UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
quarterly period ended March 31,
2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from _____________ to
Commission
File Number: 0-19065
Sandy Spring Bancorp,
Inc.
(Exact
name of registrant as specified in its charter)
Maryland
|
|
52-1532952
|
(State of incorporation)
|
|
(I.R.S. Employer Identification Number)
|
|
|
|
17801 Georgia Avenue, Olney, Maryland
|
20832
|
301-774-6400
|
(Address of principal office)
|
(Zip Code)
|
(Telephone Number)
|
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to filing requirements for the past 90 days.
YES x NO
¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).
YES ¨ NO
¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-accelerated
filer ¨ Smaller reporting Company ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)
YES ¨ NO
x
The number of shares of common stock
outstanding as of April 22, 2009 is 16,449,908 shares.
SANDY
SPRING BANCORP, INC.
INDEX
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets at
|
|
March
31, 2009 (Unaudited) and December 31, 2008
|
1
|
|
|
Consolidated
Statements of Income for the Three Month
|
|
Periods
Ended March 31, 2009 and 2008 (Unaudited)
|
2
|
|
|
Consolidated
Statements of Cash Flows for the Three
|
|
Month
Periods Ended March 31, 2009 and 2008 (Unaudited)
|
4
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
|
|
Three
Month Periods Ended March 31, 2009 and 2008 (Unaudited)
|
6
|
|
|
Notes
to Consolidated Financial Statements
|
7
|
|
|
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
|
|
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
|
21
|
|
|
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
|
|
ABOUT
MARKET RISK
|
35
|
|
|
ITEM
4. CONTROLS AND PROCEDURES
|
35
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
ITEM
1A. RISK FACTORS
|
35
|
|
|
ITEM
6. EXHIBITS
|
35
|
|
|
SIGNATURES
|
36
|
PART I -
FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
Cash
and due from banks
|
|
$ |
46,380 |
|
|
$ |
44,738 |
|
Federal
funds sold
|
|
|
392 |
|
|
|
1,110 |
|
Interest-bearing
deposits with banks
|
|
|
126,286 |
|
|
|
59,381 |
|
Cash
and cash equivalents
|
|
|
173,058 |
|
|
|
105,229 |
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
14,515 |
|
|
|
11,391 |
|
Investments
available-for-sale (at fair value)
|
|
|
472,161 |
|
|
|
291,727 |
|
Investments
held-to-maturity – fair value $163,009 (2009) and $175,908
(2008)
|
|
|
156,877 |
|
|
|
171,618 |
|
Other
equity securities
|
|
|
32,131 |
|
|
|
29,146 |
|
Total
loans and leases
|
|
|
2,461,845 |
|
|
|
2,490,646 |
|
Less:
allowance for loan and lease losses
|
|
|
(59,798 |
) |
|
|
(50,526 |
) |
Net
loans and leases
|
|
|
2,402,047 |
|
|
|
2,440,120 |
|
Premises
and equipment, net
|
|
|
50,981 |
|
|
|
51,410 |
|
Other
real estate owned
|
|
|
5,093 |
|
|
|
2,860 |
|
Accrued
interest receivable
|
|
|
11,937 |
|
|
|
11,810 |
|
Goodwill
|
|
|
76,816 |
|
|
|
76,248 |
|
Other
intangible assets, net
|
|
|
11,128 |
|
|
|
12,183 |
|
Other
assets
|
|
|
112,688 |
|
|
|
109,896 |
|
Total
assets
|
|
$ |
3,519,432 |
|
|
$ |
3,313,638 |
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
545,540 |
|
|
$ |
461,517 |
|
Interest-bearing
deposits
|
|
|
2,008,372 |
|
|
|
1,903,740 |
|
Total
deposits
|
|
|
2,553,912 |
|
|
|
2,365,257 |
|
Short-term
borrowings
|
|
|
487,900 |
|
|
|
421,074 |
|
Other
long-term borrowings
|
|
|
16,340 |
|
|
|
66,584 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
35,000 |
|
Accrued
interest payable and other liabilities
|
|
|
33,758 |
|
|
|
33,861 |
|
Total
liabilities
|
|
|
3,126,910 |
|
|
|
2,921,776 |
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock – par value $1.00 (liquidation preference of $1,000 per share)
shares authorized 83,094; shares issued and outstanding 83,094 (discount
of $3,493 and $3,654, respectively)
|
|
|
79,601 |
|
|
|
79,440 |
|
Common
stock — par value $1.00; shares authorized 49,916,906; shares issued and
outstanding 16,414,523
(2009) and 16,398,523 (2008)
|
|
|
16,415 |
|
|
|
16,399 |
|
Additional
paid in capital
|
|
|
85,820 |
|
|
|
85,486 |
|
Warrants
|
|
|
3,699 |
|
|
|
3,699 |
|
Retained
earnings
|
|
|
213,453 |
|
|
|
214,410 |
|
Accumulated
other comprehensive loss
|
|
|
(6,466 |
) |
|
|
(7,572 |
) |
Total
stockholders' equity
|
|
|
392,522 |
|
|
|
391,862 |
|
Total
liabilities and stockholders' equity
|
|
$ |
3,519,432 |
|
|
$ |
3,313,638 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Interest
Income:
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
33,233 |
|
|
$ |
38,469 |
|
Interest
on loans held for sale
|
|
|
280 |
|
|
|
96 |
|
Interest
on deposits with banks
|
|
|
46 |
|
|
|
49 |
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,195 |
|
|
|
2,698 |
|
Exempt
from federal income taxes
|
|
|
1,972 |
|
|
|
2,331 |
|
Interest
on federal funds sold
|
|
|
2 |
|
|
|
279 |
|
TOTAL
INTEREST INCOME
|
|
|
38,728 |
|
|
|
43,922 |
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,454 |
|
|
|
13,022 |
|
Interest
on short-term borrowings
|
|
|
3,446 |
|
|
|
3,279 |
|
Interest
on long-term borrowings
|
|
|
803 |
|
|
|
1,042 |
|
TOTAL
INTEREST EXPENSE
|
|
|
13,703 |
|
|
|
17,343 |
|
NET
INTEREST INCOME
|
|
|
25,025 |
|
|
|
26,579 |
|
Provision
for loan and lease losses
|
|
|
10,613 |
|
|
|
2,667 |
|
NET
INTEREST INCOME AFTER PROVISION
FOR
LOAN AND LEASE LOSSES
|
|
|
14,412 |
|
|
|
23,912 |
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
162 |
|
|
|
574 |
|
Service
charges on deposit accounts
|
|
|
2,863 |
|
|
|
3,030 |
|
Gains
on sales of mortgage loans
|
|
|
1,022 |
|
|
|
722 |
|
Fees
on sales of investment products
|
|
|
700 |
|
|
|
822 |
|
Trust
and investment management fees
|
|
|
2,287 |
|
|
|
2,397 |
|
Insurance
agency commissions
|
|
|
2,050 |
|
|
|
2,086 |
|
Income
from bank owned life insurance
|
|
|
711 |
|
|
|
714 |
|
Visa
check fees
|
|
|
638 |
|
|
|
696 |
|
Other
income
|
|
|
1,541 |
|
|
|
1,655 |
|
TOTAL
NONINTEREST INCOME
|
|
|
11,974 |
|
|
|
12,696 |
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
13,204 |
|
|
|
13,763 |
|
Occupancy
expense of premises
|
|
|
2,775 |
|
|
|
2,799 |
|
Equipment
expenses
|
|
|
1,514 |
|
|
|
1,439 |
|
Marketing
|
|
|
420 |
|
|
|
497 |
|
Outside
data services
|
|
|
806 |
|
|
|
1,122 |
|
Amortization
of intangible assets
|
|
|
1,055 |
|
|
|
1,124 |
|
Other
expenses
|
|
|
4,476 |
|
|
|
3,959 |
|
TOTAL
NONINTEREST EXPENSES
|
|
|
24,250 |
|
|
|
24,703 |
|
Income
Before Income Taxes
|
|
|
2,136 |
|
|
|
11,905 |
|
Income
Tax Expense (benefit)
|
|
|
(81 |
) |
|
|
3,700 |
|
Net
income
|
|
$ |
2,217 |
|
|
$ |
8,205 |
|
Preferred
stock dividends and discount accretion
|
|
|
1,200 |
|
|
|
0 |
|
Net
income available to common shareholders
|
|
$ |
1,017 |
|
|
$ |
8,205 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED) (Continued)
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
Basic
net income per share
|
|
$ |
0.14 |
|
|
$ |
0.50 |
|
Basic
net income per common share
|
|
|
0.06 |
|
|
|
0.50 |
|
Diluted
net income per share
|
|
|
0.13 |
|
|
|
0.50 |
|
Diluted
net income per common share
|
|
|
0.06 |
|
|
|
0.50 |
|
Dividends
declared per common share
|
|
|
0.12 |
|
|
|
0.24 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,217 |
|
|
$ |
8,205 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,617 |
|
|
|
2,715 |
|
Provision
for loan and lease losses
|
|
|
10,613 |
|
|
|
2,667 |
|
Stock
compensation expense
|
|
|
222 |
|
|
|
157 |
|
Deferred
income taxes (benefits)
|
|
|
(4,042 |
) |
|
|
(1,475 |
) |
Origination
of loans held for sale
|
|
|
(108,109 |
) |
|
|
(45,418 |
) |
Proceeds
from sales of loans held for sale
|
|
|
105,844 |
|
|
|
43,353 |
|
Gains
on sales of loans held for sale
|
|
|
(859 |
) |
|
|
(722 |
) |
Securities
gains
|
|
|
(162 |
) |
|
|
(574 |
) |
Gains
on sales of premises and equipment
|
|
|
0 |
|
|
|
(2 |
) |
Net
(increase) decrease in accrued interest receivable
|
|
|
(127 |
) |
|
|
1,754 |
|
Net
increase in other assets
|
|
|
(397 |
) |
|
|
(2,988 |
) |
Net
decrease in accrued expenses and other liabilities
|
|
|
(332 |
) |
|
|
(1,354 |
) |
Other
– net
|
|
|
(761 |
) |
|
|
(1,363 |
) |
Net
cash provided by operating activities
|
|
|
6,724 |
|
|
|
4,955 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of
other equity securities
|
|
|
(2,986 |
) |
|
|
(2,037 |
) |
Purchases
of investments available-for-sale
|
|
|
(228,490 |
) |
|
|
(129,792 |
) |
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
14,864 |
|
|
|
32,362 |
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
49,369 |
|
|
|
110,405 |
|
Net
decrease (increase) in loans and leases
|
|
|
26,567 |
|
|
|
(87,193 |
) |
Redemption
of VISA stock
|
|
|
0 |
|
|
|
429 |
|
Expenditures
for premises and equipment
|
|
|
(802
|
) |
|
|
(664 |
) |
Net
cash (used in) investing activities
|
|
|
(141,478 |
) |
|
|
(76,490 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
188,655 |
|
|
|
66,700 |
|
Net
increase (decrease) in short-term borrowings
|
|
|
16,582 |
|
|
|
(1,588 |
) |
Net
increase in long-term borrowings
|
|
|
0 |
|
|
|
50,000 |
|
Proceeds
from issuance of common stock
|
|
|
128 |
|
|
|
166 |
|
Dividends
paid
|
|
|
(2,782 |
) |
|
|
(3,915 |
) |
Net
cash provided by financing activities
|
|
|
202,583 |
|
|
|
111,363 |
|
Net
increase in cash and cash equivalents
|
|
|
67,829 |
|
|
|
39,828 |
|
Cash
and cash equivalents at beginning of period
|
|
|
105,229 |
|
|
|
85,852 |
|
Cash
and cash equivalents at end of period
|
|
$ |
173,058 |
|
|
$ |
125,680 |
|
Sandy
Spring Bancorp and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
|
|
Three Months Ended
March 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
13,778 |
|
|
$ |
16,886 |
|
Income
tax payments
|
|
|
0 |
|
|
|
7,104 |
|
Transfers
from loans to other real estate owned
|
|
|
2,234 |
|
|
|
200 |
|
Reclassification
of borrowings from long-term to short-term
|
|
|
50,244 |
|
|
|
241 |
|
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, 2008
|
|
$ |
79,440 |
|
|
