8,692 |
|
|
$ |
93,215 |
|
Weighted
average remaining life
|
|
|
|
|
|
|
1.7 |
|
|
|
5.9 |
|
|
|
6.3 |
|
|
|
|
|
*The
accumulated amortization in the table above reflects amortization of goodwill
prior to the adoption of SFAS 142.
The
changes in the carrying amount of goodwill by segment for the twelve months
ended December 31, 2008 and 2007 are as follows:
(Dollars
in thousands)
|
|
Community
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Investment
Management
|
|
|
Total
|
|
Balance
January 1, 2007
|
|
$ |
130 |
|
|
$ |
4,623 |
|
|
$ |
4,159 |
|
|
$ |
3,582 |
|
|
$ |
12,494 |
|
Purchase
price adjustment
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,491 |
|
|
|
1,491 |
|
Acquired
during the year
|
|
|
62,600 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
62,600 |
|
Balance
December 31, 2007
|
|
|
62,730 |
|
|
|
4,623 |
|
|
|
4,159 |
|
|
|
5,073 |
|
|
|
76,585 |
|
Purchase
price adjustment
|
|
|
(94 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
3,916 |
|
|
|
3,822 |
|
Impairment
losses
|
|
|
0 |
|
|
|
0 |
|
|
|
(4,159 |
) |
|
|
0 |
|
|
|
(4,159 |
) |
Balance
December 31, 2008
|
|
$ |
62,636 |
|
|
$ |
4,623 |
|
|
$ |
0 |
|
|
$ |
8,989 |
|
|
$ |
76,248 |
|
Future
estimated annual amortization expense is presented below:
(In thousands)
Year
|
|
Amount
|
|
2009
|
|
$ |
3,654 |
|
2010
|
|
|
1,958 |
|
2011
|
|
|
1,845 |
|
2012
|
|
|
1,845 |
|
2013
|
|
|
1,778 |
|
Later
years
|
|
|
1,103 |
|
Note
9 – Deposits
Deposits
outstanding at December 31 consist of:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Noninterest-bearing
deposits
|
|
$ |
461,517 |
|
|
$ |
434,053 |
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
243,986 |
|
|
|
254,878 |
|
Money
market savings
|
|
|
664,837 |
|
|
|
726,647 |
|
Regular
savings
|
|
|
146,140 |
|
|
|
153,964 |
|
Time
deposits of less than $100,000
|
|
|
477,148 |
|
|
|
416,601 |
|
Time
deposits of $100,000 or more
|
|
|
371,629 |
|
|
|
287,725 |
|
Total
interest-bearing deposits
|
|
|
1,903,740 |
|
|
|
1,839,815 |
|
Total
deposits
|
|
$ |
2,365,257 |
|
|
$ |
2,273,868 |
|
Interest
expense on time deposits of $100 thousand or more amounted to $12.7 million,
$14.8 million and $11.1 million for 2008, 2007, and 2006,
respectively.
The
following is a maturity schedule for time deposits maturing within years ending
December 31:
(In thousands)
Year
|
|
Amount
|
|
2009
|
|
$ |
617,978 |
|
2010
|
|
|
206,938 |
|
2011
|
|
|
6,432 |
|
2012
|
|
|
8,032 |
|
2013
|
|
|
9,396 |
|
Total
|
|
$ |
848,776 |
|
Note
10 – Short-term Borrowings
Information
relating to short-term borrowings is as follows for the years ended December
31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
At
Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$ |
345,968 |
|
|
|
3.63 |
% |
|
$ |
275,957 |
|
|
|
4.25 |
% |
|
$ |
215,350 |
|
|
|
4.35 |
% |
Retail
repurchase agreements
|
|
|
75,106 |
|
|
|
0.20 |
|
|
|
98,015 |
|
|
|
3.00 |
|
|
|
99,382 |
|
|
|
4.25 |
|
Total
|
|
$ |
421,074 |
|
|
|
3.02 |
|
|
$ |
373,972 |
|
|
|
3.92 |
% |
|
$ |
314,732 |
|
|
|
4.32 |
% |
Average
for the Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$ |
321,716 |
|
|
|
3.78 |
% |
|
$ |
209,974 |
|
|
|
4.47 |
% |
|
$ |
237,145 |
|
|
|
4.10 |
% |
Retail
repurchase agreements
|
|
|
88,214 |
|
|
|
1.18 |
|
|
|
109,353 |
|
|
|
3.92 |
|
|
|
174,150 |
|
|
|
4.11 |
|
Other
short-term borrowings
|
|
|
3 |
|
|
|
2.73 |
|
|
|
92 |
|
|
|
5.58 |
|
|
|
2,979 |
|
|
|
5.34 |
|
Maximum
Month-end Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
Home Loan Bank advances
|
|
$ |
406,965 |
|
|
|
|
|
|
$ |
275,957 |
|
|
|
|
|
|
$ |
252,350 |
|
|
|
|
|
Retail
repurchase agreements
|
|
|
101,666 |
|
|
|
|
|
|
|
122,130 |
|
|
|
|
|
|
|
236,427 |
|
|
|
|
|
Other
short-term borrowings
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
5,300 |
|
|
|
|
|
The
Company pledges U.S. Agencies and Corporations securities, based upon their
market values, as collateral for 102.5% of the principal and accrued interest of
its repurchase agreements.
The
Company has an available line of credit for $956.9 million with the Federal Home
Loan Bank of Atlanta (the "FHLB") under which its borrowings are limited to
$591.7 million based on pledged collateral at interest rates based upon current
market conditions, of which $412.5 million was outstanding at December 31,
2008. The Company also had lines of credit available from the Federal
Reserve of $514.4 million based on pledged collateral At
December 31, 2007, such lines of credit totaled $887.3 million under which
$649.2 million was available based on pledged collateral of which $293.5 million
was outstanding. Both short-term and long-term FHLB advances are
fully collateralized by pledges of loans. The Company has pledged,
under a blanket lien, qualifying residential mortgage loans amounting to $292.0
million, commercial loans amounting to $525.8 million, home equity lines of
credit (“HELOC”) amounting to $326.1 million and Multifamily loans amounting to
$19.5 million at December 31, 2008 as collateral under the borrowing agreement
with the FHLB. At December 31, 2007 the Company had pledged
collateral of qualifying mortgage loans of $282.6 million, commercial loans
amounting to $639.6 million, and HELOC loans amounting to $287.2 million under
the above borrowing agreement. The Company also had lines of credit
available from the Federal Reserve and correspondent banks of $574.4 million at
December 31, 2008, collateralized by loans and state and municipal securities.
At December 31, 2007, the Company had lines of credit available from the Federal
Reserve and correspondent banks of $140.8 million, collateralized by state and
municipal securities. In addition, the Company had an unsecured line of credit
with a correspondent bank of $20.0 million at December 31, 2008 and 2007. There
were no borrowings outstanding against this unsecured line at December 31, 2008
or 2007.
Note
11 – Long-term Borrowings
The
Company formed Sandy Spring Capital Trust II (“Capital Trust”) to facilitate
completion of a pooled placement issuance of $35.0 million of trust preferred
securities on August 10, 2004. Subordinated debentures on the
accompanying balance sheets reflect the subordinated debt instruments the
Company issued to Capital Trust and bear a 6.35% rate of interest until July 7,
2009 at which time the interest rate becomes a variable rate, adjusted
quarterly, equal to 225 basis points over the three month
Libor. These obligations of the Company are subordinated to all other
debt except other trust preferred subordinated, to which it may have equal
subordination. The borrowing has a maturity date of October 7, 2034,
and may be called by the Company no earlier than October 7, 2009.
The
Company had other long-term borrowings at December 31 as follows:
(In thousands)
|
|
2008
|
|
|
2007
|
|
FHLB
3.36% Advance due 2009
|
|
|
0 |
|
|
|
10,000 |
|
FHLB
4.34% Advance due 2010
|
|
|
1,809 |
|
|
|
2,094 |
|
FHLB
5.16% Advance due 2010
|
|
|
3,667 |
|
|
|
4,001 |
|
FHLB
3.22% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
3.23% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.98% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.89% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.84% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.80% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.70% Advance due 2010
|
|
|
10,000 |
|
|
|
0 |
|
FHLB
2.62% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.13% Advance due 2010
|
|
|
5,000 |
|
|
|
0 |
|
FHLB
2.45% Advance due 2010
|
|
|
10,000 |
|
|
|
0 |
|
FHLB
4.13% Advance due 2013
|
|
|
1,108 |
|
|
$ |
1,458 |
|
Total
other long-term borrowings
|
|
$ |
66,584 |
|
|
$ |
17,553 |
|
The
4.13%, 4.34% and 5.16% advances are principal reducing with monthly payments of
approximately $30 thousand, $65 thousand and $83 thousand,
respectively. Actual maturities may differ from contractual
maturities because the Company may elect to prepay obligations or the advances
may be called by the Federal Home Loan Bank.
The
following is a maturity schedule for long-term borrowings within the years
ending December 31:
|
|
Maturities
|
|
Year
|
|
(in
thousands)
|
|
2009
|
|
$ |
0 |
|
2010
|
|
|
65,826 |
|
2011
|
|
|
350 |
|
2012
|
|
|
350 |
|
2013
|
|
|
58 |
|
Total
|
|
$ |
66,584 |
|
Note
12 – Stockholders’ Equity
The
Company’s Articles of Incorporation authorize 50,000,000 shares of capital stock
(par value $1.00 per share). Issued shares have been classified as
common stock. The Articles of Incorporation provide that remaining
unissued shares may later be designated as either common or preferred
stock.
On
December 5, 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Letter Agreement, and
the related Securities Purchase Agreement – Standard Terms (collectively, the
“Purchase Agreement”) , with the United States Department of the Treasury
(“Treasury”), pursuant to which the Company issued (i) 83,094 shares of Fixed
Rate Cumulative Perpetual Preferred Stock, Series A, liquidation preference
$1,000 per share (“Series A preferred stock”), and (ii) a warrant to purchase
651,547 shares of the Company’s common stock, par value $1.00 per share, for an
aggregate purchase price of $83,094,000 in cash.
The
Series A preferred stock qualifies as Tier 1 capital and pays cumulative
dividends at a rate of 5% per annum until February 15, 2014. Beginning
February16, 2014, the dividend rate will increase to 9% per annum. On and after
February 15, 2012, the Company may, at its option, redeem shares of Series A
preferred stock, in whole or in part at any time and from time to time, for cash
at a per share amount equal to the sum of the liquidation preference per share
plus any accrued and unpaid dividends to date but excluding the redemption date.
Prior to February 15, 2012, the company may redeem shares of Series A preferred
stock only if it has received aggregate gross proceeds of not less
than $20,773,500 from one or more qualified equity offerings, and the aggregate
redemption price may not exceed the net proceeds received by the Company from
such offerings. The redemption of the Series A preferred stock requires prior
regulatory approval. The restrictions on redemption are set forth in the
Articles Supplementary to the Company’s Articles of Incorporation. The recently
enacted American Recovery and Reinvestment Act of 2009 permits the Company to
redeem the Series A preferred stock without regard to the limitations in the
Articles Supplementary.
The
warrants are exercisable at $19.13 per share at any time on or before December
5, 2018. The number of shares of common stock issuable upon exercise of the
warrant and the exercise price per share will be adjusted if specific events
occur. The Treasury has agreed not to exercise voting power with respect to any
shares of common stock issued upon exercise of the warrant.
The
Purchase Agreement also subjects the Company to certain of the executive
compensation limitations included in the Emergency Economic Stabilization Act of
2008 (the “EESA”). As a condition to the closing of the transaction, the
Company’s Senior Executive Officers, as defined in the Purchase Agreement each:
(i) voluntarily waived any claim against the Treasury or the Company for any
change to such Senior Executive Officer’s compensation or benefits that are
required to comply with he regulation issued by the Treasury under the TARP
Capital Purchase Program as published in the Federal Register on October 20,
2008 and acknowledging that the regulation may require modification of the
compensation, bonus incentive and other benefit plans, arrangements and policies
and agreements ( including so-called “golden parachute” agreements) as they
related to the period the Treasury holds any equity or debt securities of the
Company acquired through the TARP Capital Purchase Program; and (ii) entered
into an amendment to the Senior Executive Officer’s employment agreement that
provides that any severance payments made to the Senior Executive Officer will
be reduced, as necessary, so as to comply with the requirements of the TARP
Capital Purchase Program.
Pursuant
to the terms of the Purchase Agreement, prior to the earlier of (i) December 5,
2011 or (ii) the date on which the Series A preferred stock has been redeemed in
full or Treasury has transferred all of the Series A preferred stock to
non-affiliates, the Company cannot increase its quarterly cash dividend above
$0.24 per share or repurchase any shares of its common stock or other capital
stock or equity securities or trust preferred securities without the consent of
the Treasury.
In
addition, pursuant to the Articles Supplementary, so long as any shares of
Series A preferred stock remain outstanding, the Company may not declare or pay
any dividends or distributions on the Company’s common stock or any class or
series of the Company’s equity securities ranking junior, as to dividends and
upon liquidation, to the Series A preferred stock (“junior stock”) (other than
dividends payable solely in shares of common stock) or any other class or series
of the Company’s equity securities ranking, as to dividends and upon
liquidation, on a parity with the Series A preferred stock (“parity stock”), and
may not repurchase or redeem any common stock, junior stock or parity stock,
unless all accrued and unpaid dividends for past dividend periods, including the
latest completed dividend period, have been paid or have been declared and a
sufficient sum has been set aside for the benefit of the holders of the Series A
preferred stock.
The
Company has a director stock purchase plan (the “Director Plan”) which commenced
on May 1, 2004. Under the Director Plan, members of the board of
directors may elect to use a portion (minimum 50%) of their annual retainer fee
to purchase shares of Company stock. The Company has reserved 15,000
authorized but unissued shares of common stock for purchase under the
plan. Purchases are made at the fair market value of the stock on the
purchase date. At December 31, 2008, there were 5,925 shares
available for issuance under the plan.
The
Company has an employee stock purchase plan (the “Purchase Plan”) which
commenced on July 1, 2001, with consecutive monthly offering periods
thereafter. The Company has reserved 450,000 authorized but unissued
shares of common stock for purchase under the plan. Shares are
purchased at 85% of the fair market value on the exercise date through monthly
payroll deductions of not less than 1% or more than 10% of cash compensation
paid in the month. The Purchase Plan is administered by a committee
of at least three directors appointed by the board of directors. At
December 31, 2008, there were 295,450 shares available for issuance under this
plan.
In 2007,
the Company’s board of directors renewed a Stock Repurchase Plan by authorizing
the repurchase of up to 5% or approximately 786,000 shares of the Company's
outstanding common stock, par value $1.00 per share, in connection with shares
expected to be issued under the Company's stock option and employee benefit
plans, and for other corporate purposes. The share repurchases are expected to
be made primarily on the open market periodically until March 31, 2009, or
earlier termination of the repurchase program by the
board. Repurchases will be made at the discretion of management based
upon market, business, legal, accounting and other factors. As a result of
participating in the TARP Capital Purchase Program, until December 5, 2011, the
Company may not repurchase any shares of its common stock, other than in
connection with the administration of an employee benefit plan, without the
consent of the Treasury Department. The Company purchased the equivalent of
70,500 shares of its common stock under a prior share repurchase program, which
expired on March 31, 2007. No shares were repurchased during 2008. The Company
has purchased 156,249 shares under the current share repurchase program through
December 31, 2007. Share repurchases under this plan are limited by certain
restrictions imposed due to the issuance of the Series A preferred stock
mentioned above.
The
Company has an Investors Choice Plan (the “Plan”), which is sponsored and
administered by the American Stock Transfer and Trust Company (“AST”) as
independent agent, which enables current shareholders as well as first-time
buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly
through AST at low commissions. Participants may reinvest cash
dividends and make periodic supplemental cash payments to purchase additional
shares.
Bank and
holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At December
31, 2008, the Bank could have paid additional dividends of $8.2 million to its
parent company without regulatory approval. In conjunction with the
Company’s long-term borrowing from Capital Trust, the Bank issued a note to
Bancorp for $35.0 million which was outstanding at December 31, 2008. There were
no other loans outstanding between the Bank and the Company at December 31, 2008
or December 31, 2007.