$ |
16,399 |
|
|
$ |
3,699 |
|
|
$ |
85,486 |
|
|
$ |
214,410 |
|
|
$ |
(7,572 |
) |
|
$ |
391,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,217 |
|
|
|
|
|
|
|
2,217 |
|
Other
comprehensive income, net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,106 |
|
|
|
1,106 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends - $.12 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974 |
) |
|
|
|
|
|
|
(1,974 |
) |
Preferred
Stock dividends – $12.49 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,039 |
) |
|
|
|
|
|
|
(1,039 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
222 |
|
Discount
accretion
|
|
|
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock purchase plan – 9,524 shares
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
117 |
|
Restricted
stock- 5,441 shares
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
0 |
|
DRIP
plan – 1,035 shares
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Balances
at March 31, 2009
|
|
$ |
79,601 |
|
|
$ |
16,415 |
|
|
$ |
3,699 |
|
|
$ |
85,820 |
|
|
$ |
213,453 |
|
|
$ |
(6,466 |
) |
|
$ |
392,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
$ |
- |
|
|
$ |
16,349 |
|
|
$ |
- |
|
|
$ |
83,970 |
|
|
$ |
216,376 |
|
|
$ |
(1,055 |
) |
|
$ |
315,640 |
|
Adjustment
to reflect adoption of EITF Issue 06-04 effective January 1,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,647 |
) |
|
|
|
|
|
|
(1,647 |
) |
Balance
as of January 1, 2008 following adoption of EITF issue
06-04
|
|
|
|
|
|
|
16,349 |
|
|
|
|
|
|
|
83,970 |
|
|
|
214,729 |
|
|
|
(1,055 |
) |
|
|
313,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,205 |
|
|
|
|
|
|
|
8,205 |
|
Other
comprehensive income, net of tax effects and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361 |
|
|
|
361 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends- $0.24 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,915 |
) |
|
|
|
|
|
|
(3,915 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
157 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option plan –6,474 shares (14,184 shares issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
7,710 shares retired)
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
Employee
stock purchase plan- 5,653 shares
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
130 |
|
|
|
|
|
|
|
|
|
|
|
136 |
|
Balances
at March 31, 2008
|
|
$ |
- |
|
|
$ |
16,361 |
|
|
$ |
- |
|
|
$ |
84,281 |
|
|
$ |
219,019 |
|
|
$ |
(694 |
) |
|
$ |
318,967 |
|
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 –
General
The accompanying financial statements
are unaudited. In the opinion of Management, all adjustments
(comprising only normal recurring accruals) necessary for a fair presentation of
the results of the interim periods have been included. These
statements should be read in conjunction with the financial statements and
accompanying notes included in Sandy Spring Bancorp's 2008 Annual Report on Form
10-K. There have been no significant changes to the Company’s
Accounting Policies as disclosed in the 2008 Annual Report on Form
10-K. The results shown in this interim report are not necessarily
indicative of results to be expected for the full year 2009.
The accounting and reporting policies
of Sandy Spring Bancorp, Inc. (the "Company") and its wholly-owned subsidiary,
Sandy Spring Bank (the “Bank”), together with its subsidiaries, Sandy Spring
Insurance Corporation, The Equipment Leasing Company, and West Financial
Services, Inc., conform to accounting principles generally accepted in the
United States of America and to general practices within the financial services
industry. Certain reclassifications have been made to amounts previously
reported to conform to current classifications.
Consolidation has resulted in the
elimination of all significant intercompany accounts and
transactions.
Cash
Flows
For purposes of reporting cash flows,
cash and cash equivalents include cash and due from banks, federal funds sold
and interest-bearing deposits with banks (which have original maturities of
three months or less).
Note 2 -
New Accounting Pronouncements
Adopted
Accounting Pronouncements
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 $21.9
million as of March 31, 2009 and recorded a liability and a corresponding
reduction of retained earnings of $1.6 million on January 1, 2008.
In
September 2006, the FASB issued 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 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 adoption of this Statement
did not have a material impact on the Company’s 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 adoption of this Statement 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 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 adoption of
this FSP did not 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 within 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 adoption of this FSP did not
have a material impact on its financial position, results of operations or cash
flows.
Pending
Accounting Pronouncements
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.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly,” which
provides additional guidance for estimating fair value in accordance with SFAS
No 157,”Fair Value
Measurements,” when the volume and level of activity for the asset or
liability have significantly decreased. This FSP also includes guidance on
identifying circumstances that indicate a transaction is not orderly. The FSP
applies to all assets and liabilities within the scope of pronouncements that
require or permit fair value measurements, except as discussed in paragraphs 2
and 3 of SFAS No. 157. The FSP also emphasizes that, regardless of whether the
volume and level of activity for an asset or liability have decreased
significantly and regardless of which valuation technique was used, the
objective of a fair value measurement under SFAS No. 157 remains the
same.
The FSP
lists a number of factors that a reporting entity must evaluate to determine
whether there has been a significant decrease in the volume and level of
activity for the asset or liability when compared with normal market
activity. If the entity determines, after application of significant
judgment, that the volume or level of activity for the same or similar asset or
liability has significantly decreased, then transactions or quoted prices may
not be considered to be orderly and thus may require further analysis to
determine if significant adjustments are necessary to
estimate fair value. The entity may need to change its valuation technique or
use multiple valuation techniques to estimate the fair value of the asset or
liability.
If an
entity determines that the volume and level of activity for an asset or
liability have decreased significantly, it must consider whether observable
transactions were orderly through evaluation of a number of indicators. The
entity must then consider the weight of the evidence developed in determining
whether a transaction was orderly and must evaluate all relevant information
that is available without undue cost and effort. In addition the FSP requires
additional disclosures for both interim and annual periods with respect to the
valuation techniques and inputs used and changes in valuation techniques and
related inputs for all fair value measurements. For disclosures
required under SFAS No. 157, the term “major category” is now defined to have
the same meaning as “major security types” in SFAS No. 115. This FSP is
effective for interim and annual periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009, and must be applied
prospectively. If an entity adopts either FSP FAS 115-2 and FAS
124-2, “Recognition and
Presentation of Other –than-Temporary impairments,” or FSP FAS 107-1 and
APB 28-1, “Interim Disclosures
about Fair Value of Financial Instruments,” for periods ending after
March 15, 2009, then it must adopt this FSP at the same time. Further, if an
entity early adopts this FSP, it must adopt FSPFAS 115-2 and FAS 124-2
concurrently.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments.” This FSP is intended to make the
accounting for other-than-temporary impairments of financial instruments more
operational and to improve the financial statement presentation of those
impairments. Under this FSP, if the fair value of a debt security is less than
its amortized cost basis at the balance sheet date, an entity must assess
whether impairment is other-than-temporary. In performing such an assessment,
the entity must determine (1) whether it intends to sell the debt security and
(2) whether it is more likely than not that it will be required to sell the debt
security before recovery of its amortized cost basis. If either of the two are
true, then the decrease in fair value below the amortized cost basis is an
other-than-temporary impairment. The FSP also states that if the entity does not
expect to recover the entire amortized cost basis of the security, the entity
would be unable to assert that it will recover its amortized cost basis even if
it does not intend to sell the security and thus, an other-than-temporary
impairment shall be considered to have occurred. In assessing the possible
recovery of the amortized cost, an entity shall compare the present value of
cash flows expected to be collected from the security with the amortized cost
basis of the security. If such calculated present value is less than the
amortized cost basis of the security, a credit loss is deemed to exist and an
other-than-temporary impairment is assumed. The FSP also states that a number of
other factors must also be considered when an entity determines whether it will
more likely than not be required to sell a debt security before recovery of its
amortized cost basis. In making such a determination, the entity must adjust its
amortized cost basis by the amount of the credit loss calculated
above.
If an
entity determines that it will sell a debt security or that it more likely than
not will be required to sell a debt security before recovery of its amortized
cost basis, then it must recognize the difference between the fair value and the
amortized cost basis of the debt security in earnings. If not, then the
other-than-temporary impairment must be separated into the credit loss and the
amount related to all other factors. The amount related to the credit loss must
be recognized in earnings, while the other component must be recognized in other
comprehensive income, net of tax.
The FSP
also provides for revised accounting and disclosure requirements in the periods
after an entity recognized an other-than-temporary impairment. This FSP is
effective for interim and annual periods ending after June 15,
2009. Early adoption is permitted for interim and annual periods
after March 15, 2009. However, if an entity elects to adopt early either FSP FAS
157-4 or FSP FAS 107-1 and FAS APB 28-1, the entity also is required to adopt
early this FSP. Additionally, if an entity elects to adopt early this FSP, it is
required to adopt FSP FAS 157-4. The Company intends to adopt
this FSP in the second quarter of 2009 and does not expect that it will have a
material impact on its financial position, results of operations or cash
flows.
In April
2009, the FASB issued FSP FAS 107-1 and FSP APB 28-1, “Interim Disclosures about Fair Value
of Financial Instruments.” This FSP amends FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments,” to require disclosures about fair value of
financial instruments for interim reporting periods of publicly traded companies
as well as in annual financial statements. This FSP also amends APB Opinion no.
28, “Interim Financial
Reporting,” to require those disclosures in summarized financial
information at interim reporting periods. The FSP requires that a
publicly traded company include disclosures about the fair value of its
financial instruments whenever it issues summarized financial information for
interim reporting periods. Such disclosures should include the fair value of all
financial instruments for which it is practicable to estimate fair value on a
comparative basis with the related carrying values. The entity must also include
the methods and significant assumptions used to estimate such fair values and
shall describe any changes in methods and significant assumptions during the
period. This FSP is effective for interim and annual periods ending after June
15, 2009. Early adoption is permitted for interim and annual periods
ending after March 15, 2009. An entity may early adopt this FSP only if it also
elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, this FSP
requires comparative disclosures only for periods ending after initial adoption.
The Company intends to adopt this FSP in the second quarter of 2009 and does not
expect that it will have a material impact on its financial position, results of
operations or cash flows.
Note 3 –
Stock Based Compensation
At March
31, 2009, 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 1,161,876 are available for
issuance at March 31, 2009, has a term of ten years, and is administered by a
committee of at least three directors appointed by the Board of
Directors. Options granted under the plan have an exercise price
which may not be less than 100% of the fair market value of the common stock on
the date of the grant and must be exercised within seven to ten years from the
date of grant. The exercise price of stock options must be paid for
in full in cash or shares of common stock, or a combination of
both. The Stock Option Committee has the discretion when making a
grant of stock options to impose restrictions on the shares to be purchased in
exercise of such options. Outstanding options granted under the
expired 1999 stock option plan will continue until exercise or
expiration.
Effective
March 25, 2009, the Board of Directors approved the granting of 73,560 stock
options, subject to a three year vesting schedule with one third of the options
vesting each year as of March 25, 2010, 2011, and 2012, respectively. No stock
options were granted to the Company’s senior executive officers. In
addition, on March 25, 2009, the Board of Directors granted 97,008 restricted
shares subject to a five year vesting schedule with one fifth of the shares
vesting each year as of March 25, 2010, 2011, 2012, 2013, and 2014,
respectively, except that no such restricted shares granted to the Company’s
senior executive officers will vest until such time as the Company has redeemed
its Series A preferred stock. The Board of Directors approved the
granting of 116,360 stock options and 28,675 shares of restricted stock during
the three month period ended March 31, 2008.
Compensation
expense is recognized on a straight-line basis over the stock option or
restricted stock vesting period. The fair value based method for expense
recognition of employee awards resulted in expense of approximately $0.2 million
for the three month periods ended March 31, 2009 and 2008.
The fair
values of all of the options granted have been estimated using a binomial
option-pricing model.
The total
intrinsic value of options exercised during the quarters ended March 31, 2009
and 2008 was $0 million and $0.2 million, respectively
A summary of share option activity for the three month period ended
March 31, 2009 follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercised
|
|
|
Contractual
|
|
|
Intrinsic
|
|
(Dollars in thousands, except per share data):
|
|
Shares
|
|
|
Share Price
|
|
|
Life(Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
|
973,730 |
|
|
$ |
33.47 |
|
|
|
5.0 |
|
|
$ |
610 |
|
Granted
|
|
|
73,560 |
|
|
|
12.01 |
|
|
|
7.0 |
|
|
|
|
|
Exercised
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
Forfeited
or expired
|
|
|
(35,095 |
) |
|
|
32.21 |
|
|
|
3.3 |
|
|
|
|
|
Balance
at March 31, 2009
|
|
|
1,012,195 |
|
|
$ |
31.95 |
|
|
|
5.2 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2009
|
|
|
840,881 |
|
|
$ |
33.91 |
|
|
|
|
|
|
$ |
0 |
|
A summary
of the status of the Company’s nonvested options as of March 31, 2009, and
changes during the three month period then ended, is presented
below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
|
|
Of Shares
|
|
|
Fair Value
|
|
Nonvested
at January 1, 2009
|
|
|
134,010 |
|
|
$ |
5.25 |
|
Granted
|
|
|
73,560 |
|
|
|
3.22 |
|
Vested
|
|
|
(34,456 |
) |
|
|
4.47 |
|
Forfeited
|
|
|
(1,800 |
) |
|
|
4.47 |
|
Nonvested
at March 31, 2009
|
|
|
171,314 |
|
|
$ |
4.54 |
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
|
|
Of Shares
|
|
|
Fair Value
|
|
Restricted
stock at January 1, 2009
|
|
|
41,202 |
|
|
$ |
31.27 |
|
Granted
|
|
|
97,008 |
|
|
|
12.01 |
|
Vested
|
|
|
(5,441 |
) |
|
|
27.96 |
|
Forfeited
|
|
|
(496 |
) |
|
|
29.12 |
|
Restricted
stock at March 31, 2009
|
|
|
132,273 |
|
|
$ |
17.29 |
|
The
number of options, exercise prices, and fair values has been retroactively
restated for all stock dividends occurring since the date the options were
granted.
The total
of unrecognized compensation cost related to nonvested share-based compensation
arrangements was approximately $2.3 million as of March 31,
2009. That cost is expected to be recognized over a weighted average
period of approximately 3.6 years.
The
Company generally issues authorized but previously unissued shares to satisfy
option exercises.
Note 4 -
Per Share Data
The calculations of net income per
common share for the three month periods ended March 31, 2009 and 2008 are shown
in the following table. Basic net income per share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding and does not include the impact of any
potentially dilutive common stock equivalents. The diluted earnings
per share calculation method is derived by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
adjusted for the dilutive effect of outstanding stock options and restricted
stock, the unamortized compensation cost of stock options, and the accumulated
tax benefit or shortfall that would be credited or charged to additional paid in
capital.
(Dollars and amounts in thousands, except
|
|
Three Months Ended
|
|
per share data)
|
|
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,217 |
|
|
$ |
8,205 |
|
Net
income available to common stockholders
|
|
$ |
1,017 |
|
|
$ |
8,205 |
|
Average
common shares outstanding
|
|
|
16,405 |
|
|
|
16,355 |
|
Basic
net income per share
|
|
$ |
0.14 |
|
|
$ |
0.50 |
|
Basic
net income per common share
|
|
$ |
0.06 |
|
|
$ |
0.50 |
|
Diluted:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
2,217 |
|
|
$ |
8,205 |
|
Net
income available to common stockholders
|
|
$ |
1,017 |
|
|
$ |
8,205 |
|
Average
common shares outstanding
|
|
|
16,405 |
|
|
|
16,355 |
|
Stock
option, restricted stock and warrant adjustment
|
|
|
29 |
|
|
|
53 |
|
Average
common shares outstanding–diluted
|
|
|
16,434 |
|
|
|
16,408 |
|
Diluted
net income per share
|
|
$ |
0.13 |
|
|
$ |
0.50 |
|
Diluted
net income per common share
|
|
$ |
0.06 |
|
|
$ |
0.50 |
|
Options for 938,635 shares and
961,249 shares of common stock were not included in computing diluted net income
per share for the three month periods ended March 31, 2009 and 2008,
respectively, because their effects are antidilutive.
Note 5 -
Pension, Profit Sharing, and Other Employee Benefit Plans
Defined
Benefit Pension Plan
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all employees. Benefits after January 1, 2005, are
based on the benefit earned as of December 31, 2004, plus benefits earned in
future years of service based on the employee’s compensation during each such
year. On November 14, 2007, the Company informed employees that the plan would
be frozen for new and existing entrants after December 31, 2007. All
benefit accruals for employees were frozen as of December 31, 2007 based on past
service and thus future salary increases will no longer affect the defined
benefit provided by the plan, although additional vesting may continue to
occur.
The
Company’s funding policy is to contribute amounts to the plan sufficient to meet
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 (“ERISA”), as amended. In addition, the Company contributes additional
amounts as it deems appropriate based on benefits attributed to service prior to
the date of the plan freeze. The Plan invests primarily in a diversified
portfolio of managed fixed income and equity funds. The Company, with
input from its actuaries, estimates that the 2009 contribution will be
approximately $4.0 million.