Note
13 – Stock Based Compensation
At
December 31, 2008, the Company had two stock-based compensation plans in
existence, the 1999 stock option plan (expired but having outstanding options
that may still be exercised) and the 2005 Omnibus Stock Plan, which is described
below.
The
Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of
non-qualifying stock options and restricted stock to the Company’s directors,
and incentive and non-qualifying stock options, stock appreciation rights and
restricted stock grants to selected key employees on a periodic basis at the
discretion of the board. The Omnibus Plan authorizes the issuance of
up to 1,800,000 shares of common stock of which 1,296,853 are available for
issuance at December 31, 2008. It has a term of ten years, and is administered
by a committee of at least three independent directors. Options
granted under the plan have an exercise price which may not be less than 100% of
the fair market value of the common stock on the date of the grant and must be
exercised within seven to ten years from the date of grant. The
exercise price of stock options must be paid for in full in cash or shares of
common stock, or a combination of both. The Stock Option Committee
has the discretion, when making a grant of stock options, to impose restrictions
on the shares to be purchased in exercise of such
options. Outstanding options granted under the expired 1999 stock
option plan will continue until exercise or expiration.
Options
awarded prior to December 15, 2005 vest in equal increments over a two-year
period, with one third vesting immediately upon grant. Effective
October 19, 2005, the board of directors approved the acceleration, by one year,
of the vesting of the then outstanding options to purchase approximately 66,000
shares of the Company’s common stock granted in December 2004. These
included options held by certain members of senior management. This
effectively reduced the two-year vesting period on these options to one
year. The amount that would have been expensed for such unvested
options in 2006 had the Company not accelerated the vesting would have been
approximately $0.4 million. Additionally, stock options granted in
2004 have a ten year life. The other terms of the option grants
remain unchanged.
The board
of directors approved the granting of stock options totaling 116,360 in 2008 and
3,750 shares in 2007. The options are subject to a three year vesting schedule
with one third of the options vesting each year on the anniversary date of the
respective grants. In addition, the board of directors granted
restricted shares totaling 28,675 shares in 2008 and 750 shares in 2007. The
restricted shares are subject to vesting schedules ranging from three to five
years with the appropriate portion of the shares vesting each year on the
anniversary date of the respective grants. Compensation expense is recognized on
a straight-line basis over the stock option or restricted stock vesting
period. The fair value based method for expense recognition of
employee awards resulted in expense of approximately $0.8 million and $1.1
million, net of a tax benefits of approximately $0.1 million and $0.6 million
for the years ended December 31, 2008 and 2007, respectively.
The fair
values of all of the options granted during the last three years have been
estimated using a binomial option-pricing model with the following
weighted-average assumptions as of December 31:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Dividend
yield
|
|
|
3.42 |
% |
|
|
3.12 |
% |
|
|
2.43 |
% |
Weighted
average expected volatility
|
|
|
19.65 |
% |
|
|
26.71 |
% |
|
|
19.12 |
% |
Weighted
average risk-free interest rate
|
|
|
2.88 |
% |
|
|
4.35 |
% |
|
|
4.75 |
% |
Weighted
average expected lives (in years)
|
|
|
6 |
|
|
|
7 |
|
|
|
6 |
|
Weighted
average grant-date fair value
|
|
$ |
4.47 |
|
|
$ |
7.50 |
|
|
$ |
8.14 |
|
The
dividend yield is based on estimated future dividend yields. The
risk-free rate for periods within the contractual term of the share option is
based on the U.S. Treasury yield curve in effect at the time of the
grant. Expected volatilities are generally based on historical
volatilities. The expected term of share options granted is generally
derived from historical experience.
The total
intrinsic value of options exercised during the year ended December 31, 2008 and
2007 was $0.2 million and $1.1 million, respectively. The number of options,
exercise prices, and fair values has been retroactively restated for all stock
dividends, if any, occurring since the date the options were
granted. The Company generally issues authorized but previously
unissued shares to satisfy option exercises.
The total
of unrecognized compensation cost related to stock options was approximately
$0.4 million as of December 31, 2008. That cost is expected to be
recognized over a weighted average period of approximately 2.0
years.
The
following is a summary of changes in shares under option for the years ended
December 31:
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Aggregate
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
Intrinsic
|
|
|
Of
|
|
|
Exercise
|
|
|
Of
|
|
|
Exercise
|
|
|
Of
|
|
|
Exercise
|
|
|
|
Value
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Balance,
beginning of year
|
|
|
|
|
|
996,365 |
|
|
$ |
33.72 |
|
|
|
1,032,585 |
|
|
$ |
33.77 |
|
|
|
1,004,473 |
|
|
$ |
33.08 |
|
Options
(at fair value) related to option plans
of acquired companies
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
77,811 |
|
|
|
18.87 |
|
|
|
— |
|
|
|
— |
|
Granted
|
|
|
|
|
|
116,360 |
|
|
|
27.96 |
|
|
|
3,750 |
|
|
|
28.87 |
|
|
|
105,623 |
|
|
|
37.40 |
|
Forfeited
or Expired
|
|
|
|
|
|
(122,158 |
) |
|
|
27.05 |
|
|
|
(39,517 |
) |
|
|
36.58 |
|
|
|
(41,510 |
) |
|
|
37.73 |
|
Exercised
|
|
|
|
|
|
(16.837 |
) |
|
|
16.55 |
|
|
|
(78,264 |
) |
|
|
17.48 |
|
|
|
(36,001 |
) |
|
|
20.53 |
|
Balance,
end of year
|
|
$ |
610,055 |
|
|
|
973,730 |
|
|
$ |
33.47 |
|
|
|
996,365 |
|
|
$ |
33.72 |
|
|
|
1,032,585 |
|
|
$ |
33.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
exercisable at year-end
|
|
$ |
610,055 |
|
|
|
839,720 |
|
|
$ |
33.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options granted during the year
|
|
|
|
|
|
|
|
|
|
$ |
4.47 |
|
|
|
|
|
|
$ |
7.50 |
|
|
|
|
|
|
$ |
8.14 |
|
The
following table summarizes information about options outstanding at December 31,
2008:
|
|
Options
Outstanding
|
|
Exercisable
Options
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
|
|
|
|
Weighted
|
Range
of
|
|
Outstanding
|
|
Contracted
Life
|
|
Average
|
|
Exercisable
|
|
Average
|
Exercise
Price
|
|
Number
|
|
(in
years)
|
|
Exercise
Price
|
|
Number
|
|
Exercise
Price
|
$14.54-$20.69
|
|
|
100,490 |
|
|
2.8 |
|
$ |
15.76 |
|
|
100,490 |
|
$ |
15.76 |
$27.96-$32.25
|
|
|
288,821 |
|
|
4.8 |
|
|
30.31 |
|
|
181,162 |
|
|
31.67 |
$37.40-$38.91
|
|
|
584,419 |
|
|
4.9 |
|
|
38.16 |
|
|
558,068 |
|
|
38.20 |
|
|
|
973,730 |
|
|
4.7 |
|
|
33.47 |
|
|
839,720 |
|
|
33.72 |
A summary
of the status of the Company’s restricted stock as of December 31, 2008, is
presented below:
|
|
Number
|
|
|
Weighted
Average
|
|
|
|
Of
Shares
|
|
|
Grant-Date
Fair Value
|
|
Restricted
stock at January 1, 2008
|
|
|
24,746 |
|
|
$ |
37.14 |
|
Granted
|
|
|
28,675 |
|
|
|
27.96 |
|
Vested
|
|
|
(5,730 |
) |
|
|
37.03 |
|
Forfeited
|
|
|
(6,489 |
) |
|
|
33.95 |
|
Restricted
stock at December 31, 2008
|
|
|
41,202 |
|
|
|
31.27 |
|
The total
of unrecognized compensation cost related to restricted stock was approximately
$1.0 million as of December 31, 2008. That cost is expected to be
recognized over a weighted period of approximately 3.8 years.
Note
14 – Pension, Profit Sharing, and Other Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all employees. Benefits after January 1, 2005, are based on the
benefit earned as of December 31, 2004, plus benefits earned in future years of
service based on the employee’s compensation during each such year. On November
14, 2007, the Company informed employees that the plan would be frozen for new
and existing entrants after December 31, 2007. All benefit accruals for
employees were frozen as of December 31, 2007 based on past service and thus
future salary increases and additional years of service will no longer affect
the defined benefit provided by the plan although additional vesting may
continue to occur.
The
Company's funding policy is to contribute amounts to the plan sufficient to meet
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 (“ERISA”), as amended. In addition, the Company contributes additional
amounts as it deems appropriate based on benefits attributed to service prior to
the date of the plan freeze. The Plan invests primarily in a diversified
portfolio of managed fixed income and equity funds.
The
Plan's funded status as of December 31 is as follows:
(In thousands)
|
|
2008
|
|
|
2007
|
|
Reconciliation
of Projected Benefit Obligation:
|
|
|
|
|
|
|
Projected
obligation at January 1
|
|
$ |
22,942 |
|
|
$ |
22,055 |
|
Service
cost
|
|
|
0 |
|
|
|
1,315 |
|
Interest
cost
|
|
|
1,421 |
|
|
|
1,337 |
|
Actuarial
loss
|
|
|
456 |
|
|
|
734 |
|
Curtailment
|
|
|
0 |
|
|
|
(2,322 |
) |
Increase/(decrease)
due to amendments during the year
|
|
|
0 |
|
|
|
0 |
|
Increase/(decrease)
due to discount rate change
|
|
|
4,429 |
|
|
|
0 |
|
Benefit
payments
|
|
|
(737 |
) |
|
|
(177 |
) |
Projected
obligation at December 31
|
|
|
28,511 |
|
|
|
22,942 |
|
Reconciliation
of Fair Value of Plan Assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
|
23,799 |
|
|
|
20,192 |
|
Actual
return on plan assets
|
|
|
(2,488 |
) |
|
|
2,384 |
|
Employer
contributions
|
|
|
4,400 |
|
|
|
1,400 |
|
Benefit
payments
|
|
|
(738 |
) |
|
|
(177 |
) |
Fair
value of plan assets at December 31
|
|
|
24,973 |
|
|
|
23,799 |
|
|
|
|
|
|
|
|
|
|
Funded
status at December 31
|
|
$ |
(3,538 |
) |
|
$ |
857 857 |
|
|
|
|
|
|
|
|
|
|
Unrecognized
prior service cost (benefit)
|
|
$ |
0 |
|
|
$ |
(1,589 |
) |
Unrecognized
net actuarial loss
|
|
|
13,362 |
|
|
|
5,078 |
|
Net
periodic pension cost not yet recognized
|
|
$ |
(13,362 |
) |
|
$ |
(3,489 |
) |
Accumulated
benefit obligation at December 31
|
|
$ |
28,511 |
|
|
$ |
22,942 |
|
Net
periodic benefit cost for the previous three years includes the following
components:
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Service
cost for benefits earned
|
|
$ |
0 |
|
|
$ |
1,315 |
|
|
$ |
1,105 |
|
Interest
cost on projected benefit obligation
|
|
|
1,421 |
|
|
|
1,337 |
|
|
|
1,230 |
|
Expected
return on plan assets
|
|
|
(1,304 |
) |
|
|
(1,508 |
) |
|
|
(1,377 |
) |
Amortization
of prior service cost
|
|
|
(1,589 |
) |
|
|
(175 |
) |
|
|
(175 |
) |
Recognized
net actuarial loss
|
|
|
393 |
|
|
|
512 |
|
|
|
445 |
|
Net
periodic benefit cost
|
|
$ |
(1,079 |
) |
|
$ |
1,481 |
|
|
$ |
1,228 |
|
The
following shows the amounts recognized in accumulated other comprehensive income
as of the beginning of the fiscal year, the amount arising during the year, the
adjustment due to being recognized as a component of net periodic benefit cost
during the year, and the amount remaining to be recognized and therefore a part
of accumulated other comprehensive income (loss) as of December 31,
2008:
(In thousands)
|
|
Prior Service
Cost
|
|
|
Net Gain/(Loss)
|
|
Included in
accumulated other comprehensive income (loss) as of January 1,
2006
|
|
$ |
(1,157 |
) |
|
$ |
8,581 |
|
Additions
during the year
|
|
|
(782 |
) |
|
|
(83 |
) |
Reclassifications
due to recognition as net periodic pension cost
|
|
|
175 |
|
|
|
(445 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2006
|
|
|
(1,764 |
) |
|
|
8,053 |
|
Net
gain due to plan curtailment
|
|
|
0 |
|
|
|
(2,322 |
) |
Additions
during the year
|
|
|
0 |
|
|
|
(142 |
) |
Reclassifications
due to recognition as net periodic pension cost
|
|
|
175 |
|
|
|
(511 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2007
|
|
$ |
(1,589 |
) |
|
$ |
5,078 |
|
Additions
during the year
|
|
|
0 |
|
|
|
4,248 |
|
Increase
due to change in discount rate assumption
|
|
|
0 |
|
|
|
4,429 |
|
Reclassifications
due to recognition as net periodic pension cost
|
|
|
1,589 |
|
|
|
(393 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2008
|
|
$ |
0 |
|
|
$ |
13,362 |
|
Applicable
tax effect
|
|
|
0 |
|
|
|
(5,329 |
) |
Included
in accumulated other comprehensive income(loss) net of tax effect
as
of December 31, 2008
|
|
$ |
0 |
|
|
$ |
8,033 |
|
|
|
|
|
|
|
|
|
|
Amount
expected to be recognized as part of net periodic pension cost in the next
fiscal year
|
|
$ |
0 |
|
|
$ |
1,342 |
|
There are
no plan assets expected to be returned to the employer in the next twelve
months.
The
following items have not yet been recognized as a component of net periodic
benefit cost as December 31, 2009, 2008 and 2007, respectively:
(In thousands):
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Prior
service cost
|
|
$ |
0 |
|
|
$ |
1,415 |
|
|
$ |
1,589 |
|
Net
actuarial loss
|
|
|
(13,362 |
) |
|
|
(4,806 |
) |
|
|
(5,078 |
) |
Net
periodic benefit cost not yet recognized
|
|
$ |
(13,362 |
) |
|
$ |
(3,391 |
) |
|
$ |
(3,489 |
) |
Additional
Information
Weighted-average
assumptions used to determine benefit obligations at December 31 are as
follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
5.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
4.00 |
% |
|
|
4.00 |
% |
Weighted-average
assumptions used to determine net periodic benefit cost for years ended December
31 are as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Discount
rate
|
|
|
6.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected
return on plan assets
|
|
|
5.50 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
4.00 |
% |
|
|
4.00 |
% |
The
expected rate of return on assets of 5.50% reflects the Plan’s predominant
investment of assets in cash and debt type securities and an analysis of the
average rate of return of the S&P 500 index and the Lehman Brothers
Gov’t/Corp. index over the past 10 years.
Plan
Assets
The
Company’s pension plan weighted-average allocations at December 31, 2008 and
2007, by asset category are as follows:
Asset
Category
|
|
2008
|
|
|
2007
|
|
Equity
securities
|
|
|
18.1 |
% |
|
|
47.9 |
% |
Debt
securities
|
|
|
25.6 |
% |
|
|
27.6 |
% |
Cash,
other
|
|
|
56.3 |
% |
|
|
24.5 |
% |
Total
|
|
|
100.0 |
% |
|
|
100.0 |
% |
The
Company has a written investment policy approved by the board of directors that
governs the investment of the defined benefit pension fund trust
portfolio. The investment policy is designed to provide limits on
risk that is undertaken by the investment managers both in terms of market
volatility of the portfolio and the quality of the individual assets that are
held in the portfolio. The investment policy statement focuses on the
following areas of concern: preservation of capital, diversification, risk
tolerance, investment duration, rate of return, liquidity and investment
management costs. Market volatility risk is controlled by limiting
the asset allocation of the most volatile asset class, equities, to no more than
70% of the portfolio; and ensuring that there is sufficient liquidity to meet
distribution requirements from the portfolio without disrupting long-term
assets. Diversification of the equity portion of the portfolio is
controlled by limiting the value of any initial acquisition so that it does not
exceed 5% of the market value of the portfolio when purchased. The
policy requires the sale of any portion of an equity position when its value
exceeds 10% of the portfolio. Fixed income market volatility risk is
managed by limiting the term of fixed income investments to five
years. Fixed income investments must carry an “A” or better rating by
a recognized credit rating agency. Corporate debt of a single issuer
may not exceed 10% of the market value of the portfolio. The
investment in derivative instruments such as “naked” call options, futures,
commodities, and short selling is prohibited. Investment in equity
index funds and the writing of “covered” call options (a conservative strategy
to increase portfolio income) are permitted. Foreign currencies
denominated debt instruments are not permitted. Investment
performance is measured against industry accepted benchmarks. The
risk tolerance and asset allocation limitations imposed by the policy are
consistent with attaining the rate of return assumptions used in the actuarial
funding calculations. A Retirement Plan Investment Committee meets
quarterly to review the activities of the investment managers to ensure
adherence with the investment policy statement.