Net
periodic benefit cost for the three month periods ended March 31 includes the
following components:
|
|
Three Months Ended
March 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Interest
cost on projected benefit obligation
|
|
$ |
355 |
|
|
$ |
355 |
|
Expected
return on plan assets
|
|
|
(342 |
) |
|
|
(326 |
) |
Amortization
of prior service cost
|
|
|
0 |
|
|
|
(44 |
) |
Recognized
net actuarial loss
|
|
|
336 |
|
|
|
99 |
|
Net
periodic benefit cost
|
|
$ |
349 |
|
|
$ |
84 |
|
Cash and
Deferred Profit Sharing Plan
The
Company has a qualified Cash and Deferred Profit Sharing Plan that includes a
401(k) provision with a Company match. Effective January 1, 2007 the Company
revised the Plan to eliminate the deferral option and require an all-cash payout
of any profit sharing distributions beginning in 2007. The 401(k) provision is
voluntary and covers all eligible employees after ninety days of service.
Employees contributing to the 401(k) provision receive a matching contribution
of 100% of the first 3% of compensation and 50% of the next 2% of compensation
subject to employee contribution limitations. The Company match vests
immediately. The Plan permits employees to purchase shares of Sandy Spring
Bancorp, Inc. common stock with their 401(k) contributions, Company match, and
other contributions under the Plan. Profit sharing contributions and the Company
match are included in noninterest expenses and totaled $0.4 million for both of
the three month periods ended March 31, 2009 and 2008,
respectively.
The
Company has a short-term incentive plan named the Sandy Spring Leadership
Incentive Plan which provides a cash bonus to key members of management based on
the Company’s financial results using a weighted formula. Payments under this
plan to senior executive officers may be limited under the Emergency Economic
Stabilization Act of 2008, as amended. The expense for this plan is included in
noninterest expenses and totaled $0 and $0.2 million for the three month periods
ended March 31, 2009 and 2008, respectively.
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. Allocations to executive officers for 2009 and subsequent
periods may be subject to restrictions pursuant to the Emergency Economic
Stabilization Act of 2008, as amended. The Company had expenses related to the
new Plan of $0.1 million and $0.2 million for the three month periods ended
March 31, 2009 and 2008, respectively.
Note 6 –
Unrealized Losses on Investments
Shown
below is information that summarizes the gross unrealized losses and fair value
for the Company’s available-for-sale and held-to-maturity investment
portfolios.
Gross
unrealized losses and fair value by length of time that the individual
available-for-sale securities have been in a continuous unrealized loss position
at March 31, 2009 and December 31, 2008 are as follows:
(In thousands)
|
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
|
Available for sale as of March 31, 2009
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
$ |
50,411 |
|
|
$ |
157 |
|
|
$ |
0 |
|
|
$ |
157 |
|
Mortgage-backed
|
|
|
54,556 |
|
|
|
394 |
|
|
|
9 |
|
|
|
403 |
|
CMO
|
|
|
624 |
|
|
|
0 |
|
|
|
44 |
|
|
|
44 |
|
Trust
preferred
|
|
|
5,950 |
|
|
|
1,901 |
|
|
|
0 |
|
|
|
1,901 |
|
State
and municipal
|
|
|
361 |
|
|
|
15 |
|
|
|
0 |
|
|
|
15 |
|
|
|
$ |
111,902 |
|
|
$ |
2,467 |
|
|
$ |
53 |
|
|
$ |
2,520 |
|
(In thousands)
|
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
|
Available for sale as of
December 31, 2008
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
$ |
14,898 |
|
|
$ |
101 |
|
|
$ |
0 |
|
|
$ |
101 |
|
State
and Municipal
|
|
|
1,131 |
|
|
|
41 |
|
|
|
0 |
|
|
|
41 |
|
Mortgage-backed
|
|
|
66,640 |
|
|
|
911 |
|
|
|
9 |
|
|
|
920 |
|
Trust
Preferred
|
|
|
4,950 |
|
|
|
1,633 |
|
|
|
0 |
|
|
|
1,633 |
|
|
|
$ |
87,619 |
|
|
$ |
2,686 |
|
|
$ |
9 |
|
|
$ |
2,695 |
|
Approximately
94% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of March 31, 2009 are rated AAA, 4% are rated
A and 2% are not rated. The securities representing the unrealized
losses in the available-for-sale portfolio as of March 31, 2009 and December 31,
2008 all have minimal duration risk (2.36 years in 2009 and 2.41 years in 2008),
low credit risk, and minimal loss (approximately 2.20% in 2009 and 2.98% in
2008) when compared to book value. The unrealized losses that exist
are the result of market changes in interest rates since the original
purchase. These factors coupled with the fact that the Company has
both the intent and ability to hold these investments for a period of time
sufficient to allow for any anticipated recovery in fair value substantiates
that the unrealized losses in the available-for-sale portfolio are
temporary.
Gross
unrealized losses and fair value by length of time that the individual
held-to-maturity securities have been in a continuous unrealized loss position
at March 31, 2009 and December 31, 2008 are as follows:
(In thousands)
|
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
|
Held to Maturity as of March 31, 2009
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
$ |
8,165 |
|
|
$ |
37 |
|
|
$ |
0 |
|
|
$ |
37 |
|
|
|
$ |
8,165 |
|
|
$ |
37 |
|
|
$ |
0 |
|
|
$ |
37 |
|
(In thousands)
|
|
|
|
|
Continuous unrealized losses
existing for:
|
|
|
|
|
Held to Maturity as of December 31,
2008
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
$ |
3,340 |
|
|
$ |
1 |
|
|
$ |
31 |
|
|
$ |
32 |
|
|
|
$ |
3,340 |
|
|
$ |
1 |
|
|
$ |
31 |
|
|
$ |
32 |
|
Approximately
71% of the bonds carried in the held-to-maturity investment portfolio with
continuous unrealized losses as of March 31, 2009 are rated AA and 29% are rated
A. Approximately 16% of the bonds carried in the held-to-maturity investment
portfolio with continuous unrealized losses as of December 31, 2008 are rated
AAA and 84% are rated AA. The securities representing the unrealized losses in
the held-to-maturity portfolio as of March 31, 2009 have minimal duration risk
of 2.70 years, low credit risk and minimal loss (approximately .45%) when
compared to book value. The securities representing the unrealized losses in the
held-to-maturity portfolio as of December 31, 2008, have modest duration risk of
6.27 years, low credit risk, and minimal loss (approximately 1.47%) when
compared to book value. The unrealized losses that exist are the
result of market changes in interest rates since the original
purchase. These factors coupled with the Company’s intent and ability
to hold these investments for a period of time sufficient to allow for any
anticipated recovery in fair value substantiates that the unrealized losses in
the held-to-maturity portfolio are temporary.
Note 7 -
Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing, and Investment Management. Only Community Banking currently
meets the threshold for segment reporting; however, the Company is disclosing
separate information for all four operating segments. Each of the
operating segments is a strategic business unit that offers different products
and services. The Insurance, Leasing, and Investment Management segments are
businesses that were acquired in separate transactions where management at the
time of acquisition was retained. The accounting policies of the
segments are the same as those described in Note 1 to the consolidated financial
statements included in the 2008 Annual Report on Form 10-K. However,
the segment data reflect intersegment transactions and balances.
The
Community Banking segment is conducted through Sandy Spring Bank and involves
delivering a broad range of financial products and services, including various
loan and deposit products to both individuals and businesses. Parent
company income is included in the Community Banking segment, as the majority of
parent company activities are related to this segment. Major revenue
sources include net interest income, gains on sales of mortgage loans, trust
income, fees on sales of investment products and service charges on deposit
accounts. Expenses include personnel, occupancy, marketing, equipment
and other expenses. Included in Community Banking expenses are
noncash charges associated with amortization of intangibles related to acquired
entities totaling $0.8 million for both of the three month periods ended March
31, 2009 and 2008, respectively.
The
Insurance segment is conducted through Sandy Spring Insurance Corporation, a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. In addition, Sandy Spring Insurance Corporation
operates the Chesapeake Insurance Group and Wolfe and Reichelt Insurance Agency,
general insurance agencies located in Annapolis, Maryland, and Neff &
Associates, located in Ocean City, Maryland. Major sources of revenue
are insurance commissions from commercial lines and personal
lines. Expenses include personnel and support
charges. Included in insurance expenses are non-cash charges
associated with amortization of intangibles totaling $0.1 million for both of
the three month periods ended March 31, 2009 and 2008.
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. The major
revenue source is interest income. Expenses include personnel and
support charges.
The
Investment Management segment is conducted through West Financial Services,
Inc., a subsidiary of the Bank that was acquired in October
2005. This asset management and financial planning firm, located in
McLean, Virginia, provides comprehensive financial planning to individuals,
families, small businesses and associations including cash flow analysis,
investment review, tax planning, retirement planning, insurance analysis and
estate planning. West Financial has approximately $600.0 million in
assets under management as of March 31, 2009. Major revenue sources
include noninterest income earned on the above services. Expenses
include personnel and support charges. Included in investment
management expenses are non-cash charges associated with amortization of
intangibles totaling $0.2 million for both of the three month periods ended
March 31, 2009 and 2008.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
(In thousands)
|
|
Community
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Investment
Mgmt.
|
|
|
Inter-Segment
Elimination
|
|
|
Total
|
|
Quarter
ended
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,321 |
|
|
$ |
2 |
|
|
$ |
642 |
|
|
$ |
2 |
|
|
$ |
(239 |
) |
|
$ |
38,728 |
|
Interest
expense
|
|
|
13,707 |
|
|
|
0 |
|
|
|
235 |
|
|
|
0 |
|
|
|
(239 |
) |
|
|
13,703 |
|
Provision
for loan and lease losses
|
|
|
10,613 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
10,613 |
|
Noninterest
income
|
|
|
8,758 |
|
|
|
2,244 |
|
|
|
65 |
|
|
|
1,060 |
|
|
|
(153 |
) |
|
|
11,974 |
|
Noninterest
expenses
|
|
|
21,870 |
|
|
|
1,434 |
|
|
|
229 |
|
|
|
870 |
|
|
|
(153 |
) |
|
|
24,250 |
|
Income
before income taxes
|
|
|
889 |
|
|
|
812 |
|
|
|
243 |
|
|
|
192 |
|
|
|
0 |
|
|
|
2,136 |
|
Income
tax expense (benefit)
|
|
|
(582 |
) |
|
|
328 |
|
|
|
98 |
|
|
|
75 |
|
|
|
0 |
|
|
|
(81 |
) |
Net
income
|
|
$ |
1,471 |
|
|
$ |
484 |
|
|
$ |
145 |
|
|
$ |
117 |
|
|
$ |
0 |
|
|
$ |
2,217 |
|
Preferred
stock dividends and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
discount
accretion
|
|
|
1,200 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
1,200 |
|
Net
income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
shareholders
|
|
$ |
271 |
|
|
$ |
484 |
|
|
$ |
145 |
|
|
$ |
117 |
|
|
|
0 |
|
|
$ |
1,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,526,445 |
|
|
$ |
12,064 |
|
|
$ |
32,100 |
|
|
$ |
14,050 |
|
|
$ |
(65,227 |
) |
|
$ |
3,519,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended
March
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
43,499 |
|
|
$ |
20 |
|
|
$ |
707 |
|
|
$ |
14 |
|
|
$ |
(318 |
) |
|
$ |
43,922 |
|
Interest
expense
|
|
|
17,377 |
|
|
|
0 |
|
|
|
284 |
|
|
|
0 |
|
|
|
(318 |
) |
|
|
17,343 |
|
Provision
for loan and lease losses
|
|
|
2,667 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
2,667 |
|
Noninterest
income
|
|
|
9,398 |
|
|
|
2,171 |
|
|
|
137 |
|
|
|
1,142 |
|
|
|
(152 |
) |
|
|
12,696 |
|
Noninterest
expenses
|
|
|
22,270 |
|
|
|
1,363 |
|
|
|
291 |
|
|
|
931 |
|
|
|
(152 |
) |
|
|
24,703 |
|
Income
before income taxes
|
|
|
10,583 |
|
|
|
828 |
|
|
|
269 |
|
|
|
225 |
|
|
|
0 |
|
|
|
11,905 |
|
Income
tax expense
|
|
|
3,169 |
|
|
|
335 |
|
|
|
108 |
|
|
|
88 |
|
|
|
0 |
|
|
|
3,700 |
|
Net
income
|
|
$ |
7,414 |
|
|
$ |
493 |
|
|
$ |
161 |
|
|
$ |
137 |
|
|
$ |
0 |
|
|
$ |
8,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,163,891 |
|
|
$ |
11,871 |
|
|
$ |
34,983 |
|
|
$ |
11,060 |
|
|
$ |
(60,909 |
) |
|
$ |
3,160,896 |
|
Note 8 –
Comprehensive Income
The
components of total comprehensive income for the three month periods ended March
31, 2009 and 2008 are as follows:
|
|
For the three months ended
March 31
|
|
|
|
2009
|
|
|
2008
|
|
(In
Thousands)
|
|
|
|
|
|
|
Net
Income
|
|
$ |
2,217 |
|
|
$ |
8,205 |
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains (losses) on securities available for
sale
|
|
|
1,667 |
|
|
|
691 |
|
Related
income tax expense
|
|
|
(665 |
) |
|
|
(275 |
) |
Net
securities gains reclassified into earnings
|
|
|
(162 |
) |
|
|
(146 |
) |
Related
income tax benefit
|
|
|
65 |
|
|
|
58 |
|
Net
effect on other comprehensive income for the period
|
|
|
905 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs
|
|
|
0 |
|
|
|
(44 |
) |
Related
income tax benefit (expense)
|
|
|
0 |
|
|
|
18 |
|
Recognition
of unrealized gain
|
|
|
336 |
|
|
|
99 |
|
Related
income tax expense
|
|
|
(135 |
) |
|
|
(40 |
) |
Net
effect on other comprehensive income for the period
|
|
|
201 |
|
|
|
33 |
|
Total
other comprehensive income
|
|
|
1,106 |
|
|
|
361 |
|
Comprehensive
income
|
|
$ |
3,323 |
|
|
$ |
8,566 |
|
The
activity in accumulated other comprehensive income for the periods ended March
31, 2009 and 2008 is as follows:
|
|
Defined
Benefit
Pension Plan
|
|
|
Unrealized Gains
(losses) on Securities
Available-for-Sale
|
|
|
Total
|
|
Balance
at January 1, 2008
|
|
$ |
(2,097 |
) |
|
$ |
1,042 |
|
|
$ |
(1,055 |
) |
Period
change, net of tax
|
|
|
33 |
|
|
|
328 |
|
|
|
361 |
|
Balance
at March 31, 2008
|
|
$ |
(2,064 |
) |
|
$ |
1,370 |
|
|
$ |
(694 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
$ |
(8,033 |
) |
|
$ |
461 |
|
|
$ |
(7,572 |
) |
Period
change, net of tax
|
|
|
201 |
|
|
|
905 |
|
|
|
1,106 |
|
Balance
at March 31, 2009
|
|
$ |
(7,832 |
) |
|
$ |
1,366 |
|
|
$ |
(6,466 |
) |
Note 9-
Fair Value Measurements
On
February 15, 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS No. 159), which gives entities the option to measure eligible financial
assets, financial 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. Additionally, SFAS No. 159 allows for a
one-time election for recorded to beginning retained earnings.
The
Company adopted SFAS No. 159 as of January 1, 2008 and elected the fair value
option for a group of specific financial instruments which are mortgage loans
held for sale. The Company believes by electing the fair value option
for this financial instrument, it will allow the accounting for gains on sale of
mortgage loans to more accurately reflect the timing and economics of the
transaction. The effect of this adjustment was immaterial to the
Company’s financial results for the three month periods ending March 31, 2009
and March 31, 2008.
Simultaneously
with the adoption of SFAS No, 159, the Company adopted SFAS No. 157, “Fair Value
Measurements” (“SFAS No. 157”), effective January 1, 2008. SFAS No.
157 clarifies that fair value is an exit price, representing the amount that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. Under SFAS No. 157, fair
value measurements are not adjusted for transaction costs. SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the
highest priority to unadjusted quoted prices in active markets for identical
assets or liabilities (level 1 measurements) and the lowest priority to
unobservable inputs (level 3 measurements). The three levels of the
fair value hierarchy under SFAS No. 157 are described below.
Basis of
Fair Value Measurement:
Level 1- Unadjusted quoted prices in
active markets that are accessible at the measurement date for identical,
unrestricted assets or liabilities;
Level 2- Quoted prices in markets that
are not active, or inputs that are observable, either directly or indirectly,
for substantially the full term of the asset or liability;
Level 3- Prices or valuation techniques
that require inputs that are both significant to the fair value measurement and
unobservable (i.e. supported by little or no market activity).
A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
The types
of instruments valued based on quoted market prices in active markets include
most U.S. government and agency securities, many other sovereign government
obligations, liquid mortgage products, active listed equities and most money
market securities. Such instruments are generally classified within
level 1 or level 2 of the fair value hierarchy. As required by SFAS
No. 157, the Company does not adjust the quoted price for such
instruments.
The types
of instruments valued based on quoted prices in markets that are not active,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency include most investment-grade and high-yield
corporate bonds, less liquid mortgage products, less liquid equities, state,
municipal and provincial obligations, and certain physical
commodities. Such instruments are generally classified within level 2
of the fair value hierarchy.
Level 3
is for positions that are not traded in active markets or are subject to
transfer restrictions, valuations are adjusted to reflect illiquidity and/or
non-transferability, and such adjustments are generally based on available
market evidence. In the absence of such evidence, management’s best
estimate is used.
Impaired
loans are evaluated and valued at the time the loan is identified as impaired,
at the lower of cost or market value. Market value is measured based
on the value of the collateral securing these loans and is classified at a level
3 in the fair value hierarchy. Collateral may be real estate and/or
business assets including equipment, inventory and/or accounts
receivable. The value of real estate collateral is determined based
on appraisals by qualified licensed appraisers hired by the
Company. The value of business equipment, inventory and accounts
receivable collateral is based on net book value on the business’ financial
statements and if necessary discounted based on managements review and
analysis. Appraised and reported values may be discounted based on
management’s historical knowledge, changes in market conditions from the time of
valuation, and/or management’s expertise and knowledge of the client and
client’s business. Impaired loans are reviewed and evaluated on at least a
quarterly basis for additional impairment and adjusted accordingly, based on the
same factors identified above.
Impaired
loans totaled $97.6 million at March 31, 2009, compared to $52.6 million at
December 31, 2008.
Interest
rate swap agreements are measured by alternative pricing sources with reasonable
levels of price transparency in markets that are not active. Based on
the complex nature of interest rate swap agreements, the markets these
instruments trade in are not as efficient and are less liquid than that of the
more mature level 1 markets. These markets do however have
comparable, observable inputs in which an alternative pricing source values
these assets in order to arrive at a fair market value. These
characteristics classify interest rate swap agreements as level 2 as represented
in SFAS No. 157.