Contributions
The
Company, with input from its actuaries, estimates that the 2009 contribution
will be approximately $4.0 million.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
Year
|
|
Pension Benefits
(in thousands)
|
|
2009
|
|
$ |
417 |
|
2010
|
|
|
482 |
|
2011
|
|
|
573 |
|
2012
|
|
|
784 |
|
2013
|
|
|
954 |
|
2014-2018
|
|
|
7,069 |
|
Cash
and Deferred Profit Sharing Plan
The Sandy
Spring Bancorp, Inc. Cash and Deferred Profit Sharing Plan includes a 401(k)
provision with a Company match. Effective January 1, 2007 the Company
revised the Plan to eliminate the deferral option and require an all-cash payout
of any profit sharing distributions beginning in 2007. The 401(k)
provision is voluntary and covers all eligible employees after ninety days of
service. Employees contributing to the 401(k) provision receive a
matching contribution of 100% of the first 3% of compensation and 50% of the
next 2% of compensation subject to employee contribution
limitations. The Company match vests immediately. The Plan
permits employees to purchase shares of Sandy Spring Bancorp, Inc. common stock
with their 401(k) contributions, Company match, and other contributions under
the Plan. Profit sharing contributions and Company match are included
in noninterest expenses and totaled $1.4 million in 2008, $1.5 million in 2007,
and $1.4 million in 2006.
The
Company also had a performance based compensation benefit in 2007 that at one
time was integrated with the Cash and Deferred Profit Sharing Plan and provided
incentives to employees based on the Company's financial results as measured
against key performance indicator goals set by management. Payments were made
annually and amounts included in noninterest expense under the plan amounted to
$0.2 million in 2007 and $2.3 million in 2006. For 2008, this
incentive plan has been replaced with a new short-term incentive plan named the
Sandy Spring Leadership Incentive Plan. It provides a cash bonus to
key members of management based on the Company's financial results using a
weighted formula. Noninterest expense related to this plan amounted to $0.2
million in 2008.
Executive
Incentive Retirement Plan
In past
years, the Company had Supplemental Executive Retirement Agreements ("SERAs")
with its executive officers providing for retirement income benefits as well as
pre-retirement death benefits. Retirement benefits payable under the SERAs, if
any, were integrated with other pension plan and Social Security retirement
benefits expected to be received by the executive. The Company accrued the
present value of these benefits over the remaining number of years to the
executives' retirement dates. Effective January 1, 2008, these agreements were
replaced with a defined contribution plan, the “Executive Incentive Retirement
Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as
of December 31, 2007, and those amounts accrued were transferred to the new plan
on behalf of each participant. Additionally, under the new Plan, officers
designated by the board of directors earn a deferral bonus which is accrued
annually based on the Company’s financial performance compared to a selected
group of peer banks. For current participants, accruals after January 1, 2008
vest immediately. Amounts transferred to the Plan from the SERAs on
behalf of each participant continue to vest based on years of
service. Benefit costs related to the Plan included in noninterest
expenses for 2008, 2007 and 2006 were $0.4 million, $0.9 million, and $1.0
million, respectively.
Executive
Health Reimbursement Plan
In past
years, the Company had an Executive Health Reimbursement 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 a credit to
expense in 2007 of $0.4 million. Currently retired executives that formerly
retired under this plan will continue to receive this benefit. There was no
expense recorded for this plan in 2008.
Note
15 – Income Taxes
Income
tax expense for the years ended December 31 consists of:
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Current
Income Taxes:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
11,404 |
|
|
$ |
13,178 |
|
|
$ |
11,793 |
|
State
|
|
|
2,755 |
|
|
|
2,514 |
|
|
|
2,082 |
|
Total
current
|
|
|
14,159 |
|
|
|
15,692 |
|
|
|
13,875 |
|
Deferred
Income Taxes (benefits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(8,593 |
) |
|
|
(2,003 |
) |
|
|
(845 |
) |
State
|
|
|
(1,924 |
) |
|
|
(718 |
) |
|
|
(141 |
) |
Total
deferred
|
|
|
(10,517 |
) |
|
|
(2,721 |
) |
|
|
(986 |
) |
Total
income tax expense
|
|
$ |
3,642 |
|
|
$ |
12,971 |
|
|
$ |
12,889 |
|
Temporary
differences between the amounts reported in the financial statements and the tax
bases of assets and liabilities result in deferred taxes. Deferred tax assets
and liabilities, shown as the sum of the appropriate tax effect for each
significant type of temporary difference, are presented below for the years
ended December 31:
(In thousands)
|
|
2008
|
|
|
2007
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$ |
20,152 |
|
|
$ |
10,009 |
|
Loan
and deposit premium/discount
|
|
|
775 |
|
|
|
997 |
|
Intangible
assets
|
|
|
0 |
|
|
|
0 |
|
Employee
benefits
|
|
|
2,518 |
|
|
|
3,002 |
|
Pension
plan OCI
|
|
|
5,328 |
|
|
|
1,391 |
|
Unrealized
losses on investments available for sale
|
|
|
0 |
|
|
|
0 |
|
Non-qualified
stock option expense
|
|
|
296 |
|
|
|
149 |
|
Other
|
|
|
228 |
|
|
|
424 |
|
Gross
deferred tax assets
|
|
|
29,297 |
|
|
|
15,972 |
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(549 |
) |
|
|
(953 |
) |
Intangible
assets
|
|
|
(286 |
) |
|
|
(2,777 |
) |
Deferred
loan fees and costs
|
|
|
(741 |
) |
|
|
(1,098 |
) |
Unrealized
gains on investments available for sale
|
|
|
(306 |
) |
|
|
(691 |
) |
Bond
accretion
|
|
|
(336 |
) |
|
|
(396 |
) |
Pension
plan costs
|
|
|
(3,917 |
) |
|
|
(1,733 |
) |
Other
|
|
|
(1 |
) |
|
|
(3 |
) |
Gross
deferred tax liabilities
|
|
|
(6,136 |
) |
|
|
(7,651 |
) |
Net
deferred tax asset
|
|
$ |
23,161 |
|
|
$ |
8,321 |
|
No
valuation allowance exists with respect to deferred tax items.
A
three-year reconcilement of the difference between the statutory federal income
tax rate and the effective tax rate for the Company is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Federal
income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
exempt income, net
|
|
|
(19.5 |
) |
|
|
(9.1 |
) |
|
|
(9.7 |
) |
State
income taxes, net of federal income tax benefits
|
|
|
2.8 |
|
|
|
3.0 |
|
|
|
2.9 |
|
State
tax rate change on deferred tax assets
|
|
|
0 |
|
|
|
(0.4 |
) |
|
|
0 |
|
Other,
net
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
0 |
|
Effective
tax rate
|
|
|
18.8 |
% |
|
|
28.7 |
% |
|
|
28.2 |
% |
Note
16 – Net Income per Common Share
The
calculation of net income per common share for the years ended December 31 is as
follows:
(In
thousands, except per share and per common share data)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
15,779 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Net
income available to common stockholders
|
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Average
common shares outstanding
|
|
|
16,373 |
|
|
|
16,015 |
|
|
|
14,801 |
|
Basic
net income per share
|
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
Basic
net income per common share
|
|
$ |
0.94 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common stockholders
|
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Average
common shares outstanding
|
|
|
16,373 |
|
|
|
16,015 |
|
|
|
14,801 |
|
Stock
option adjustment
|
|
|
49 |
|
|
|
72 |
|
|
|
126 |
|
Warrant
adjustment
|
|
|
7 |
|
|
|
0 |
|
|
|
0 |
|
Average
common shares outstanding-diluted
|
|
|
16,429 |
|
|
|
16,087 |
|
|
|
14,927 |
|
Diluted
net income per share
|
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.20 |
|
Diluted
net income per common share
|
|
$ |
0.94 |
|
|
$ |
2.01 |
|
|
$ |
2.20 |
|
As of
December 31, 2008 options for 873,240 shares of common stock were not included
in computing diluted net income per share because their effects were
anti-dilutive.
Note
17 – Related Party Transactions
Certain
directors and executive officers have loan transactions with the Company. Such
loans were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with outsiders. The following schedule summarizes
changes in amounts of loans outstanding, both direct and indirect, to these
persons during the years indicated.
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Balance
at January 1
|
|
$ |
25,708 |
|
|
$ |
38,342 |
|
Additions
|
|
|
2,156 |
|
|
|
3,300 |
|
Repayments
|
|
|
(1,106 |
) |
|
|
(15,934 |
) |
Balance
at December 31
|
|
$ |
26,758 |
|
|
$ |
25,708 |
|
Note
18 – Financial Instruments with Off-balance Sheet Risk and
Derivatives
In the
normal course of business, the Company has various outstanding credit
commitments that are properly not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Company's clients.
The associated credit risk is controlled by subjecting such activity to the same
credit and quality controls as exist for the Company's lending and investing
activities. The commitments involve diverse business and consumer customers and
are generally well collateralized. Collateral held varies, but may
include residential real estate, commercial real estate, property and equipment,
inventory and accounts receivable. Management does not anticipate
that losses, if any, which may occur as a result of these commitments, would
materially affect the stockholders' equity of the Company. Since a portion of
the commitments have some likelihood of not being exercised, the amounts do not
necessarily represent future cash requirements. A summary of the
financial instruments with off-balance sheet credit risk is as follows at
December 31:
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Commitments
to extend credit and available credit lines:
|
|
|
|
|
|
|
Commercial
|
|
$ |
96,026 |
|
|
$ |
98,930 |
|
Real
estate-development and construction
|
|
|
58,132 |
|
|
|
82,498 |
|
Real
estate-residential mortgage
|
|
|
26,308 |
|
|
|
2,955 |
|
Lines
of credit, principally home equity and business lines
|
|
|
614,090 |
|
|
|
665,778 |
|
Standby
letters of credit
|
|
|
64,856 |
|
|
|
55,280 |
|
|
|
$ |
859,412 |
|
|
$ |
905,441 |
|
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify as
derivatives, but are not designated as hedging instruments. Interest rate swap
contracts involve the risk of dealing with counterparties and their ability to
meet contractual terms. When the fair value of a derivative instrument contract
is positive, this generally indicates that the counterparty or customer owes the
Company, and results in credit risk to the Company. When the fair value of a
derivative instrument contract is negative, the Company owes the customer or
counterparty and therefore, has no credit risk.
A summary
of the Company’s interest rate swaps is included in the following
table:
|
|
As of December 31, 2008
|
|
(in thousands)
|
|
Weighted Average
|
|
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Years to
Maturity
|
|
|
Receive Rate
|
|
|
Pay
Rate
|
|
Interest
Rate Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
Fixed/Receive Variable Swaps
|
|
$ |
4,141 |
|
|
$ |
307 |
|
|
|
2.3 |
|
|
|
2.84
|
% |
|
|
7.39
|
% |
Pay
Variable/Receive Fixed Swaps
|
|
|
4.141 |
|
|
|
(307
|
) |
|
|
2.3 |
|
|
|
7.39 |
|
|
|
2.84 |
|
Total
Swaps
|
|
$ |
8,282 |
|
|
$ |
0 |
|
|
|
2.3 |
|
|
|
5.12
|
% |
|
|
5.12
|
% |
|
|
As of December 31, 2007
|
|
(in thousands)
|
|
Weighted Average
|
|
|
|
Notional
Amount
|
|
|
Estimated
Fair Value
|
|
|
Years to
Maturity
|
|
|
Receive Rate
|
|
|
Pay
Rate
|
|
Interest
Rate Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
Fixed/Receive Variable Swaps
|
|
$ |
3,153 |
|
|
$ |
74 |
|
|
|
2.7 |
|
|
|
7.00
|
% |
|
|
7.47
|
% |
Pay
Variable/Receive Fixed Swaps
|
|
|
3,153 |
|
|
|
(74
|
) |
|
|
2.7 |
|
|
|
7.47 |
|
|
|
7.00 |
|
Total
Swaps
|
|
$ |
6,306 |
|
|
$ |
0 |
|
|
|
2.7 |
|
|
|
7.24
|
% |
|
|
7.24
|
% |
Note
19 – Litigation
In the
normal course of business, the Company becomes involved in litigation arising
from the banking, financial, and other activities it conducts. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
Note
20 – Fair Value
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 liabilities 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.
The
Company adopted SFAS No. 159 as of January 1, 2008 and elected the fair value
option for residential mortgage loans held for sale. The Company
believes by electing the fair value option on residential mortgage loans held
for sale, it will allow the accounting for gains on sale of residential 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 year ended December 31, 2008.
Valuation
Methodologies and Fair Value Heirarchy
As
discussed in Note 1, the Company adopted SFAS No. 157, “Fair Value Measurements”
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 of the fair value hierarchy. 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.
Assets
Measured at Fair Value on a Recurring Basis
The
following table sets forth the Company’s financial assets and liabilities that
were accounted for at fair value on a recurring basis. 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
December 31,
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Mortgage loans held for sale
|
|
$ |
- |
|
|
$ |
11,391 |
|
|
$ |
- |
|
|
$ |
11,391 |
|
Investment
securities, available for sale
|
|
|
- |
|
|
|
288,573 |
|
|
|
3,154 |
|
|
|
291,727 |
|
Interest
swap agreements
|
|
|
- |
|
|
|
307 |
|
|
|
- |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
swap agreements
|
|
$ |
- |
|
|
$ |
(307 |
) |
|
$ |
- |
|
|
$ |
(307 |
) |
(In thousands)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
Investments
available for sale:
|
|
|
|
|
|
|
|
Beginning
balance December 31, 2007
|
|
$ |
- |
|
|
|
|
|
|
Transfer
into Level 3
|
|
$ |
3,154 |
|
|
|
|
|
|
Ending
balance December 31, 2008
|
|
$ |
3,154 |
|
We own
$4.8 million collateralized debt obligation securities that are backed by pooled
trust preferred securities issued by banks, thrifts, and insurance
companies. The market for the pooled trust securities at December 31,
2008 is not active and markets for similar securities are also not
active. There are currently very few market participants who are
willing and or able to transact for these securities.
Given
conditions in the debt markets today and the absence of observable transactions
in the secondary markets, we determined:
|
·
|
The
few observable transactions and market quotations that are available are
not reliable for purposes of determining fair value at December 31,
2008,
|
|
·
|
An
income valuation approach technique (present value technique) that
maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs will be equally or more representative of fair value
than the market approach valuation technique used at prior measurement
dates and
|
|
·
|
Our
pooled trust preferred securities will be classified within Level 3 of the
fair value hierarchy because we determined that significant adjustments
are required to determine fair value at the measurement
date.
|
Assets
Measured at Fair Value on a Nonrecurring Basis
The
following table sets forth the Company’s financial assets subject to fair value
adjustments (impairment) on a nonrecurring basis as they are valued at the lower
of cost or market. Assets 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
December 31,
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
38,820 |
|
|
$ |
38,820 |
|
In
accordance with SFAS No. 114, “Accounting by Creditors for
Impairment of a Loan” impaired loans totaling $52.6 million were written
down to their fair value of $38.8 million resulting in an impairment charge of
$13.8 million which was included in our allowance for loan losses.
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.
Fair
Value of Financial Instruments
The
Company discloses fair value information about financial instruments for which
it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial
instruments have been defined broadly to encompass 95.0% of the Company's assets
and 99.0% of its liabilities at December 31, 2008 and 94.0% of its assets and
99.0% of its liabilities at December 31, 2007. Fair value is the
amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price, if one exists.
Quoted
market prices, where available, are shown as estimates of fair market values.
Because no quoted market prices are available for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on the amount and timing of future cash flows and estimated
discount rates.