The
following table set forth the Company’s financial assets and liabilities that
were accounted for or disclosed at fair value. Assets and liabilities
are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement (in thousands):
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance as of
March 31,
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Mortgage loans held for sale
|
|
$ |
- |
|
|
$ |
14,515 |
|
|
$ |
|
|
|
$ |
14,515 |
|
Investments
securities, available
for sale
|
|
|
|
|
|
|
469,030 |
|
|
|
3,131 |
|
|
|
472,161 |
|
Interest
rate swap agreements
|
|
|
- |
|
|
|
550 |
|
|
|
- |
|
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
- |
|
|
$ |
(550 |
) |
|
$ |
- |
|
|
$ |
(550 |
) |
(In thousands)
|
|
Significant Unobservable
|
|
Assets
|
|
Inputs (Level 3)
|
|
|
|
|
|
Investments
available for sale:
|
|
|
|
|
|
|
|
Beginning
balance December 31, 2008
|
|
$ |
3,
154 |
|
|
|
|
|
|
Total
Unrealized losses included in other comprehensive income
|
|
|
(23 |
) |
|
|
|
|
|
Ending
balance March 31, 2009
|
|
$ |
3,131 |
|
The
Company owns $4.8 million of collateralized debt obligation securities that are
backed by pooled trust preferred securities issued by banks, thrifts, and
insurance companies. The market for pooled trust securities at March
31, 2009 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
current conditions in the debt markets and the absence of observable
transactions in the secondary markets, the Company has determined:
|
·
|
The
few observable transactions and market quotations that are available are
not reliable for purposes of determining fair value at March 31,
2009.
|
|
·
|
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.
|
|
·
|
The
pooled trust preferred securities will be classified within Level 3 of the
fair value hierarchy because the Company has 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 classified in their entirety based on the
lowest level of input that is significant to the fair value
measurement:
|
|
Quoted Prices in Active
|
|
|
Significant Other
|
|
|
|
|
|
|
|
(In thousands)
|
|
Markets for Identical
|
|
|
Observable
|
|
|
Significant Unobservable
|
|
|
Balance as of
|
|
Assets
|
|
Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
75,143 |
|
|
$ |
75,143 |
|
In
accordance with SFAS No. 114, “Accounting for Creditors for
Impairment of a Loan” impaired loans totaling $97.6 million were written
down to fair value of $75.1 million resulting in an impairment charge of $22.5
million which was included in our allowance for loan losses.
Impaired
loans are evaluated 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 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.
Item
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
Sandy Spring Bancorp makes
forward-looking statements in this report. These forward-looking
statements may include: statements of goals, intentions, earnings expectations,
and other expectations; estimates of risks and of future costs and benefits;
assessments of probable loan and lease losses; assessments of market risk; and
statements of the ability to achieve financial and other
goals. Forward-looking statements are typically identified by
words such as “believe,” “expect,” “anticipate,” “intend,” “outlook,”
“estimate,” “forecast,” “project” and other similar words and expressions.
Forward-looking statements are subject to numerous assumptions, risks and
uncertainties, which change over time. Forward-looking statements speak only as
of the date they are made. The Company does not assume any duty and does not
undertake to update its forward-looking statements. Because
forward-looking statements are subject to assumptions and uncertainties, actual
results or future events could differ, possibly materially, from those that the
Company anticipated in its forward-looking statements, and future results could
differ materially from historical performance.
The
Company’s forward-looking statements are subject to the following principal
risks and uncertainties:
general economic conditions and trends, either nationally or locally;
conditions in the securities markets; changes in interest rates; changes in
deposit flows, and in the demand for deposit, loan, and investment products and
other financial services; changes in real estate values; changes in the quality
or composition of the Company’s loan or investment portfolios; changes in
competitive pressures among financial institutions or from non-financial
institutions; the Company’s ability to retain key members of management; changes
in legislation, regulation, and policies; and a variety of other matters which,
by their nature, are subject to significant uncertainties. The
Company provides greater detail regarding some of these factors in its Form 10-K
for the year ended December 31, 2008, including in the Risk Factors section
of that report. The Company’s forward-looking statements may also be
subject to other risks and uncertainties, including those that it may discuss
elsewhere in this report or in its other filings with the SEC.
THE
COMPANY
The Company is the registered bank
holding company for Sandy Spring Bank (the "Bank"), headquartered in Olney,
Maryland. The Bank operates forty two community offices in Anne
Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George’s Counties in
Maryland and Fairfax and Loudoun counties in Virginia, together with an
insurance subsidiary, an equipment leasing company and an investment management
company in McLean, Virginia.
The Company offers a broad range of
financial services to consumers and businesses in this market area. Through
March 31, 2009, year-to-date average commercial loans and leases and commercial
real estate loans accounted for approximately 58% of the Company’s loan and
lease portfolio, and year-to-date average consumer and residential real estate
loans accounted for approximately 42%. The Company has established a strategy of
independence, and intends to establish or acquire additional offices, banking
organizations, and non-banking organizations as appropriate opportunities
arise.
CRITICAL
ACCOUNTING POLICIES
The
Company’s 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. The following accounting policies comprise those that
management believe are the most critical to aid in fully understanding and
evaluating our reported financial results:
|
·
|
Allowance
for loan and lease losses;
|
|
·
|
Accounting
for income taxes;
|
|
·
|
Fair
value measurements, including assessment of other than temporary
impairment;
|
|
·
|
Defined
benefit pension plan.
|
Allowance
for loan and lease losses
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 included in the Company’s
Annual Repot on Form 10-K for the year ended December 31, 2008. 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 62% and 70% of the total
allowance at March 31, 2009 and December 31, 2008, respectively.
The
specific allowance is used primarily to establish allowances for risk-rated
credits on an individual or portfolio basis, and accounted for 38% and 30% of
the total allowance at March 31, 2009 and December 31, 2008,
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.
Goodwill
Goodwill
is the excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired in a business combination.
Under the provisions of FAS No. 142, “Goodwill and Other Intangible
Assets”, goodwill is not amortized but is tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. Impairment testing requires that the fair value of each of
the Company’s reporting units be compared to the carrying amount of its net
assets, including goodwill. The Company’s reporting units were identified based
upon an analysis of each of its individual operating segments. Determining the
fair value of a reporting unit requires the Company to us a high degree of
subjectivity. If the fair values of the reporting units exceed their book
values, no write-down of recorded goodwill is necessary. If the fair value of a
reporting unit is less than book value, an expense may be required on the
Company’s books to write down the related goodwill to the proper carrying value.
The Company tests for impairment of goodwill as of September 30 each year, and
again at any quarter-end if any triggering events occur during a quarter that
may affect goodwill. For this testing the company works together with a
third-party valuation firm to perform a “step one” test for potential goodwill
impairment. The Company and the valuation firm determined that the Income
approach and the Market approach were most appropriate in testing whether a
“step two test” for impairment was necessary. At March 31, 2009 it
was determined that there was no evidence of impairment of goodwill or
intangibles.
Accounting
for Income Taxes
The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
and Financial Accounting Standards Board (the “FASB”) Interpretation (“FIN”) No.
48, Accounting for Uncertainty
in Income Taxes – an interpretation of FASB Statement No. 109. SFAS No.
109 requires the recording of deferred income taxes that reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Management exercises significant judgment in the evaluation of the
amount and timing of the recognition of the resulting tax assets and
liabilities. The judgments and estimates required for the evaluation are updated
based upon changes in business factors and the tax laws. If actual results
differ from the assumptions and other considerations used in estimating the
amount and timing of tax recognized, there can be no assurance that additional
expenses will not be required in future periods. On January 1, 2007 the Company
incorporated FIN No. 48 with its existing accounting policy. FIN No. 48
prescribes a minimal probability threshold that a tax position must meet before
a financial statement benefit is recognized. The Company recognized, when
applicable, interest and penalties related to unrecognized tax benefits in other
noninterest expenses in the consolidated income statement. Assessment of
uncertain tax positions under FIN No. 48 requires careful consideration of the
technical merits of a position based on management’s analysis of tax regulations
and interpretations. Significant judgment may be involved in applying the
requirements of FIN No. 48.
Management
expects that the Company’s adherence to FIN No. 48 may result in increased
volatility in quarterly and annual effective income tax rates as FIN no. 48
requires that any change in judgment or measurement of a tax position taken in a
prior period be recognized as a discrete event in the period in which it occurs.
Factors that could impact management’s judgment include changes in income, tax
laws and regulations, and tax planning strategies.
Fair
Value
The
Company measures certain financial assets and liabilities at fair value in
accordance with SFAS No. 157, Fair Value Measurements and
FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a
financial Asset When the Market for that Asset is Not Active. Significant
financial instruments measured at fair value in accordance with SFAS No.157 on a
recurring basis are investment securities available for sale and interest rate
swap agreements while impaired loans are measured on a nonrecurring basis under
SFAS No. 157. In addition, the Company has elected the fair value
option under SFAS No. 159, The
Fair Value Option of Financial Assets and Financial Liabilities for
residential mortgage loans held for sale.
The
Company conducts a review each quarter for all investment securities which
reflect possible impairment to determine whether unrealized losses are
temporary. Valuations for the investment portfolio are determined using quoted
market prices, where available. If quoted market prices are not available, such
valuation is based on pricing models, quotes for similar investment securities,
and, where necessary, an income valuation approach based on the present value of
expected cash flows. In addition, the Company considers the financial condition
of the issuer, the receipt of principal and interest according to the
contractual terms and the intent and ability of the Company to hold the
investment for a period of time sufficient to allow for any anticipated recovery
in fair value.
The above
accounting policies with respect to fair value are discussed in further detail
in Note 9 to the consolidated financial statements.
Defined
benefit pension plan
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all employees. On November 14, 2007, the plan was 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.