Present
value techniques used in estimating the fair value of many of the Company's
financial instruments are significantly affected by the assumptions used. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities, and should not be considered an
indication of the fair value of the Company.
The
estimated fair values of the Company's financial instruments at December 31 are
as follows:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$ |
116,620 |
|
|
$ |
116,620 |
|
|
$ |
92,941 |
|
|
$ |
93,028 |
|
Investments
available for sale
|
|
|
291,727 |
|
|
|
291,727 |
|
|
|
186,801 |
|
|
|
186,801 |
|
Investments
held to maturity and other equity securities
|
|
|
200,764 |
|
|
|
205,054 |
|
|
|
258,472 |
|
|
|
264,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of allowances
|
|
|
2,440,120 |
|
|
|
2,467,993 |
|
|
|
2,251,939 |
|
|
|
2,261,950 |
|
Accrued
interest receivable and other assets (2)
|
|
|
85,219 |
|
|
|
85,219 |
|
|
|
85,759 |
|
|
|
85,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
2,365,257 |
|
|
$ |
2,380,527 |
|
|
$ |
2,273,868 |
|
|
$ |
2,274,872 |
|
Short-term
borrowings
|
|
|
421,074 |
|
|
|
462,130 |
|
|
|
373,972 |
|
|
|
395,302 |
|
Long-term
borrowings
|
|
|
101,584 |
|
|
|
103,495 |
|
|
|
52,553 |
|
|
|
57,311 |
|
Accrued
interest payable and other liabilities (2)
|
|
|
4,330 |
|
|
|
4,330 |
|
|
|
3,552 |
|
|
|
3,552 |
|
(1)
|
Temporary
investments include federal funds sold, interest-bearing deposits with
banks and residential mortgage loans held for
sale.
|
(2)
|
Only
financial instruments as defined in SFAS No. 107, “Disclosure about Fair
Value of Financial Instruments,” are included in other assets and other
liabilities.
|
The
following methods and assumptions were used to estimate the fair value of each
category of financial instruments for which it is practicable to estimate that
value:
Cash
and Temporary Investments:
Cash and due from banks, federal
funds sold and interest-bearing deposits with banks. The carrying amount
approximated the fair value.
Residential mortgage loans held for
sale. The fair value of residential mortgage loans held for sale was
derived from secondary market quotations for similar instruments.
Investments. The fair value
for U.S. Treasury, U.S. Agency, state and municipal, corporate debt and some
trust preferred securities was based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and, for equity securities upon quoted market prices. Certain trust
preferred securities were estimated by utilizing the discounted value of
estimated cash flows.
Loans. The fair value was
estimated by computing the discounted value of estimated cash flows, adjusted
for potential loan and lease losses, for pools of loans having similar
characteristics. The discount rate was based upon the current loan origination
rate for a similar loan. Non-performing loans have an assumed interest rate of
0%.
Accrued interest receivable.
The carrying amount approximated the fair value of accrued interest, considering
the short-term nature of the receivable and its expected
collection.
Other assets. The carrying
amount approximated the fair value considering their short-term
nature.
Deposits. The fair value of
demand, money market savings and regular savings deposits, which have no stated
maturity, were considered equal to their carrying amount, representing the
amount payable on demand. While management believes that the Bank’s core deposit
relationships provide a relatively stable, low-cost funding source that has a
substantial intangible value separate from the value of the deposit balances,
these estimated fair values do not include the intangible value of core deposit
relationships, which comprise a significant portion of the Bank’s deposit
base.
The fair
value of time deposits was based upon the discounted value of contractual cash
flows at current rates for deposits of similar remaining maturity.
Short-term borrowings. The
carrying amount approximated the fair value of repurchase agreements due to
their variable interest rates. The fair value of Federal Home Loan Bank of
Atlanta advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
Long-term borrowings. The fair
value of the Federal Home Loan Bank of Atlanta advances and subordinated
debentures was estimated by computing the discounted value of contractual cash
flows payable at current interest rates for obligations with similar remaining
terms.
Accrued interest payable and other
liabilities. The carrying amount approximated the fair value of accrued
interest payable, accrued dividends and premiums payable, considering their
short-term nature and expected payment.
Note
21 – Parent Company Financial Information
The
condensed financial statements for Sandy Spring Bancorp, Inc. (Parent Only)
pertaining to the periods covered by the Company's consolidated financial
statements are presented below:
Balance
Sheets
|
|
December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
3,021 |
|
|
$ |
6,601 |
|
Investments
available for sale (at fair value)
|
|
|
350 |
|
|
|
350 |
|
Investment
in subsidiary
|
|
|
386,199 |
|
|
|
302,980 |
|
Loan
to subsidiary
|
|
|
35,000 |
|
|
|
35,000 |
|
Other
assets
|
|
|
4,315 |
|
|
|
6,994 |
|
Total
assets
|
|
$ |
428,885 |
|
|
$ |
351,925 |
|
Liabilities
|
|
|
|
|
|
|
|
|
Subordinated
debentures
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
Accrued
expenses and other liabilities
|
|
|
2,023 |
|
|
|
1,285 |
|
Total
liabilities
|
|
|
37,023 |
|
|
|
36,285 |
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
79,440 |
|
|
|
0 |
|
Common
stock
|
|
|
16,399 |
|
|
|
16,349 |
|
Warrants
|
|
|
3,699 |
|
|
|
0 |
|
Additional
paid in capital
|
|
|
85,486 |
|
|
|
83,970 |
|
Retained
earnings
|
|
|
214,410 |
|
|
|
216,376 |
|
Accumulated
other comprehensive income (loss)
|
|
|
(7,572
|
) |
|
|
(1,055 |
) |
Total
stockholders’ equity
|
|
|
391,862 |
|
|
|
315,640 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
428,885 |
|
|
$ |
351,925 |
|
Statements
of Income
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Cash
dividends from subsidiary
|
|
$ |
7,912 |
|
|
$ |
68,880 |
|
|
$ |
13,073 |
|
Securities
gains
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Other
income, principally interest
|
|
|
2,609 |
|
|
|
2,802 |
|
|
|
2,269 |
|
Total
income
|
|
|
10,521 |
|
|
|
71,682 |
|
|
|
15,342 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
2,223 |
|
|
|
2,223 |
|
|
|
2,223 |
|
Other
expenses
|
|
|
796 |
|
|
|
1,972 |
|
|
|
1,555 |
|
Total
expenses
|
|
|
3,019 |
|
|
|
4,195 |
|
|
|
3,778 |
|
Income
before income taxes and equity in undistributed income
of subsidiary
|
|
|
7,502 |
|
|
|
67,487 |
|
|
|
11,564 |
|
Income
tax expense (benefit)
|
|
|
(41
|
) |
|
|
(309
|
) |
|
|
(471 |
) |
Income
before equity in undistributed income of subsidiary
|
|
|
7,543 |
|
|
|
67,796 |
|
|
|
12,035 |
|
Equity
in undistributed (excess distributions) income of
subsidiary
|
|
|
8,236 |
|
|
|
(35,534
|
) |
|
|
20,836 |
|
Net
income
|
|
|
15,779 |
|
|
|
32,262 |
|
|
|
32,871 |
|
Preferred
stock dividends and discount accretion
|
|
|
334 |
|
|
|
0 |
|
|
|
0 |
|
Net
income available to common shareholders
|
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Statements
of Cash Flows
|
|
Years
Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
15,779 |
|
|
$ |
32,262 |
|
|
$ |
32,871 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
distributions of (equity in undistributed)
income-subsidiary
|
|
|
(8,237 |
) |
|
|
35,534 |
|
|
|
(20,836 |
) |
Investment
in subsidiary
|
|
|
0 |
|
|
|
(41,176 |
) |
|
|
0 |
|
Securities
gains
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Stock
compensation expense
|
|
|
772 |
|
|
|
1,128 |
|
|
|
624 |
|
Net
change in other liabilities
|
|
|
448 |
|
|
|
(142 |
) |
|
|
(959 |
) |
Other-net
|
|
|
(183 |
) |
|
|
(295 |
) |
|
|
(91 |
) |
Net
cash provided by operating activities
|
|
|
8,579 |
|
|
|
27,311 |
|
|
|
11,609 |
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in loans receivable
|
|
|
2,811 |
|
|
|
(6,171 |
) |
|
|
0 |
|
Proceeds
from sales of investments available for sale
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Increase
in note receivable from subsidiary
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Net
cash (used) provided by investing activities
|
|
|
2,811 |
|
|
|
(6,171 |
) |
|
|
0 |
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of preferred stock
|
|
|
83,094 |
|
|
|
0 |
|
|
|
0 |
|
Common
stock purchased and retired
|
|
|
(83,094 |
) |
|
|
(4,354 |
) |
|
|
(866 |
) |
Proceeds
from issuance of common stock
|
|
|
743 |
|
|
|
1,823 |
|
|
|
1,424 |
|
Tax
benefit from stock options exercised
|
|
|
51 |
|
|
|
110 |
|
|
|
121 |
|
Dividends
paid
|
|
|
(15,764 |
) |
|
|
(14,988 |
) |
|
|
(13,028 |
) |
Net
cash used by financing activities
|
|
|
(14,970 |
) |
|
|
(17,409 |
) |
|
|
(12,349 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(3,580 |
) |
|
|
3,731 |
|
|
|
(740 |
) |
Cash
and cash equivalents at beginning of year
|
|
|
6,601 |
|
|
|
2,870 |
|
|
|
3,610 |
|
Cash
and cash equivalents at end of year
|
|
$ |
3,021 |
|
|
$ |
6,601 |
|
|
$ |
2,870 |
|
Note
22 – Regulatory Matters
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company and
the Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 2008 and 2007, the capital levels of the
Company and the Bank substantially exceeded all capital adequacy requirements to
which they are subject.
As of
December 31, 2008, the most recent notification from the Bank’s primary
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The
Company's and the Bank's actual capital amounts and ratios are also presented in
the table:
|
|
|
|
|
|
|
|
To
Be Well
|
|
|
|
|
|
|
|
|
|
Capitalized
Under
|
|
|
|
|
|
|
For
Capital
|
|
|
Prompt
Corrective
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Action
Provisions
|
|
(Dollars
in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
380,947 |
|
|
|
13.82 |
% |
|
$ |
220,540 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
|
Sandy
Spring Bank
|
|
|
374,136 |
|
|
|
13.60 |
|
|
|
220,127 |
|
|
|
8.00 |
|
|
$ |
275,159 |
|
|
|
10.00 |
% |
Tier
1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
346,289 |
|
|
|
12.56 |
|
|
|
110,270 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
|
|
Sandy
Spring Bank
|
|
|
304,542 |
|
|
|
11.07 |
|
|
|
110,064 |
|
|
|
4.00 |
|
|
|
165,095 |
|
|
|
6.00 |
|
Tier
1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
346,289 |
|
|
|
11.00 |
|
|
|
94,466 |
|
|
|
3.00 |
|
|
|
N/A |
|
|
|
|
|
Sandy
Spring Bank
|
|
|
304,542 |
|
|
|
9.69 |
|
|
|
94,310 |
|
|
|
3.00 |
|
|
|
157,183 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
283,571 |
|
|
|
11.28 |
% |
|
$ |
201,123 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
|
|
Sandy
Spring Bank
|
|
|
269,828 |
|
|
|
10.77 |
|
|
|
200,480 |
|
|
|
8.00 |
|
|
$ |
250,601 |
|
|
|
10.00 |
% |
Tier
1 Capital (to risk weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
258,479 |
|
|
|
10.28 |
|
|
|
100,561 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
|
|
Sandy
Spring Bank
|
|
|
209,737 |
|
|
|
8.37 |
|
|
|
100,240 |
|
|
|
4.00 |
|
|
|
150,360 |
|
|
|
6.00 |
|
Tier
1 Capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
|
258,479 |
|
|
|
8.87 |
|
|
|
87,386 |
|
|
|
3.00 |
|
|
|
N/A |
|
|
|
|
|
Sandy
Spring Bank
|
|
|
209,737 |
|
|
|
7.22 |
|
|
|
87,156 |
|
|
|
3.00 |
|
|
|
145,260 |
|
|
|
5.00 |
|
Note
23 - Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing and Investment Management. Only Community Banking presently
meets the threshold for reportable segment reporting; however, the Company is
disclosing separate information for all four operating segments. Each
of the operating segments is a strategic business unit that offers different
products and services. The Insurance, Leasing and Investment Management segments
were businesses that were acquired in separate transactions where management at
the time of acquisition was retained. The accounting policies of the
segments are the same as those described in Note 1 to the consolidated financial
statements. However, the segment data reflect inter-segment
transactions and balances.
The
Community Banking segment is conducted through Sandy Spring Bank and involves
delivering a broad range of financial products and services, including various
loan and deposit products to both individuals and businesses. Parent
company income is included in the Community Banking segment, as the majority of
effort of these functions is related to this segment. The Community
Banking segment also includes Sandy Spring Bancorp. Major revenue sources
include net interest income, gains on sales of mortgage loans, trust income,
fees on sales of investment products and service charges on deposit
accounts. Expenses include personnel, occupancy, marketing, equipment
and other expenses. Included in Community Banking expenses are
non-cash charges associated with amortization of intangibles related to acquired
entities totaling $3.3 million in 2008, $2.9 million in 2007 and $1.8 million in
2006.
The
Insurance segment is conducted through Sandy Spring Insurance Corporation, a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. Sandy Spring Insurance Corporation operates the
Chesapeake Insurance Group, a general insurance agency located in Annapolis,
Maryland, and Neff and Associates, located in Ocean City,
Maryland. Major sources of revenue are insurance commissions from
commercial lines, personal lines, and medical liability
lines. Expenses include personnel and support
charges. Included in insurance expenses are non-cash charges
associated with amortization of intangibles related to acquired entities
totaling $0.4 million in 2008, 2007 and 2006.
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. In 2008, leasing expenses include additional noncash
charges of $4.2million for impairment of goodwill related to the acquisition of
The Equipment Leasing Company.
The
Investment Management segment is conducted through West Financial Services,
Inc., a subsidiary of the Bank. This asset management and financial
planning firm, located in McLean, Virginia, provides comprehensive investment
management and financial planning to individuals, families, small businesses and
associations including cash flow analysis, investment review, tax planning,
retirement planning, insurance analysis and estate planning. West
Financial currently has approximately $610 million in assets under
management. Major revenue sources include noninterest income earned
on the above services. Expenses include personnel and support
charges. Included in investment management expenses are non-cash
charges associated with amortization of intangibles related to acquired entities
totaling $0.8 million in 2008, 2007 and 2006.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
(In
thousands)
|
|
Community
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Investment
Mgmt.
|
|
|
Inter-Segment
Elimination
|
|
|
Total
|
|
Year
ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
167,128 |
|
|
$ |
46 |
|
|
$ |
2,875 |
|
|
$ |
30 |
|
|
$ |
(1,234 |
) |
|
$ |
168,845 |
|
Interest
expense
|
|
|
60,461 |
|
|
|
0 |
|
|
|
1,159 |
|
|
|
0 |
|
|
|
(1,234 |
) |
|
|
60,386 |
|
Provision
for loan and lease losses
|
|
|
32,583 |
|
|
|
0 |
|
|
|
609 |
|
|
|
0 |
|
|
|
0 |
|
|
|
33,192 |
|
Noninterest
income
|
|
|
34,425 |
|
|
|
6,675 |
|
|
|
493 |
|
|
|
4,542 |
|
|
|
108 |
|
|
|
46,243 |
|
Noninterest
expenses
|
|
|
88,585 |
|
|
|
5,469 |
|
|
|
5,082 |
|
|
|
3,562 |
|
|
|
(609 |
) |
|
|
102,089 |
|
Income
(loss) before income taxes
|
|
|
19,924 |
|
|
|
1,252 |
|
|
|
(3,482 |
) |
|
|
1,010 |
|
|
|
717 |
|
|
|
19,421 |
|
Income
tax expense (benefit)
|
|
|
4,145 |
|
|
|
510 |
|
|
|
(1,407 |
) |
|
|
394 |
|
|
|
0 |
|
|
|
3,642 |
|
Net
income (loss)
|
|
$ |
15,779 |
|
|
$ |
742 |
|
|
$ |
(2,075 |
) |
|
$ |
616 |
|
|
$ |
717 |
|
|
$ |
15,779 |
|
Preferred
stock dividends and discount accretion
|
|
|
334 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
334 |
|
Net
income (loss) available to common shareholders
|
|
$ |
15,445 |
|
|
$ |
742 |
|
|
$ |
(2,075 |
) |
|
$ |
616 |
|
|
$ |
717 |
|
|
$ |
15,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,317,715 |
|
|
$ |
12,032 |
|
|
$ |
33,585 |
|
|
$ |
13,905 |
|
|
$ |
(63,599 |
) |
|
$ |
$3,313,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
179,364 |
|
|
$ |
104 |
|
|
$ |
2,759 |
|
|
$ |
70 |
|
|
$ |
(1,322 |
) |
|
$ |
180,975 |
|
Interest
expense
|
|
|
76,319 |
|
|
|
0 |
|
|
|
1,152 |
|
|
|
0 |
|
|
|
(1,322 |
) |
|
|
76,149 |
|
Provision
for loan and lease losses
|
|
|
4,094 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
4,094 |
|
Noninterest
income
|
|
|
34,680 |
|
|
|
7,097 |
|
|
|
818 |
|
|
|
4,588 |
|
|
|
(2,894 |
) |
|
|
44,289 |
|
Noninterest
expense
|
|
|
89,930 |
|
|
|
5,515 |
|
|
|
1,068 |
|
|
|
3,848 |
|
|
|
(573 |
) |
|
|
99,788 |
|
Income
before income taxes
|
|
|
43,701 |
|
|
|
1,686 |
|
|
|
1,357 |
|
|
|
810 |
|
|
|
(2,321 |
) |
|
|
45,233 |
|
Income
tax expense
|
|
|
11,439 |
|
|
|
676 |
|
|
|
539 |
|
|
|
317 |
|
|
|
0 |
|
|
|
12,971 |
|
Net
income
|
|
$ |
32,262 |
|
|
$ |
1,010 |
|
|
$ |
818 |
|
|
$ |
493 |
|
|
$ |
(2,321 |
) |
|
$ |
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,045,055 |
|
|
$ |
12,073 |
|
|
$ |
36,151 |
|
|
$ |
10,037 |
|
|
$ |
(59,363 |
) |
|
$ |
3,043,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
151,982 |
|
|
$ |
68 |
|
|
$ |
2,277 |
|
|
$ |
27 |
|
|
$ |
(911 |
) |
|
$ |
153,443 |
|
Interest
expense
|
|
|
58,780 |
|
|
|
0 |
|
|
|
818 |
|
|
|
0 |
|
|
|
(911 |
) |
|
|
58,687 |
|
Provision
for loan and lease losses
|
|
|
2,795 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,795 |
|
Noninterest
income
|
|
|
29,480 |
|
|
|
7,452 |
|
|
|
884 |
|
|
|
4,115 |
|
|
|
(3,036 |
) |
|
|
38,895 |
|
Noninterest
expense
|
|
|
75,618 |
|
|
|
5,690 |
|
|
|
994 |
|
|
|
3,588 |
|
|
|
(794 |
) |
|
|
85,096 |
|
Income
before income taxes
|
|
|
44,269 |
|
|
|
1,830 |
|
|
|
1,349 |
|
|
|
554 |
|
|
|
(2,242 |
) |
|
|
45,760 |
|
Income
tax expense
|
|
|
11,398 |
|
|
|
724 |
|
|
|
554 |
|
|
|
213 |
|
|
|
0 |
|
|
|
12,889 |
|
Net
income
|
|
$ |
32,871 |
|
|
$ |
1,106 |
|
|
$ |
795 |
|
|
$ |
341 |
|
|
$ |
(2,242 |
) |
|
$ |
32,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
2,608,392 |
|
|
$ |
11,146 |
|
|
$ |
32,843 |
|
|
$ |
8,015 |
|
|
$ |
(49,939 |
) |
|
$ |
2,610,457 |
|
Note
24 – Quarterly Financial Results (unaudited)
A summary
of selected consolidated quarterly financial data for the two years ended
December 31, 2008 and December 31, 2007 is reported in the following
table.
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(In
thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
43,922 |
|
|
$ |
41,845 |
|
|
$ |
42,048 |
|
|
$ |
41,030 |
|
Net
interest income
|
|
|
26,579 |
|
|
|
27,119 |
|
|
|
28,087 |
|
|
|
26,674 |
|
Provision
for loan and lease losses
|
|
|
2,667 |
|
|
|
6,189 |
|
|
|
6,545 |
|
|
|
17,791 |
|
Income
(loss) before income taxes
|
|
|
11,905 |
|
|
|
7,739 |
|
|
|
7,154 |
|
|
|
(7,377 |
) |
Net
income (loss)
|
|
|
8,205 |
|
|
|
5,651 |
|
|
|
5,359 |
|
|
|
(3,436 |
) |
Net
income (loss) available to common shareholders
|
|
|
8,205 |
|
|
|
5,651 |
|
|
|
5,359 |
|
|
|
(3,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
0.50 |
|
|
$ |
0.35 |
|
|
$ |
0.33 |
|
|
$ |
(0.21 |
) |
Basic
net income (loss) per common share
|
|
|
0.50 |
|
|
|
0.35 |
|
|
|
0.33 |
|
|
$ |
(0.23 |
) |
Diluted
net income (loss) per share
|
|
|
0.50 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
(0.21 |
) |
Diluted
net income (loss) per common share
|
|
|
0.50 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
(0.23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
41,894 |
|
|
$ |
46,014 |
|
|
$ |
46,958 |
|
|
$ |
46,109 |
|
Net
interest income
|
|
|
24,015 |
|
|
|
26,199 |
|
|
|
27,212 |
|
|
|
27,400 |
|
Provision
for loan and lease losses
|
|
|
839 |
|
|
|
780 |
|
|
|
750 |
|
|
|
1,725 |
|
Income
before income taxes
|
|
|
10,468 |
|
|
|
11,333 |
|
|
|
11,693 |
|
|
|
11,739 |
|
Net
income
|
|
|
7,545 |
|
|
|
8,169 |
|
|
|
8,181 |
|
|
|
8,367 |
|
Net
income available to common shareholders
|
|
|
7,545 |
|
|
|
8,169 |
|
|
|
8,181 |
|
|
|
8,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
0.49 |
|
|
$ |
0.51 |
|
|
$ |
0.50 |
|
|
$ |
0.51 |
|
Basic
net income per common share
|
|
|
0.49 |
|
|
|
0.51 |
|
|
|
0.50 |
|
|
|
0.51 |
|
Diluted
net income per share
|
|
|
0.49 |
|
|
|
0.51 |
|
|
|
0.50 |
|
|
|
0.51 |
|
Diluted
net income per common share
|
|
|
0.49 |
|
|
|
0.51 |
|
|
|
0.50 |
|
|
|
0.51 |
|
OTHER
MATERIAL REQUIRED BY FORM 10-K
DESCRIPTION
OF BUSINESS
General
Sandy
Spring Bancorp, Inc. (the “Company") is the one-bank holding company for Sandy
Spring Bank (the "Bank"). The Company is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). As such, the Company is subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
The Company began operating in 1988. The Bank was founded in 1868, and is the
oldest banking business based in Maryland. The Bank is independent, community
oriented, and conducts a full-service commercial banking business through 42
community offices located in Anne Arundel, Carroll, Frederick, Howard,
Montgomery and Prince George's counties in Maryland, and Fairfax and Loudoun
counties in Virginia. The Bank is a state chartered bank subject to supervision
and regulation by the Federal Reserve and the State of Maryland. The Bank's
deposit accounts are insured by the Deposit Insurance
Fund administered by the Federal Deposit Insurance Corporation
(the "FDIC") to the maximum permitted by law. The Bank is a member of the
Federal Reserve System and is an Equal Housing Lender. The Company, the Bank,
and its other subsidiaries are Affirmative Action/Equal Opportunity
Employers.
The
Company's and the Bank's principal executive office is located at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is
301-774-6400. The Company’s Web site is located at www.sandyspringbank.com.
Loan
and Lease Products
Residential
Real Estate Loans
The
residential real estate category contains loans principally to consumers secured
by residential real estate. The Company's residential real estate lending policy
requires each loan to have viable repayment sources. Residential real estate
loans are evaluated for the adequacy of these repayment sources at the time of
approval, based upon measures including credit scores, debt-to-income ratios,
and collateral values. Credit risk for residential real estate loans arises from
borrowers lacking the ability or willingness to repay the loan and by a
shortfall in the value of the residential real estate in relation to the
outstanding loan balance in the event of a default and subsequent liquidation of
the real estate collateral. The residential real estate portfolio
includes both conforming and nonconforming mortgage loans. Conforming mortgage
loans represent loans originated in accordance with underwriting standards set
forth by the government-sponsored entities (“GSEs”), including the Federal
National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage
Corporation (“Freddie Mac”), and the Government National Mortgage Association
(“Ginnie Mae”), which serve as the primary purchasers of loans sold in the
secondary mortgage market by mortgage lenders. These loans are generally
collateralized by one-to-four-family residential real estate, have
loan-to-collateral value ratios of 80% or less or have mortgage insurance to
insure down to 80%, and are made to borrowers in good credit standing.
Substantially all fixed-rate conforming loans originated are sold in the
secondary mortgage market. For any loans retained by the Company, title
insurance insuring the priority of its mortgage lien, as well as fire and
extended coverage casualty insurance protecting the properties securing the
loans are required. Borrowers may be required to advance funds, with each
monthly payment of principal and interest, to a loan escrow account from which
the Company makes disbursements for items such as real estate taxes and mortgage
insurance premiums. Appraisers approved by the Company appraise the properties
securing substantially all of the Company's residential mortgage
loans.
Nonconforming
mortgage loans represent loans that generally are not saleable in the secondary
market to the GSEs for inclusion in conventional mortgage-backed securities due
to the credit characteristics of the borrower, the underlying documentation, the
loan-to-value ratio, or the size of the loan, among other factors. The Company
originates nonconforming loans for its own portfolio and for sale to third-party
investors, usually large mortgage companies, under commitments by them to
purchase subject to compliance with pre-established investor criteria. These
nonconforming loans generated for sale include some residential mortgage credits
that may be categorized as sub-prime under federal banking regulations. Such
sub-prime credits typically remain on the Company’s consolidated books after
funding for thirty days or less, and are included in residential mortgages held
for sale on the face of the balance sheet. The Company also holds occasional,
isolated credits that inadvertently failed to meet GSE or other third-party
investor criteria, or that were originated and managed in the ordinary course of
business (rather than in any sub-prime lending program) and may have
characteristics that could cause them to be categorized as
sub-prime. The Company’s current practice is to sell all such
sub-prime loans to third-party investors. The Company believes that the
sub-prime credits it originates or holds and the risks they entail are not
significant to its financial condition, results of operations, liquidity, or
capital resources.
The
Company engages in sales of residential mortgage loans originated by the Bank.
The Company's current practice is to sell loans on a servicing released
basis.
The
Company makes residential real estate development and construction loans
generally to provide interim financing on property during the development and
construction period. Borrowers include builders, developers and persons who will
ultimately occupy the single-family dwelling. Residential real estate
development and construction loan funds are disbursed periodically as
pre-specified stages of completion are attained based upon site inspections.
Interest rates on these loans are usually adjustable. Loans to
individuals for the construction of primary personal residences are typically
secured by the property under construction, frequently include additional
collateral (such as a second mortgage on the borrower's present home), and
commonly have maturities of six to twelve months. The Company attempts to obtain
the permanent mortgage loan under terms, conditions and documentation standards
that permit the sale of the mortgage loan in the secondary mortgage loan market.
The Company's practice is to immediately sell substantially all fixed-rate
residential mortgage loans in the secondary market with servicing
released.
Commercial
Loans and Leases
The
Company devotes significant resources and attention to seeking and then serving
commercial clients. Included in this category are commercial real estate loans,
commercial construction loans, leases and other commercial loans. Over the
years, the Company’s commercial loan clients have come to represent a diverse
cross-section of small to mid-size local businesses, whose owners and employees
are often established Bank customers. Such banking relationships are a natural
business for the Company, with its long-standing community roots and extensive
experience in serving and lending to this market segment.
Commercial
loans are evaluated for the adequacy of repayment sources at the time of
approval and are regularly reviewed for any possible deterioration in the
ability of the borrower to repay the loan. Collateral generally is required to
provide the Company with an additional source of repayment in the event of
default by a commercial borrower. The structure of the collateral package,
including the type and amount of the collateral, varies from loan to loan
depending on the financial strength of the borrower, the amount and terms of the
loan, and the collateral available to be pledged by the borrower, but generally
may include real estate, accounts receivable, inventory, equipment or other
assets. Loans also may be supported by personal guarantees from the principals
of the commercial loan borrowers. The financial condition and cash
flow of commercial borrowers are closely monitored by the submission of
corporate financial statements, personal financial statements and income tax
returns. The frequency of submissions of required information depends upon the
size and complexity of the credit and the collateral that secures the
loan. Credit risk for commercial loans arises from borrowers lacking
the ability or willingness to repay the loan, and in the case of secured loans,
by a shortfall in the collateral value in relation to the outstanding loan
balance in the event of a default and subsequent liquidation of collateral. The
Company has no commercial loans to borrowers in similar industries that exceed
10% of total loans.
Included
in commercial loans are credits directly originated by the Company and
syndicated transactions or loan participations that are originated by other
lenders. The Corporation's commercial lending policy requires each loan,
regardless of whether it is directly originated or is purchased, to have viable
repayment sources. The risks associated with syndicated loans or purchased
participations are similar to those of directly originated commercial loans,
although additional risk may arise from the limited ability to control actions
of the primary lender. Shared National Credits (SNC), as defined by
the banking regulatory agencies, represent syndicated lending arrangements with
three or more participating financial institutions and credit exceeding $20.0
million in the aggregate. As of December 31, 2008, the Company had $58.6 million
in SNC purchased outstanding and no SNC sold outstanding. The Company
also sells participations in loans it originates to other financial institutions
in order to build long-term customer relationships or limit loan concentration.
Strict policies are in place governing the degree of risk assumed and volume of
loans held. At December 31, 2008, other financial institutions had $13.4 million
in outstanding commercial and commercial real estate loan participations sold by
the Company, and the Company had $65.1 million in outstanding commercial and
commercial real estate loan participations purchased from other lenders,
excluding SNC.
The
Company's commercial real estate loans consist of loans secured by owner
occupied properties where an established banking relationship exists and
involves investment properties for warehouse, retail, and office space with a
history of occupancy and cash flow. The
commercial real estate category contains mortgage loans to developers and owners
of commercial real estate. Commercial real estate loans are governed by the same
lending policies and subject to credit risk as previously described for
commercial loans. Although terms and amortization periods vary, the Company's
commercial mortgages generally have maturities or repricing opportunities of
five years or less. The Company seeks to reduce the risks associated
with commercial mortgage lending by generally lending in its market area, using
conservative loan-to-value ratios and obtaining periodic financial statements
and tax returns from borrowers to perform annual loan reviews. It is also the
Company's general policy to obtain personal guarantees from the principals of
the borrowers and to underwrite the business entity from a cash flow
perspective.
Commercial
real estate loans secured by owner occupied properties are based upon the
borrower’s financial health and the ability of the borrower and the business to
repay. Whenever appropriate and available, the Bank seeks governmental loan
guarantees, such as the Small Business Administration loan programs, to reduce
risks. All borrowers are required to forward annual corporate, partnership and
personal financial statements. Interest rate risks are mitigated by using either
floating interest rates or by fixing rates for a short period of time, generally
less than three years. While loan amortizations may be approved for
up to 300 months, each loan generally has a call provision (maturity date) of
five years or less. A risk rating system is used to determine loss
exposure.
The
Company lends for commercial construction in markets it knows and understands,
works selectively with local, top-quality builders and developers, and requires
substantial equity from its borrowers. The underwriting process is
designed to confirm that the project will be economically feasible and
financially viable; it is generally evaluated as though the Company will provide
permanent financing. The Company's portfolio growth objectives do not include
speculative commercial construction projects or projects lacking reasonable
proportionate sharing of risk. The Company has mitigated loan losses in this
area of lending through monitoring of development and construction loans with
on-site inspections and control of disbursements on loans in process.
Development and construction loans are secured by the properties under
development or construction and personal guarantees are typically obtained.