Several
factors affect the net periodic benefit cost of the plan to include (1) the size
and characteristics of the plan population, (2) the discount rate, (3) the
expected long-term rate of return on plan assets and (4) other actuarial
assumptions. Pension cost is directly related to the number of employees covered
by the plan and other factors including salary, age, years of employment, and
the terms of the plan. As a result of the plan freeze mentioned above the
characteristics of the plan population should not have a materially different
effect in future years. The discount rate is used to determine the present value
of future benefit obligations. The discount rate is determined by matching the
expected cash flows of the plan to a yield curve based on long term, high
quality fixed income debt instruments available as of the measurement date,
December 31 of each year. The discount rate is adjusted each year on the
measurement date to reflect current market conditions. The expected long-term
rate of return on plan assets is based on a number of factors to include
expectations of market performance and the target asset allocation adopted in
the plan investment policy. Should actual asset returns deviate from the
projected returns, this can affect over a period of time, the benefit plan
expense recognized in the financial statements.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure as defined in Securities and Exchange Commission
Regulation G and Item 10 of Commission Regulation S-K. This
traditional efficiency ratio is used as a measure of operating expense control
and efficiency of operations. Management believes that its
traditional ratio better focuses attention on the operating performance of the
Company over time than does a GAAP ratio, and that it is highly useful in
comparing period-to-period operating performance of the Company’s core business
operations. It is used by management as part of its assessment of its
performance in managing noninterest expenses. However, this measure
is supplemental, and is not a substitute for an analysis of performance based on
GAAP measures. The reader is cautioned that the traditional
efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP
efficiency ratios reported by other financial institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of net
interest income plus total noninterest income. This is a GAAP
financial measure. Noninterest expenses used in the calculation of
the traditional, non-GAAP efficiency ratio exclude intangible asset
amortization. Income for the traditional ratio is increased for the
favorable effect of tax-exempt income, and excludes securities gains and losses,
which can vary widely from period to period without appreciably affecting
operating expenses. The traditional measure is different from the
GAAP efficiency ratio. The GAAP measure is calculated using
noninterest expense and income amounts as shown on the face of the Consolidated
Statements of Income. The traditional and GAAP efficiency ratios are
presented and reconciled in Table 1.
Table 1 –
GAAP and Non-GAAP efficiency ratios
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
GAAP
efficiency ratio:
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
24,250 |
|
|
$ |
24,703
|
|
Net
interest income plus noninterest income
|
|
|
|
|
|
|
|
|
|
|
36,999 |
|
|
|
39,275 |
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–GAAP
|
|
|
65.54 |
% |
|
|
62.90 |
% |
Non-GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
24,250 |
|
|
$ |
24,703 |
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
1,055 |
|
|
|
1,124 |
|
Noninterest
expenses–
|
|
|
23,195 |
|
|
|
23,579 |
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income
|
|
|
36,999 |
|
|
|
39,275 |
|
|
|
|
|
|
|
|
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
1,009 |
|
|
|
1,140 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
162 |
|
|
|
574 |
|
Net
interest income plus noninterest
|
|
|
|
|
|
|
|
|
Income
– non-GAAP
|
|
|
37,846 |
|
|
|
39,841 |
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – Non-GAAP
|
|
|
61.29 |
% |
|
|
59.18 |
% |
A. FINANCIAL
CONDITION
The Company's total assets were $3.5
billion at March 31, 2009, increasing $205.8 million or 6% during the first
three months of 2009. Earning assets increased by 7% or $209.2
million in the first three months of 2009 to $3.3 billion at March 31,
2009. These increases were mainly the result of increases of 52% in
investments and 38% in cash and cash equivalents driven by the growth in
deposits.
Total loans and leases, excluding
loans held for sale, decreased 1% or $28.8 million during the first three months
of 2009, to $2.5 billion. This decrease was due primarily to declines in the
commercial and mortgage loan portfolios. During this period, commercial loans
and leases decreased by $12.0 million or 1%, attributable primarily to
commercial loans (down 7%). Consumer loans increased by $4.8 million
or 1%, primarily due to an increase in home equity lines. Residential
real estate loans decreased by $21.6 million or 3% due to a decrease in
residential construction loans. Residential mortgage loans held for
sale increased by $3.1 million from December 31, 2008, to $14.5 million at March
31, 2009.
Table 2 –
Analysis of Loans and Leases
The
following table presents the trends in the composition of the loan and lease
portfolio at the dates indicated:
(In thousands)
|
|
March 31, 2009
|
|
|
%
|
|
|
December 31, 2008
|
|
|
%
|
|
Residential
real estate
|
|
$ |
625,220 |
|
|
|
25 |
% |
|
$ |
646,820 |
|
|
|
26 |
% |
Commercial
loans and leases
|
|
|
1,425,557 |
|
|
|
58 |
|
|
|
1,437,599 |
|
|
|
58 |
|
Consumer
|
|
|
411,068 |
|
|
|
17 |
|
|
|
406,227 |
|
|
|
16 |
|
Total
Loans and Leases
|
|
|
2,461,845 |
|
|
|
100 |
% |
|
|
2,490,646 |
|
|
|
100 |
% |
Less: Allowance
for credit losses
|
|
|
(59,798 |
) |
|
|
|
|
|
|
(50,526 |
) |
|
|
|
|
Net
loans and leases
|
|
$ |
2,402,047 |
|
|
|
|
|
|
$ |
2,440,120 |
|
|
|
|
|
The total investment portfolio
increased by 34% or $168.7 million from December 31, 2008, to $661.2 million at
March 31, 2009. The increase was due mainly to increases of $180.4
million or 62% in available-for-sale securities and $3.0 million or 10% in other
equity securities, which were somewhat offset by a decrease of $14.7 million or
9% in held-to-maturity securities. The increases were the result of an increase
in deposits resulting primarily from the Company’s new Premier money market
product. The aggregate of federal funds sold and interest-bearing deposits with
banks increased by $66.2 million during the first three months of 2009, reaching
$126.7 million at March 31, 2009.
Table 3 –
Analysis of Deposits
The
following table presents the trends in the composition of deposits at the dates
indicated:
(In thousands)
|
|
March 31, 2009
|
|
|
%
|
|
|
December 31, 2008
|
|
|
%
|
|
Noninterest-bearing
deposits
|
|
$ |
545,540 |
|
|
|
21 |
% |
|
$ |
461,517 |
|
|
|
20 |
% |
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
249,011 |
|
|
|
10 |
|
|
|
243,986 |
|
|
|
10 |
|
Money
market savings
|
|
|
765,780 |
|
|
|
30 |
|
|
|
664,837 |
|
|
|
28 |
|
Regular
savings
|
|
|
151,154 |
|
|
|
6 |
|
|
|
146,140 |
|
|
|
6 |
|
Time
deposits less than $100,000
|
|
|
473,189 |
|
|
|
19 |
|
|
|
477,148 |
|
|
|
20 |
|
Time
deposits $100,000 or more
|
|
|
369,238 |
|
|
|
14 |
|
|
|
371,629 |
|
|
|
16 |
|
Total
interest-bearing
|
|
|
2,008,372 |
|
|
|
79 |
|
|
|
1,903,740 |
|
|
|
80 |
|
Total
deposits
|
|
$ |
2,553,912 |
|
|
|
100 |
% |
|
$ |
2,365,257 |
|
|
|
100 |
% |
Total deposits were $2.6 billion at
March 31, 2009, increasing $188.7 million or 8% from December 31, 2008. During
the first three months of 2009, growth rates of 18% were achieved for
noninterest bearing demand deposits (up $84.0 million), 15% for money market
deposits (up $100.9 million), 3% for interest-bearing regular savings (up $5.0
million) and 2% for interest bearing demand deposits (up $5.0 million). Over the
same period, decreases of 1% were recorded for time deposits less than $100,000
(down $4.0 million) and for time deposits of $100,000 or more (down $2.4
million). The growth in both money market and demand deposits was due in part to
the increase in the FDIC insurance limits which were put into place late in
2008. The increase in money market deposits was also due in large part to the
introduction of the Company’s new Premier money market product which is priced
very competitively.
Total borrowings were $539.2 million
at March 31, 2009, which represented an increase of $16.6 million or 3% from
December 31, 2008. These additional borrowings were due to growth in
retail repurchase agreements.
Market
Risk and Interest Rate Sensitivity
Overview
The Company’s net income is largely
dependent on its net interest income. Net interest income is susceptible to
interest rate risk to the degree that interest-bearing liabilities mature or
reprice on a different basis than interest-earning assets. When interest-bearing
liabilities mature or reprice more quickly than interest-earning assets in a
given period, a significant increase in market rates of interest could adversely
affect net interest income. Similarly, when interest-earning assets mature or
reprice more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income. Net interest income is also
affected by changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds, such as
noninterest-bearing deposits and stockholders’ equity.
The Company’s Board of Directors has
established a comprehensive interest rate risk management policy, which is
administered by Management’s Asset Liability Management Committee (“ALCO”). The
policy establishes limits of risk, which are quantitative measures of the
percentage change in net interest income (a measure of net interest income at
risk) and the fair value of equity capital (a measure of economic value of
equity (“EVE”) at risk) resulting from a hypothetical change in U.S. Treasury
interest rates for maturities from one day to thirty years. The Company measures
the potential adverse impacts that changing interest rates may have on its
short-term earnings, long-term value, and liquidity by employing simulation
analysis through the use of computer modeling. The simulation model captures
optionality factors such as call features and interest rate caps and floors
imbedded in investment and loan portfolio contracts. As with any method of
gauging interest rate risk, there are certain shortcomings inherent in the
interest rate modeling methodology used by the Company. When interest rates
change, actual movements in different categories of interest-earning assets and
interest-bearing liabilities, loan prepayments, and withdrawals of time and
other deposits, may deviate significantly from assumptions used in the model.
Finally, the methodology does not measure or reflect the impact that higher
rates may have on adjustable-rate loan customers’ ability to service their
debts, or the impact of rate changes on demand for loan, lease, and deposit
products.
The Company prepares a current base
case and eight alternative simulations, at least once a quarter, and reports the
analysis to the Board of Directors. In addition, more frequent
forecasts are produced when interest rates are particularly uncertain or when
other business conditions so dictate.
If a measure of risk produced by the
alternative simulations of the entire balance sheet violates policy guidelines,
ALCO is required to develop a plan to restore the measure of risk to a level
that complies with policy limits within two quarters.
The Company’s interest rate risk
management goals are (1) to increase net interest income at a growth rate
consistent with the growth rate of total assets and, (2) to minimize
fluctuations in net interest margin as a percentage of earning
assets. Management attempts to achieve these goals by balancing,
within policy limits, the volume of floating-rate liabilities with a similar
volume of floating-rate assets; by keeping the average maturity of fixed-rate
asset and liability contracts reasonably matched; by maintaining a pool of
administered core deposits; and by adjusting pricing rates to market conditions
on a continuing basis.