Further, to assure that reliance is not placed solely upon the value of the
underlying collateral, the Company considers the financial condition and
reputation of the borrower and any guarantors, the amount of the borrower's
equity in the project, independent appraisals, cost estimates and
pre-construction sales information.
Residential
construction loans to residential builders are generally made for the
construction of residential homes for which a binding sales contract exists and
the prospective buyers had been pre-qualified for permanent mortgage financing
by either third-party lenders (mortgage companies or other financial
institutions) or the Company. Loans for the development of
residential land are extended when evidence is provided that the lots under
development will be or have been sold to builders satisfactory to the Company.
These loans are generally extended for a period of time sufficient to allow for
the clearing and grading of the land and the installation of water, sewer and
roads, typically a minimum of eighteen months to three years. In addition,
residential land development loans generally carry a loan-to-value ratio not to
exceed 75% of the value of the project as completed.
The
Company's equipment leasing business is, for the most part, technology based,
consisting of a portfolio of leases for essential commercial equipment used by
small to medium sized businesses. Equipment leasing is conducted through vendor
relations and direct solicitation to end-users located primarily in east coast
states from New Jersey to Florida. The typical lease is “small
ticket” by industry standards, averaging less than $100 thousand, with
individual leases generally not exceeding $500 thousand. Terms generally are
fixed payment for up to five years. Leases are extended based
primarily upon the ability of the borrower to pay rather than the value of the
leased property.
The
Company makes other commercial loans. Commercial term loans are made to provide
funds for equipment and general corporate needs. This loan category
is designed to support borrowers who have a proven ability to service debt over
a term generally not to exceed 84 months. The Company generally
requires a first lien position on all collateral and requires guarantees from
owners having at least a 20% interest in the involved
business. Interest rates on commercial term loans are generally
floating or fixed for a term not to exceed five years. Management
carefully monitors industry and collateral concentrations to avoid loan
exposures to a large group of similar industries or similar collateral.
Commercial loans are evaluated for historical and projected cash flow
attributes, balance sheet strength, and primary and alternate resources of
personal guarantors. Commercial term loan documents require borrowers
to forward regular financial information on both the business and personal
guarantors. Loan covenants require at least annual submission of complete
financial information and in certain cases this information is required monthly,
quarterly or semi-annually depending on the degree to which the Company desires
information resources for monitoring a borrower’s financial condition and
compliance with loan covenants. Examples of properly margined
collateral for loans, as required by bank policy, would be a 75% advance on the
lesser of appraisal or recent sales price on commercial property, an 80% or less
advance on eligible receivables, a 50% or less advance on eligible inventory and
an 80% advance on appraised residential property. Collateral borrowing
certificates may be required to monitor certain collateral categories on a
monthly or quarterly basis. Loans may require personal
guarantees. Key person life insurance may be required as appropriate
and as necessary to mitigate the risk of loss of a primary owner or
manager.
Commercial
lines of credit are granted to finance a business borrower’s short-term credit
needs and/or to finance a percentage of eligible receivables and
inventory. In addition to the risks inherent in term loan facilities,
line of credit borrowers typically require additional monitoring to protect the
lender against increasing loan volumes and diminishing collateral
values. Commercial lines of credit are generally revolving in nature
and require close scrutiny. The Company generally requires at least
an annual out of debt period (for seasonal borrowers) or regular financial
information (monthly or quarterly financial statements, borrowing base
certificates, etc.) for borrowers with more growth and greater permanent working
capital financing needs. Advances against collateral value are
limited. Lines of credit and term loans to the same borrowers
generally are cross-defaulted and cross-collateralized. Interest rate
charges on this group of loans generally float at a factor at or above the prime
lending rate.
Consumer
Lending
Consumer
lending continues to be very important to the Company’s full-service, community
banking business. This category of loans includes primarily home
equity loans and lines, installment loans, personal lines of credit, marine
loans and student loans.
The home
equity category consists mainly of revolving lines of credit to consumers which
are secured by residential real estate. Home equity lines of
credit and other home equity loans are originated by the Company for typically
up to 90% of the appraised value, less the amount of any existing prior liens on
the property. While home equity loans have maximum terms of up to twenty years
and interest rates are generally fixed, home equity lines of credit have maximum
terms of up to ten years for draws and thirty years for repayment, and interest
rates are generally adjustable. The Company secures these loans with mortgages
on the homes (typically a second mortgage). Purchase money second mortgage loans
originated by the Company have maximum terms ranging from ten to thirty years.
These loans generally carry a fixed rate of interest for the entire term or a
fixed rate of interest for the first five years, repricing every five years
thereafter at a predetermined spread to the prime rate of interest. Home equity
lines are generally governed by the same lending policies and subject to credit
risk as described above for residential real estate loans.
Other
consumer loans include installment loans used by customers to purchase
automobiles, boats, recreational vehicles, and student loans. These consumer
loans are generally governed by the same overall lending policies as described
for residential real estate. Credit risk for consumer loans arises from
borrowers lacking the ability or willingness to repay the loan, and in the case
of secured loans, by a shortfall in the value of the collateral in relation to
the outstanding loan balance in the event of a default and subsequent
liquidation of collateral.
Consumer
installment loans are generally offered for terms of up to five years at fixed
interest rates. The Company makes loans for automobiles, recreational
vehicles, and marine craft, both new and used, directly to the borrowers.
Automobile loans can be for up to 100% of the purchase price or the retail value
listed by the National Automobile Dealers Association. The terms of the loans
are determined by the age and condition of the collateral. Collision insurance
policies are required on all these loans, unless the borrower has substantial
other assets and income. The Company’s student loans are made in amounts of up
to $20,500 per year. The Company offers a variety of graduate and undergraduate
loan programs under the Federal Family Education Loan Program. Interest is
capitalized annually until the student leaves school and amortization over a
ten-year period then begins. It is the Company’s practice to sell all such loans
in the secondary market when the student leaves school. The Company also makes
other consumer loans, which may or may not be secured. The term of the loans
usually depends on the collateral. Unsecured loans usually do not exceed $50
thousand and have a term of no longer than 36 months.
Availability
of Filings Through the Company’s Web Site
The
Company provides internet access to annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, ownership reports on Forms 3,
4, and 5, and amendments to those reports, through the Investor Relations area
of the Company’s Web site, at www.sandyspringbank.com. Access
to these reports is provided by means of a link to a third-party vendor that
maintains a database of such filings. In general, the Company intends
that these reports be available as soon as reasonably practicable after they are
filed with or furnished to the SEC. However, technical and other
operational obstacles or delays caused by the vendor may delay their
availability. The SEC maintains a Web site (www.sec.gov) where these
filings also are available through the SEC’s EDGAR system. There is
no charge for access to these filings through either the Company’s site or the
SEC’s site.
Regulation,
Supervision, and Governmental Policy
Following
is a brief summary of certain statutes and regulations that significantly affect
the Company and the Bank. A number of other statutes and regulations affect the
Company and the Bank but are not summarized below.
Bank
Holding Company Regulation
The
Company is registered as a bank holding company under the Holding Company Act
and, as such, is subject to supervision and regulation by the Federal Reserve.
As a bank holding company, the Company is required to furnish to the Federal
Reserve annual and quarterly reports of its operations and additional
information and reports. The Company is also subject to regular examination by
the Federal Reserve.
Under the
Holding Company Act, a bank holding company must obtain the prior approval of
the Federal Reserve before (1) acquiring direct or indirect ownership or control
of any class of voting securities of any bank or bank holding company if, after
the acquisition, the bank holding company would directly or indirectly own or
control more than 5% of the class; (2) acquiring all or substantially all of the
assets of another bank or bank holding company; or (3) merging or consolidating
with another bank holding company.
Under the
Holding Company Act, any company must obtain approval of the Federal Reserve
prior to acquiring control of the Company or the Bank. For purposes of the
Holding Company Act, "control" is defined as ownership of 25% or more of any
class of voting securities of the Company or the Bank, the ability to control
the election of a majority of the directors, or the exercise of a controlling
influence over management or policies of the Company or the Bank.
The
Change in Bank Control Act and the related regulations of the Federal Reserve
require any person or persons acting in concert (except for companies required
to make application under the Holding Company Act), to file a written notice
with the Federal Reserve before the person or persons acquire control of the
Company or the Bank. The Change in Bank Control Act defines "control" as the
direct or indirect power to vote 25% or more of any class of voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The
Holding Company Act also limits the investments and activities of bank holding
companies. In general, a bank holding company is prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
a company that is not a bank or a bank holding company or from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks, providing services for its subsidiaries, non-bank activities that are
closely related to banking, and other financially related activities. The
activities of the Company are subject to these legal and regulatory limitations
under the Holding Company Act and Federal Reserve regulations.
In
general, bank holding companies that qualify as financial holding companies
under federal banking law may engage in an expanded list of non-bank activities.
Non-bank and financially related activities of bank holding companies, including
companies that become financial holding companies, also may be subject to
regulation and oversight by regulators other than the Federal Reserve. The
Company is not a financial holding company, but may choose to become one in the
future.
The
Federal Reserve has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
The
Federal Reserve has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "Regulatory Capital Requirements."
The
Federal Reserve has the power to prohibit dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The Federal Reserve has
issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve's view that a bank holding
company should pay cash dividends only to the extent that the company's net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the company's capital needs,
asset quality, and overall financial condition.
Bank
Regulation
The Bank
is a state chartered bank and trust company subject to supervision by the State
of Maryland was approved and the Bank began operations as such. As a
member of the Federal Reserve System, the Bank is also subject to supervision by
the Federal Reserve. Deposits of the Bank are insured by the FDIC to
the legal maximum. Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and acquisitions, corporate activities, changes in control,
electronic funds transfers, responsiveness to community needs, management
practices, compensation policies, and other aspects of operations are subject to
regulation by the appropriate federal and state supervisory authorities. In
addition, the Bank is subject to numerous federal, state and local laws and
regulations which set forth specific restrictions and procedural requirements
with respect to extensions of credit (including to insiders), credit practices,
disclosure of credit terms and discrimination in credit
transactions.
The
Federal Reserve regularly examines the operations and condition of the Bank,
including, but not limited to, its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of the Bank's depositors and the Deposit Insurance Fund. In addition, the Bank
is required to furnish quarterly and annual reports to the Federal Reserve. The
Federal Reserve's enforcement authority includes the power to remove officers
and directors and the authority to issue cease-and-desist orders to prevent a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
The
Federal Reserve has adopted regulations regarding capital adequacy, which
require member banks to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "Regulatory Capital
Requirements." Federal Reserve and State regulations limit the amount of
dividends that the Bank may pay to the Company. See “Note 12 – Stockholders’
Equity” of the Notes to the Consolidated Financial Statements.
The Bank
is subject to restrictions imposed by federal law on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and on
investments in their stock or other securities. These restrictions prevent the
Company and the Bank's other affiliates from borrowing from the Bank unless the
loans are secured by specified collateral, and require those transactions to
have terms comparable to terms of arms-length transactions with third persons.
In addition, secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Company and all other
affiliates together to an aggregate of 20% of the Bank's capital and surplus.
Certain exemptions to these limitations apply to extensions of credit and other
transactions between the Bank and its subsidiaries. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest, and operating expenses.
Under
Federal Reserve regulations, banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards; prudent underwriting standards, including
loan-to-value limits, that are clear and measurable; loan administration
procedures; and documentation, approval, and reporting requirements. A bank's
real estate lending policy must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
adopted by the federal bank regulators. The Interagency Guidelines, among other
things, call for internal loan-to-value limits for real estate loans that are
not in excess of the limits specified in the Guidelines. The Interagency
Guidelines state, however, that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
The FDIC
has established a risk-based deposit insurance premium assessment system for
insured depository institutions. Under the current system, insured
institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors. An
institution’s assessment rate depends upon the category to which it is
assigned. Risk category I, which contains the least risky depository
institutions, is expected to include more than 90% of all
institutions. Unlike the other categories, Risk Category I contains
further risk differentiation based on the FDIC’s analysis of financial ratios,
examination component ratings and other information. Assessment rates
are determined by the FDIC and for 2008 ranged from five to seven basis points
for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV). Due to
losses from failed institutions and anticipated future losses, the FDIC has
increased assessments for 2009. The FDIC has also announced that it intends to
impose an “emergency premium” assessment on insured banks on June 30,
2009. No institution may pay a dividend if in default of its FDIC
assessment.
Regulatory Capital
Requirements. The Federal Reserve has established guidelines for
maintenance of appropriate levels of capital by bank holding companies and
member banks. The regulations impose two sets of capital adequacy requirements:
minimum leverage rules, which require bank holding companies and banks to
maintain a specified minimum ratio of capital to total assets, and risk-based
capital rules, which require the maintenance of specified minimum ratios of
capital to risk-weighted assets. These capital regulations are subject to
change.
The
regulations of the Federal Reserve require bank holding companies and member
banks to maintain a minimum leverage ratio of "Tier 1 capital" (as defined in
the risk-based capital guidelines discussed in the following paragraphs) to
total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies and banks, with composite examination ratings
of 1 under the rating system used by the federal bank regulators, would be
permitted to operate at or near this minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. A bank or
bank holding company experiencing or anticipating significant growth is expected
to maintain capital well above the minimum levels. In addition, the Federal
Reserve has indicated that it also may consider the level of an organization's
ratio of tangible Tier 1 capital (after deducting all intangibles) to total
assets in making an overall assessment of capital.
The
risk-based capital rules of the Federal Reserve require bank holding companies
and member banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a core capital (Tier 1)
requirement and a supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock (noncumulative perpetual preferred stock with respect to banks), and
minority interests in the equity accounts of consolidated subsidiaries; less all
intangible assets, except for certain mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements include, subject to
certain limitations, the allowance for losses on loans and leases; perpetual
preferred stock that does not qualify as Tier 1 capital; long-term preferred
stock with an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to 45%
of pre-tax net unrealized gains on available-for-sale equity
securities.
The
risk-based capital regulations assign balance sheet assets and credit equivalent
amounts of off-balance sheet obligations to one of four broad risk categories
based principally on the degree of credit risk associated with the obligor. The
assets and off-balance sheet items in the four risk categories are weighted at
0%, 20%, 50% and 100%. These computations result in the total risk-weighted
assets.
The
risk-based capital regulations require all commercial banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for credit losses that may be included in capital to 1.25% of total
risk-weighted assets.
The
federal bank regulatory agencies have established a joint policy regarding the
evaluation of commercial banks' capital adequacy for interest rate risk. Under
the policy, the Federal Reserve's assessment of a bank's capital adequacy
includes an assessment of the bank's exposure to adverse changes in interest
rates. The Federal Reserve has determined to rely on its examination process for
such evaluations rather than on standardized measurement systems or formulas.
The Federal Reserve may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are
adequate.
Federal
banking regulations also require banks with significant trading assets or
liabilities to maintain supplemental risk-based capital based upon their levels
of market risk. The Bank did not have significant levels of trading assets or
liabilities during 2008, and was not required to maintain such supplemental
capital.
Well-capitalized
institutions are not subject to limitations on brokered deposits, while an
adequately capitalized institution is able to accept, renew, or rollover
brokered deposits only with a waiver from the FDIC and subject to certain
restrictions on the yield paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits.
The
Federal Reserve has established regulations that classify banks by capital
levels and provide for the Federal Reserve to take various "prompt corrective
actions" to resolve the problems of any bank that fails to satisfy the capital
standards. Under these regulations, a well-capitalized bank is one
that is not subject to any regulatory order or directive to meet any specific
capital level and that has a total risk-based capital ratio of 10% or more, a
Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or
more. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a
total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%,
and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank that does not meet these standards is
categorized as undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A bank that falls within any
of the three undercapitalized categories established by the prompt corrective
action regulation is subject to severe regulatory sanctions. As of December 31,
2008, the Bank was well-capitalized as defined in the Federal Reserve's
regulations.
For
information regarding the Company's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Management”
of this report, and “Note 11-Long-term Borrowings,” and "Note 22 – Regulatory
Matters" of the Notes to the Consolidated Financial Statements of this
report.
Supervision
and Regulation of Mortgage Banking Operations
The
Company's mortgage banking business is subject to the rules and regulations of
the U.S. Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration ("FHA"), the Veterans' Administration ("VA"), and the
Fannie Mae with respect to originating, processing, selling and servicing
mortgage loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines, which include provisions
for inspections and appraisals, require credit reports on prospective borrowers,
and fix maximum loan amounts. Lenders such as the Company are required annually
to submit audited financial statements to Fannie Mae, FHA and VA. Each of these
regulatory entities has its own financial requirements. The Company's affairs
are also subject to examination by the Federal Reserve, Fannie Mae, FHA and VA
at all times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act,
Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate
Settlement Procedures Act and related regulations that prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. The Company's mortgage banking operations
also are affected by various state and local laws and regulations and the
requirements of various private mortgage investors.
Community
Reinvestment
Under the
Community Reinvestment Act (“CRA”), a financial institution has a continuing and
affirmative obligation to help meet the credit needs of the entire community,
including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions,
or limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular
community. However, institutions are rated on their performance in
meeting the needs of their communities. Performance is tested in
three areas: (a) lending, to evaluate the institution’s record of making loans
in its assessment areas; (b) investment, to evaluate the institution’s record of
investing in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and (c) service,
to evaluate the institution’s delivery of services through its branches, ATMs
and other offices. The CRA requires each federal banking agency, in
connection with its examination of a financial institution, to assess and assign
one of four ratings to the institution’s record of meeting the credit needs of
the community and to take such record into account in its evaluation of certain
applications by the institution, including applications for charters, branches
and other deposit facilities, relocations, mergers, consolidations, acquisitions
of assets or assumptions of liabilities, and savings and loan holding company
acquisitions. The CRA also requires that all institutions make
public, disclosure of their CRA ratings. The Bank was assigned a
“satisfactory” rating as a result of its last CRA examination.
Bank
Secrecy Act
Under the
Bank Secrecy Act (“BSA”), a financial institution is required to have systems in
place to detect certain transactions, based on the size and nature of the
transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In
addition, financial institutions are required to file suspicious activity
reports for transactions that involve more than $5,000 and which the financial
institution knows, suspects, or has reason to suspect involves illegal funds, is
designed to evade the requirements of the BSA, or has no lawful purpose. The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot
Act" or the "Patriot Act", enacted in response to the September 11, 2001,
terrorist attacks, enacted prohibitions against specified financial transactions
and account relationships, as well as enhanced due diligence standards intended
to prevent the use of the United States financial system for money laundering
and terrorist financing activities. The Patriot Act requires banks and other
depository institutions, brokers, dealers and certain other businesses involved
in the transfer of money to establish anti-money laundering programs, including
employee training and independent audit requirements meeting minimum standards
specified by the act, to follow standards for customer identification and
maintenance of customer identification records, and to compare customer lists
against lists of suspected terrorists, terrorist organizations and money
launderers. The Patriot Act also requires federal bank regulators to evaluate
the effectiveness of an applicant in combating money laundering in determining
whether to approve a proposed bank acquisition.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established a broad range of
corporate governance and accounting measures intended to increase corporate
responsibility and protect investors by improving the accuracy and reliability
of disclosures under federal securities laws. The Company is subject to
Sarbanes-Oxley because it is required to file periodic reports with the SEC
under the Securities and Exchange Act of 1934. Among other things,
Sarbanes-Oxley, its implementing regulations and related Nasdaq Stock Market
rules have established membership requirements and additional responsibilities
for the Company’s audit committee, imposed restrictions on the relationship
between the Company and its outside auditors (including restrictions on the
types of non-audit services our auditors may provide to us), imposed additional
financial statement certification responsibilities for the Company’s chief
executive officer and chief financial officer, expanded the disclosure
requirements for corporate insiders, required management to evaluate the
Company’s disclosure controls and procedures and its internal control over
financial reporting, and required the Company’s auditors to issue a report on
our internal control over financial reporting.
Other
Laws and Regulations
Some of
the aspects of the lending and deposit business of the Bank that are subject to
regulation by the Federal Reserve and the FDIC include reserve requirements and
disclosure requirements in connection with personal and mortgage loans and
deposit accounts. The Bank’s federal student lending activities are
subject to regulation and examination by the United States Department of
Education. In addition, the Bank is subject to numerous federal and
state laws and regulations that include specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms, and
discrimination in credit transactions.
Enforcement
Actions
Federal
statutes and regulations provide financial institution regulatory agencies with
great flexibility to undertake an enforcement action against an institution that
fails to comply with regulatory requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
civil money penalties, cease-and-desist orders, receivership, conservatorship,
or the termination of the deposit insurance.
RISK
FACTORS
Investing
in our common stock involves risks. You should carefully consider the following
risk factors before you decide to make an investment decision regarding our
stock. The risk factors may cause our future earnings to be lower or our
financial condition to be less favorable than we expect. In addition, other
risks of which we are not aware, or which we do not believe are material, may
cause earnings to be lower, or may hurt our financial condition. You should also
consider the other information in this Annual Report on Form 10-K, as well as in
the documents incorporated by reference into it.
Changes
in interest rates and other factors beyond our control may adversely affect our
earnings and financial condition.
Our net
income depends to a great extent upon the level of our net interest income.
Changes in interest rates can increase or decrease net interest income and net
income. Net interest income is the difference between the interest income we
earn on loans, investments, and other interest-earning assets, and the interest
we pay on interest-bearing liabilities, such as deposits and borrowings. Net
interest income is affected by changes in market interest rates, because
different types of assets and liabilities may react differently, and at
different times, to market interest rate changes. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest
income. Similarly, when interest-earning assets mature or reprice more quickly
than interest-bearing liabilities, falling interest rates could reduce net
interest income.
Changes
in market interest rates are affected by many factors beyond our control,
including inflation, unemployment, money supply, international events, and
events in world financial markets. We attempt to manage our risk from changes in
market interest rates by adjusting the rates, maturity, repricing, and balances
of the different types of interest-earning assets and interest-bearing
liabilities, but interest rate risk management techniques are not exact. As a
result, a rapid increase or decrease in interest rates could have an adverse
effect on our net interest margin and results of operations. Changes in the
market interest rates for types of products and services in our various markets
also may vary significantly from location to location and over time based upon
competition and local or regional economic factors. At December 31, 2008, our
interest rate sensitivity simulation model projected that net interest income
would not change significantly if interest rates immediately fell by 200 basis
points due to the current low level of market interest rates but would increase
by 4.35% if interest rates immediately rose by 200 basis points. The results of
our interest rate sensitivity simulation model depend upon a number of
assumptions which may not prove to be accurate. There can be no assurance that
we will be able to successfully manage our interest rate risk. Please see
“Market Risk Management” on page 22 of this report.
A
continuation of recessionary conditions could have an adverse effect on our
financial position or results of operations.
United
States and global markets have experienced severe disruption and volatility, and
general economic conditions have declined significantly. Adverse developments in
credit quality and asset values throughout the financial services industry, as
well as general uncertainty regarding the economic and regulatory environment,
have had a significant negative impact on the industry. The United
States government has taken steps to try to stabilize the financial system,
including investing in financial institutions, and also has been working to
design and implement programs to stimulate economic recovery. There can be no
assurances that these efforts will be successful. Factors that could
continue to pressure financial services companies, including the Company, are
numerous and include (1) worsening credit quality, leading to increases in loan
losses and reserves, (2) continued or worsening disruption and volatility in
financial markets, leading to continuing reductions in assets values, (3)
capital and liquidity concerns regarding financial institutions generally, (4)
limitations resulting from or imposed in connection with governmental actions
intended to stabilize or provide additional regulation of the financial system,
and (5) recessionary conditions that are deeper or last longer than currently
anticipated.
Changes
in local economic conditions could adversely affect our business.
Our
commercial and commercial real estate lending operations are concentrated in
Anne Arundel, Frederick, Howard, Montgomery, and Prince George’s counties in
Maryland, and Fairfax and Loudoun counties in Virginia. Our success depends in
part upon economic conditions in these markets. Adverse changes in economic
conditions in these markets could reduce our growth in loans and deposits,
impair our ability to collect our loans, increase our problem loans and
charge-offs, and otherwise negatively affect our performance and financial
condition. Recent declines in real estate values could cause some of our
residential and commercial real estate loans to be inadequately collateralized,
which would expose us to a greater risk of loss in the event that we
seek to recover on defaulted loans by selling the real estate
collateral.
Our
allowance for loan and lease losses may not be adequate to cover our actual loan
and lease losses, which could adversely affect our earnings.
We
maintain an allowance for loan and lease losses in an amount that we believe is
adequate to provide for probable losses in the portfolio. While we strive to
carefully monitor credit quality and to identify loans and leases that may
become nonperforming, at any time there are loans and leases included in the
portfolio that will result in losses, but that have not been identified as
nonperforming or potential problem credits. We cannot be sure that we will be
able to identify deteriorating credits before they become nonperforming assets,
or that we will be able to limit losses on those loans and leases that are
identified. As a result, future additions to the allowance may be necessary.
Additionally, future additions may be required based on changes in the loans and
leases comprising the portfolio and changes in the financial condition of
borrowers, such as may result from changes in economic conditions, or as a
result of incorrect assumptions by management in determining the allowance.
Additionally, federal banking regulators, as an integral part of their
supervisory function, periodically review our allowance for loan and lease
losses. These regulatory agencies may require us to increase our provision for
loan and lease losses or to recognize further loan or lease charge-offs based
upon their judgments, which may be different from ours. Any increase in the
allowance for loan and lease losses could have a negative effect on our
financial condition and results of operations.
We
rely on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are
and will continue to be dependent upon the services of our executive management
team. In addition, we will continue to depend on our ability to retain and
recruit key client relationship managers. The unexpected loss of services of any
key management personnel, or the inability to recruit and retain qualified
personnel in the future, could have an adverse effect on our business and
financial condition.
The
market price for our common stock may be volatile.
The
market price for our common stock has fluctuated, ranging between $13.33 and
$28.65 per share during the 12 months ended December 31, 2008. The overall
market and the price of our common stock may continue to be volatile. There may
be a significant impact on the market price for our common stock due to, among
other things:
Variations
in our anticipated or actual operating results or the results of our
competitors;
Changes
in investors’ or analysts’ perceptions of the risks and conditions of our
business;
The size
of the public float of our common stock;
Regulatory
developments;
The
announcement of acquisitions or new branch locations by us or our
competitors;
Market
conditions; and
General
economic conditions.
Additionally,
the average daily trading volume for our common stock as reported on the Nasdaq
Market was 96,252 shares during the twelve months ended December 31, 2008, with
daily volume ranging from a low of 10,900 shares to a high of 328,200 shares.
There can be no assurance that a more active or consistent trading market in our
common stock will develop. As a result, relatively small trades could have a
significant impact on the price of our common stock.
We
may fail to realize the cost savings we estimate for mergers and
acquisitions.
The
success of our mergers and acquisitions may depend, in part, on our ability to
realize the estimated cost savings from combining the businesses. It is possible
that the potential cost savings could turn out to be more difficult to achieve
than we anticipated. Our cost savings estimates also depend on our ability to
combine the businesses in a manner that permits those cost savings to be
realized. If our estimates turn out to be incorrect or we are not able to
combine successfully, the anticipated cost savings may not be realized fully or
at all, or may take longer to realize than expected.
Combining
acquired businesses with Sandy Spring may be more difficult, costly, or
time-consuming than we expect, or could result in the loss of
customers.
It is
possible that the process of merger integration of acquired companies could
result in the loss of key employees, the disruption of ongoing business or
inconsistencies in standards, controls, procedures and policies that adversely
affect the ability to maintain relationships with clients and employees or to
achieve the anticipated benefits of the merger or acquisition. There also may be
disruptions that cause us to lose customers or cause customers to withdraw their
deposits. Customers may not readily accept changes to their banking arrangements
or other customer relationships after the merger or acquisition.
Competition
may decrease our growth or profits.
We
compete for loans, deposits, and investment dollars with other banks and other
financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders, many of which have substantially greater resources than ours. Credit
unions have federal tax exemptions, which may allow them to offer lower rates on
loans and higher rates on deposits than taxpaying financial institutions such as
commercial banks. In addition, non-depository institution competitors are
generally not subject to the extensive regulation applicable to institutions
that offer federally insured deposits. Other institutions may have other
competitive advantages in particular markets or may be willing to accept lower
profit margins on certain products. These differences in resources, regulation,
competitive advantages, and business strategy may decrease our net interest
margin, increase our operating costs, and may make it harder for us to compete
profitably.
Government
regulation significantly affects our business.
The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Sandy Spring Bank is subject to regulation and supervision by the
Board of Governors of the Federal Reserve System and by Maryland banking
authorities. Sandy Spring Bancorp is subject to regulation and supervision by
the Board of Governors of the Federal Reserve System. The burdens imposed by
federal and state regulations put banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, mortgage banking
companies, and leasing companies. Changes in the laws, regulations, and
regulatory practices affecting the banking industry may increase our costs of
doing business or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial services
companies undergo continuous change, and we cannot predict the ultimate effect
of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may
also affect our ability to attract deposits and other funding sources, make
loans and investments, and achieve satisfactory interest spreads.
Our
ability to pay dividends is limited by law and contract.
Our
ability to pay dividends to our shareholders largely depends on Sandy Spring
Bancorp’s receipt of dividends from Sandy Spring Bank. The amount of dividends
that Sandy Spring Bank may pay to Sandy Spring Bancorp is limited by federal
laws and regulations. We also may decide to limit the payment of dividends even
when we have the legal ability to pay them in order to retain earnings for use
in our business. We also are prohibited from paying dividends on our common
stock if the required payments on our subordinated debentures or preferred stock
have not been made.
Restrictions
on unfriendly acquisitions could prevent a takeover.
Our
articles of incorporation and bylaws contain provisions that could discourage
takeover attempts that are not approved by the board of directors. The Maryland
General Corporation Law includes provisions that make an acquisition of Sandy
Spring Bancorp more difficult. These provisions may prevent a future takeover
attempt in which our shareholders otherwise might receive a substantial premium
for their shares over then-current market prices.
These
provisions include supermajority provisions for the approval of certain business
combinations and certain provisions relating to meetings of shareholders. Our
certificate of incorporation also authorizes the issuance of additional shares
without shareholder approval on terms or in circumstances that could deter a
future takeover attempt.
Future
sales of our common stock or other securities may dilute the value of our common
stock.
In many
situations, our board of directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued stock, including
shares authorized and unissued under our omnibus stock plan. In the future, we
may issue additional securities, through public or private offerings, in order
to raise additional capital. Any such issuance would dilute the percentage of
ownership interest of existing shareholders and may dilute the per share book
value of the common stock. In addition, option holders may exercise their
options at a time when we would otherwise be able to obtain additional equity
capital on more favorable terms.
We
may not attain the revenue increases or expense reduction goals targeted by
Project LIFT.
The
Company's results in the coming year may depend, in part, on our ability to
realize the estimated revenue increases and expense reductions from Project
LIFT. It is possible that the potential revenue
increases or expense savings could turn out to be more difficult to achieve than
we anticipated. Our estimates also depend on our ability to execute
on a number of expense reduction initiatives. If our estimates turn
out to be incorrect the anticipated revenue increases or cost savings may not be
realized fully or at all, or may take longer to realize than
expected.
The
limitations on dividends and repurchases imposed through our participation in
the TARP Capital Purchase Program may make our common stock less attractive of
an investment.
On
December 5, 2008, the United States Department of the Treasury (the “Treasury”)
purchased newly issued shares of our preferred stock as part of the Troubled
Asset Relief Program (TARP) Capital Purchase Program. As part of this
transaction, we agreed to not increase the dividend paid on our common stock and
to not repurchase shares of our capital stock for a period of three
years. These capital management devices contribute to the
attractiveness of our common stock, and limitations and prohibitions on such
activities may make our common stock less attractive to investors.
The
limitations on executive compensation imposed through our participation in the
Capital Purchase Program may restrict our ability to attract, retain and
motivate key employees, which could adversely affect our
operations.
As part
of our participation in the TARP Capital Purchase Program, we agreed to be bound
by certain executive compensation restrictions, including limitations on
severance payments and the clawback of any bonus and incentive compensation that
were based on materially inaccurate financial statements or any other materially
inaccurate performance metric criteria. The recently enacted American
Recovery and Reinvestment Act of 2009 provides more stringent limitations on
severance pay and the payment of bonuses to certain officers and highly
compensated employees of participants in the Capital Purchase
Program. To the extent that any of these compensation restrictions do
not permit us to provide a comprehensive compensation package to our key
employees that is competitive in our market area, we may have difficulty in
attracting, retaining and motivating our key employees, which could have an
adverse effect on our results of operations.
The
terms governing the issuance of the preferred stock to Treasury may be changed,
the effect of which may have an adverse effect on our operations.
The
Securities Purchase Agreement that we entered into with the Treasury provides
that the Treasury may unilaterally amend any provision of the agreement to the
extent required to comply with any changes in applicable federal statutes that
may occur in the future. The recently enacted American Recovery and
Reinvestment Act of 2009 placed more stringent limits on executive compensation
for participants in the Capital Purchase Program and established a requirement
that compensation paid to executives be presented to shareholders for a
“non-binding” vote. Further changes in the terms of the transaction
may occur in the future. Such changes may place further restrictions
on our business, which may adversely affect our operations.
Our
inability to raise capital at attractive rates may restrict our ability to
redeem the preferred stock we issued, which may lead to a greater cost of that
investment.
The terms
of the preferred stock issued to the Treasury provide that the shares pay a
dividend at a rate of 5% per year for the first five years after which time the
rate will increase to 9% per year. It is our current goal to repay
the Treasury before the date of the increase in the dividend
rate. However, our ability to repay the Treasury will depend on our
ability to raise capital, which will depend on conditions in the capital markets
at that time, which are outside of our control. We can give no
assurance that we will be able to raise additional capital or that such capital
will be available on terms more attractive to us than the Treasury’s
investment.
COMPETITION
The
Bank's principal competitors for deposits are other financial institutions,
including other banks, credit unions, and savings institutions located in the
Bank’s primary market area of Anne Arundel, Carroll, Frederick, Howard,
Montgomery and Prince George’s counties in Maryland, and Fairfax and Loudoun
counties in Virginia. Competition among these institutions is based primarily on
interest rates and other terms offered, service charges imposed on deposit
accounts, the quality of services rendered, and the convenience of banking
facilities. Additional competition for depositors' funds comes from mutual
funds, U.S. Government securities, and private issuers of debt obligations and
suppliers of other investment alternatives for depositors such as securities
firms. Competition from credit unions has intensified in recent years as
historical federal limits on membership have been relaxed. Because federal law
subsidizes credit unions by giving them a general exemption from federal income
taxes, credit unions have a significant cost advantage over banks and savings
associations, which are fully subject to federal income taxes. Credit unions may
use this advantage to offer rates that are highly competitive with those offered
by banks and thrifts.
The
banking business in Maryland generally, and the Bank's primary service areas
specifically, are highly competitive with respect to both loans and deposits. As
noted above, the Bank competes with many larger banking organizations that have
offices over a wide geographic area. These larger institutions have certain
inherent advantages, such as the ability to finance wide-ranging advertising
campaigns and promotions and to allocate their investment assets to regions
offering the highest yield and demand. They also offer services, such as
international banking, that are not offered directly by the Bank (but are
available indirectly through correspondent institutions), and, by virtue of
their larger total capitalization, such banks have substantially higher legal
lending limits, which are based on bank capital, than does the Bank. The Bank
can arrange loans in excess of its lending limit, or in excess of the level of
risk it desires to take, by arranging participations with other banks. Other
entities, both governmental and in private industry, raise capital through the
issuance and sale of debt and equity securities and indirectly compete with the
Bank in the acquisition of deposits.
Sandy
Spring Insurance Corporation (“SSIC”), a wholly-owned subsidiary of the Bank,
offers annuities as an alternative to traditional deposit accounts. SSIC
operates the Chesapeake Insurance Group, a general insurance agency located in
Annapolis, Maryland, and Neff & Associates, an insurance agency located in
Ocean City, Maryland. Both agencies face competition primarily from
other insurance agencies and insurance companies. West Financial
Services, Inc. (“WFS”), a wholly-owned subsidiary of the Bank, is an asset
management and financial planning company located in McLean,
Virginia. WFS faces competition primarily from other financial
planners, banks, and financial management companies. The primary factors in
competing for loans are interest rates, loan origination fees, and the range of
services offered by lenders. Competitors for loan originations include other
commercial banks, mortgage bankers, mortgage brokers, savings associations, and
insurance companies. Equipment leasing through the equipment leasing subsidiary
basically involves the same competitive factors as lending, with competition
from other equipment leasing companies.
In
addition to competing with other commercial banks, credit unions and savings
associations, commercial banks such as the Bank compete with non-bank
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and hold
deposits. Mutual funds also provide substantial competition to banks for
deposits.
The
Holding Company Act permits the Federal Reserve to approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than that holding company's home state. The Federal Reserve may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Holding Company Act also prohibits the Federal Reserve from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Holding Company
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. The State of Maryland
allows out-of-state financial institutions to merge with Maryland banks and to
establish branches in Maryland, subject to certain limitations.
Financial
holding companies may engage in banking as well as types of securities,
insurance, and other financial activities that historically had been prohibited
for bank holding companies under prior law. Banks with or without
holding companies also may establish and operate financial subsidiaries that may
engage in most financial activities in which financial holding companies may
engage. Competition may increase as bank holding companies and other large
financial services companies take advantage of the ability to engage in new
activities and provide a wider array of products.
EMPLOYEES
The
Company and the Bank employed 717 persons, including executive officers, loan
and other banking and trust officers, branch personnel, and others at December
31, 2008. None of the Company's or the Bank's employees is represented by a
union or covered under a collective bargaining agreement. Management of the
Company and the Bank consider their employee relations to be
excellent.
EXECUTIVE
OFFICERS
The
following listing sets forth the name, age (as of February 27, 2009), principal
position and business experience of each executive officer that is not a
director for at least the last five years are set forth below:
R. Louis
Caceres, 46, Executive Vice President of the Bank. Mr. Caceres was made
Executive Vice President of the Bank in 2002. Prior to that, Mr.
Caceres was a Senior Vice President of the Bank.
William
W. Hill, 56, became Executive Vice President of the Bank in 2008. Prior to that,
Mr. Hill was a Senior Vice President of the Bank.
Ronald E.
Kuykendall, 56, became Executive Vice President, General Counsel and Secretary
of the Company and the Bank in 2002. Prior to that, Mr. Kuykendall
was General Counsel and Secretary of the Company and Senior Vice President of
the Bank.
Philip J.
Mantua, CPA, 50, became Executive Vice President and Chief Financial Officer of
the Company and the Bank in 2004. Prior to that, Mr. Mantua was
Senior Vice President of Managerial Accounting.
Joseph J.
O'Brien, Jr., 45, joined the Bank in July 2007 as Executive Vice
President. On January 1, 2008 he became president of the Northern
Virginia Market. Prior to joining the Bank Mr. O'Brien was Executive
Vice President and senior lender for a local banking institution.
Daniel J.
Schrider, 44, became President of the Company and the Bank effective March 26,
2008 and Chief Executive Officer effective January 1, 2009. Prior to
that, Mr. Schrider served as an Executive Vice President and Chief Revenue
Officer of the Bank.
Frank H.
Small, 62, became an Executive Vice President of the Company and the Bank in
2001 and Chief Operating Officer of the Bank in 2002. Prior to that,
Mr. Small was an Executive Vice President of the Bank.
Jeffrey
A. Welch, 49, became an Executive Vice President and Chief Credit Officer of the
Bank in 2008. Prior to joining the Bank, Mr. Welch served as a Senior Vice
President of Commerce Bank.
PROPERTIES
The
Company’s headquarters is located in Olney, Maryland. As of December 31, 2008,
Sandy Spring Bank owned 14 of its 42 full-service community banking centers and
leased the remaining banking centers. Visit www.sandyspringbank.com
for a complete list of community banking and ATM locations.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
The
following financial statements are filed as a part of this
report:
|
Consolidated
Balance Sheets at December 31, 2008 and 2007 |
|
Consolidated
Statements of Income for the years ended December 31, 2008, 2007, and
2006
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007, and
2006
|
|
Consolidated
Statements of Changes in Stockholders' Equity for the years ended December
31, 2008, 2007, and 2006
|
|
Notes
to the Consolidated Financial Statements
|
|
Reports
of Registered Public Accounting
Firm |
All
financial statement schedules have been omitted, as the required information is
either not applicable or included in the Consolidated Financial Statements or
related Notes.
The
following exhibits are filed as a part of this report:
Exhibit No.
|
|
Description
|
|
Incorporated
by Reference to:
|
3(a)
|
|
Articles
of Incorporation of Sandy Spring Bancorp, Inc., as Amended
|
|
Exhibit
3.1 to Form 10-Q for the quarter ended June 30, 1996, SEC File No.
0-19065.
|
|
|
|
|
|
3(b)
|
|
Bylaws
of Sandy Spring Bancorp, Inc.
|
|
Exhibit
3.2 to Form 8-K dated May 13, 1992, SEC File No.
0-19065.
|
|
|
|
|
|
3(c)
|
|
Articles
Supplementary establishing Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, of Sandy Spring Bancorp, Inc.
|
|
Exhibit
4.1 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
4(a)
|
|
No
long-term debt instrument issued by the Company exceeds 10% of
consolidated assets or is registered. In accordance with
paragraph 4(iii) of Item 601(b) of Regulation S-K, the Company will
furnish the SEC copies of all long-term debt instruments and related
agreements upon request.
|
|
|
|
|
|
|
|
4(b)
|
|
Warrant
to Purchase 651,547 Shares of Common
Stock of Sandy Spring Bancorp, Inc.
|
|
Exhibit
4.3 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
10(a)*
|
|
Amended
and Restated Sandy Spring Bancorp, Inc., Cash and Deferred Profit Sharing
Plan and Trust
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 1997, SEC File No.
0-19065.
|
|
|
|
|
|
10(b)*
|
|
Sandy
Spring Bancorp, Inc. 2005 Omnibus Stock Plan
|
|
Exhibit
10.1 to Form 8-K dated June 27, 2005, Commission File No.
0-19065.
|
|
|
|
|
|
10(c)*
|
|
Sandy
Spring Bancorp, Inc. Amended and Restated Stock Option Plan for Employees
of Annapolis Bancshares, Inc.
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement No.
333-11049.
|
|
|
|
|
|
10(d)*
|
|
Sandy
Spring Bancorp, Inc. 1999 Stock Option Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement No.
333-81249.
|
|
|
|
|
|
10(e)*
|
|
Sandy
Spring National Bank of Maryland Executive Health Insurance
Plan
|
|
Exhibit
10 to Form 10-Q for the quarter ended March 31, 2002, SEC File No.
0-19065.
|
|
|
|
|
|
10(f)*
|
|
Form
of Director Fee Deferral Agreement, August 26, 1997, as
amended
|
|
Exhibit
10(h) to Form 10-K for the year ended December 31, 2003, SEC File No.
0-19065.
|
|
|
|
|
|
10(g)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
Philip J. Mantua
|
|
Exhibit
10(l) to Form 10-K for the year ended December 31, 2004, SEC File No.
0-19065.
|
|
|
|
|
|
10(h)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
Daniel J. Schrider
|
|
|
Exhibit No.
|
|
Description
|
|
Incorporated
by Reference to:
|
10(i)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
Frank H. Small
|
|
Exhibit
10(o) to Form 10-K for the year ended December 31, 2002, SEC File No.
0-19065.
|
|
|
|
|
|
10(j)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
R. Louis Caceres
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 2004, SEC File No.
0-19065.
|
|
|
|
|
|
10(k)*
|
|
Form
of Sandy Spring National Bank of Maryland Officer Group Term Replacement
Plan
|
|
Exhibit
10(r) to Form 10-K for the year ended December 31, 2001, SEC File No.
0-19065.
|
|
|
|
|
|
10(l)*
|
|
Sandy
Spring Bancorp, Inc. Directors’ Stock Purchase Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, File No.
333-117330.
|
|
|
|
|
|
10(m)*
|
|
Amended
and Restated Potomac Bank of Virginia 1999 Stock Option
Plan
|
|
Exhibit
4.1 to Registration Statement on Form S-8, File No.
333-141052
|
|
|
|
|
|
10(n)*
|
|
Sandy
Spring Bank Executive Incentive Retirement Plan
|
|
Exhibit
10(v) to Form 10-K for the year ended December 31, 2007, SEC File No.
0-19065.
|
|
|
|
|
|
10(o)*
|
|
Form
of Amendment to Directors’ Fee Deferral Agreement
|
|
|
|
|
|
|
|
10(p)*
|
|
Form
of Amendment to Employment Agreement for executive
officers
|
|
|
|
|
|
|
|
10(q)*
|
|
Form
of Amendment to Employment Agreement for executive
officers
|
|
|
|
|
|
|
|
10(s)
|
|
Letter
Agreement and related Securities Purchase Agreement – Standard Terms,
dated December 5, 2008, between Sandy Spring Bancorp, Inc. and United
States Department of the Treasury
|
|
Exhibit
10.1 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
10(t)
|
|
Sandy
Spring Bancorp, Inc. Employee Stock Purchase Plan
|
|
Exhibit
4 to registration Statement on Form S-8, Registration Statement No.
333-63126
|
|
|
|
|
|
12
|
|
Statement
of computation of ratio of earnings to combined fixed charges and
preferred stock dividends
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries
|
|
|
|
|
|
|
|
23(a)
|
|
Consent
of McGladrey & Pullen, LLP
|
|
|
|
|
|
|
|
23(b)
|
|
Consent
of Grant Thornton LLP
|
|
|
|
|
|
|
|
31(a)
|
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
|
|
|
|
|
|
31(b)
|
|
Rule
13a-14(a)/15d-14(a) Certification
|
|
|
|
|
|
|
|
32(a)
|
|
18
U.S.C. Section 1350 Certification
|
|
|
|
|
|
|
|
32(b)
|
|
18
U.S.C. Section 1350 Certification
|
|
|
*
Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
15(c) of this Report.
Shareholders
may obtain, upon payment of a reasonable fee, a copy of the exhibits to this
Report on Form 10-K by writing Ronald E. Kuykendall, General Counsel and
Secretary, at Sandy Spring Bancorp, Inc., 17801 Georgia Avenue, Olney, Maryland
20832. Shareholders also may access a copy of the Form 10-K including exhibits
on the SEC Web site at www.sec.gov or through the Company’s Investor Relations
Web site maintained at www.sandyspringbank.com.
Signatures
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANDY
SPRING BANCORP, INC.
(Registrant)
By:
|
/s/
Daniel J. Schrider
|
Daniel
J. Schrider
|
President
and Chief Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated as of February 25, 2009.
Principal
Executive Officer and Director:
|
|
Principal
Financial and Accounting Officer:
|
/s/ Daniel J. Schrider
|
|
/s/ Philip J. Mantua
|
Daniel
J. Schrider
|
|
Philip
J. Mantua
|
President
and Chief Executive Officer
|
|
Executive
Vice President and Chief Financial
Officer
|
|
|
Title
|
|
|
|
/s/
Mark E. Friis
|
|
Director
|
Mark
E. Friis
|
|
|
|
|
|
/s/
Susan D. Goff
|
|
Director
|
Susan
D. Goff
|
|
|
|
|
|
/s/
Solomon Graham
|
|
Director
|
Solomon
Graham
|
|
|
|
|
|
/s/
Marshall H. Groom
|
|
Director
|
Marshall
Groom
|
|
|
|
|
|
/s/
Gilbert L. Hardesty
|
|
Director
|
Gilbert
L. Hardesty
|
|
|
|
|
|
/s/
Pamela A. Little
|
|
Director
|
Pamela
A. Little
|
|
|
|
|
|
/s/
Charles F. Mess
|
|
Director
|
Charles
F. Mess
|
|
|
|
|
|
/s/
Robert L. Orndorff
|
|
Director
|
Robert
L. Orndorff
|
|
|
|
|
|
/s/
David E. Rippeon
|
|
Director
|
David
E. Rippeon
|
|
|
|
|
|
/s/
Craig A. Ruppert
|
|
Director
|
Craig
A. Ruppert
|
|
|
|
|
|
/s/
Lewis R. Schumann
|
|
Director
|
Lewis
R. Schumann
|
|
|
|
|
|
|
|
Chairman
of the Board,
|
Hunter
R. Hollar
|
|
Director
|