The balance sheet is subject to
quarterly testing for eight alternative interest rate shock possibilities to
indicate the inherent interest rate risk. Average interest rates are
shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company
may elect not to use particular scenarios that it determines are impractical in
a current rate environment. It is management’s goal to structure the
balance sheet so that net interest earnings at risk over a twelve-month period
and the economic value of equity at risk do not exceed policy guidelines at the
various interest rate shock levels.
The Company augments its quarterly
interest rate shock analysis with alternative external interest rate scenarios
on a monthly basis. These alternative interest rate scenarios may include
non-parallel rate ramps and non-parallel yield curve twists.
Analysis
Measures of net interest income at
risk produced by simulation analysis are indicators of an institution’s
short-term performance in alternative rate environments. These
measures are typically based upon a relatively brief period, usually one
year. They do not necessarily indicate the long-term prospects or
economic value of the institution.
ESTIMATED
CHANGES IN NET INTEREST INCOME
CHANGE IN
INTEREST RATES:
|
|
+ 400 bp
|
|
|
+ 300 bp
|
|
|
+ 200 bp
|
|
|
+ 100 bp
|
|
|
- 100 bp
|
|
|
- 200 bp
|
|
|
-300 bp
|
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
-25 |
% |
|
|
-20 |
% |
|
|
-17.5 |
% |
|
|
-12.5 |
% |
|
|
-12.5 |
% |
|
|
-17.5 |
% |
|
|
-20 |
% |
|
|
-25 |
% |
March
2009
|
|
|
-1.37 |
|
|
|
1.00 |
|
|
|
2.11 |
|
|
|
2.99 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
December
2008
|
|
|
4.19 |
|
|
|
4.81 |
|
|
|
4.35 |
|
|
|
2.80 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
The Net Interest Income at Risk
position increased in the +200, +300 and +400 shock bands and decreased over the
year-end 2008 in the +100 shock band. All of the above measures of
net interest income at risk remained well within prescribed policy
limits. Although assumed to be unlikely, our largest exposure is at
the +400bp level, with a measure of -1.37%. This is
also well within our prescribed policy limit of 25%.
The measures of equity value at risk
indicate the ongoing economic value of the Company by considering the effects of
changes in interest rates on all of the Company’s cash flows, and discounting
the cash flows to estimate the present value of assets and
liabilities. The difference between these discounted values of the
assets and liabilities is the economic value of equity, which, in theory,
approximates the fair value of the Company’s net assets.
ESTIMATED
CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
CHANGE IN
INTEREST RATES:
|
|
+ 400 bp
|
|
|
+ 300 bp
|
|
|
+ 200 bp
|
|
|
+ 100 bp
|
|
|
- 100 bp
|
|
|
-200 bp
|
|
|
-300 bp
|
|
|
-400 bp
|
|
POLICY
LIMIT
|
|
|
-40 |
% |
|
|
-30 |
% |
|
|
-
22.5 |
% |
|
|
-10.0 |
% |
|
|
-12.5 |
% |
|
|
-22.5 |
% |
|
|
-30 |
% |
|
|
-40 |
% |
March
2009
|
|
|
-7.77 |
|
|
|
-1.48 |
|
|
|
1.98 |
|
|
|
3.81 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
December
2008
|
|
|
-4.80 |
|
|
|
1.92 |
|
|
|
3.61 |
|
|
|
1.59 |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
Measures of the economic value of
equity (EVE) at risk position increased in the +400, +300 and +200 shock bands
and decreased over year-end 2008 in the +100 shock bands. Although
assumed to be highly unlikely, the largest exposure is at the +400bp level, with
a measure of -7.77%. This is also well within our prescribed policy
limit of 40%.
Liquidity
Liquidity is measured using an
approach designed to take into account loan and lease payments, maturities,
calls and pay-downs of securities, earnings, balance sheet growth, mortgage
banking activities, investment portfolio liquidity, and other
factors. Through this approach, implemented by the funds management
subcommittee of ALCO under formal policy guidelines, the Company’s liquidity
position is measured weekly, looking forward at thirty-day intervals out to 180
days. The
measurement is based upon the asset-liability management model’s projection of a
funds’ sold or purchased position, along with ratios and trends developed to
measure dependence on purchased funds and core growth. Resulting projections as
of March 31, 2009 showed short-term investments exceeding short-term borrowings
over the subsequent 180 days by $76.0 million, which decreased from an excess of
$110.1 million at December 31, 2008. This excess of liquidity over
projected requirements for funds indicates that the Company can increase its
loans and other earning assets without incurring additional
borrowing.
The Company also has external sources
of funds, which can be drawn upon when required. The main 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 $992.6 million, of which $557.9 million was
available based on pledged collateral with $412.3 million outstanding at March
31, 2009. The line of credit at the Federal Reserve totaled $446.5 million, all
of which was available for borrowing based on pledged collateral, with no
borrowings against it as of March 31, 2009. Other external sources of
liquidity available to the Company in the form of unsecured lines of credit
granted by correspondent banks totaled $40.0 million at March 31, 2009, against
which there were no outstanding borrowings. In addition, the Company had a
secured line of credit with a correspondent bank of $20.0 million as of March
31, 2009. Based upon its liquidity analysis, including external sources of
liquidity available, management believes the liquidity position is appropriate
at March 31, 2009.
The following is a schedule of
significant commitments at March 31, 2009:
|
|
(In
thousands)
|
|
Commitments
to extend credit:
|
|
|
|
Unused
lines of credit (home equity and business)
|
|
$ |
614,898 |
|
Other
commitments to extend credit
|
|
|
171,149 |
|
Standby
letters of credit
|
|
|
67,980 |
|
|
|
$ |
854,027 |
|
Capital
Management
The Company recorded a total
risk-based capital ratio of 13.69% at March 31, 2009, compared to 13.82% at
December 31, 2008; a tier 1 risk-based capital ratio of 12.43%, compared to
12.56%; and a capital leverage ratio of 10.52%, compared to
11.00%. These decreases were mainly the result of growth in the
Company’s investment portfolio for the three month period ending March 31, 2009.
Capital adequacy, as measured by these ratios, was well above regulatory
requirements. Management believes the level of capital at March 31,
2009, is appropriate.
Stockholders' equity for March 31,
2009, totaled $392.5 million, representing an increase of $0.6 million from
$391.9 million at December 31, 2008.
Internal capital generation (net
income less dividends) reduced total stockholders’ equity by $0.8 million during
the first three months of 2009.
External capital formation (equity
created through the issuance of stock under the employee stock purchase plan and
the DRIP plan) totaled $128,000 during the three month period ended March 31,
2009.
Dividends for the first three months
of the year were $0.12 per share in 2009, compared to $0.24 per share in 2008,
for respective dividend payout ratios (dividends declared per share to diluted
net income per common share) of 200% versus 48% for the first three months of
2008.
B.
RESULTS OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2009 AND MARCH 31,
2008
Net income available to common
shareholders for the first three months of the year decreased $7.2 million or
88% to $1.0 million in 2009 from $8.2 million in 2008, representing annualized
returns on average common equity of 1.32% in 2009 and 10.45% in 2008,
respectively. Diluted earnings per common share (“EPS”) for the first
three months of the year was $0.06 in 2009, compared to $0.50 in
2008.
Net interest income declined by $1.6
million, or 6%, to $25.0 million for the first three months of 2009, while total
noninterest income decreased by $0.7 million, or 6% for the period. These
declines were somewhat offset by a $0.5 million, or 2%, decrease in noninterest
expenses.
The decrease in net interest income
was due to a decline of 125 basis points in the yield on loans and 110 basis
points in the yield on investments which exceeded the decline of 76 basis points
on interest-bearing liabilities. This reflects the Company’s current asset
sensitive position and the growth in non performing assets as well as the growth
in the Company’s new Premier Money Market product, which has been very
competitively priced to grow market and customer relationships over the long
term. These factors produced a net interest margin decrease of 60 basis points
to 3.39% for the three months ended March 31, 2009, from 3.99% for the same
period of 2008.
Table 4 – Consolidated Average Balances, Yields and Rates
|
|
(Dollars in thousands and tax equivalent)
|
|
For the three months ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases (2)
|
|
$ |
2,505,826 |
|
|
$ |
33,513 |
|
|
|
5.41 |
% |
|
$ |
2,324,733 |
|
|
$ |
38,565 |
|
|
|
6.66 |
% |
Total
securities
|
|
|
536,981 |
|
|
|
6,176 |
|
|
|
4.74 |
|
|
|
427,819 |
|
|
|
6,169 |
|
|
|
5.84 |
|
Other
earning assets
|
|
|
74,783 |
|
|
|
48 |
|
|
|
0.26 |
|
|
|
42,901 |
|
|
|
328 |
|
|
|
3.07 |
|
TOTAL
EARNING ASSETS
|
|
|
3,117,590 |
|
|
|
39,737 |
|
|
|
5.17 |
% |
|
|
2,795,453 |
|
|
|
45,062 |
|
|
|
6.48 |
% |
Nonearning
assets
|
|
|
258,125 |
|
|
|
|
|
|
|
|
|
|
|
276,975 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,375,715 |
|
|
|
|
|
|
|
|
|
|
$ |
3,072,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
242,799 |
|
|
|
121 |
|
|
|
0.20 |
% |
|
$ |
241,177 |
|
|
|
171 |
|
|
|
0.28 |
% |
Money
market savings deposits
|
|
|
713,295 |
|
|
|
2,416 |
|
|
|
1.37 |
|
|
|
709,009 |
|
|
|
4,667 |
|
|
|
2.65 |
|
Regular
savings deposits
|
|
|
147,537 |
|
|
|
55 |
|
|
|
0.15 |
|
|
|
153,365 |
|
|
|
120 |
|
|
|
0.32 |
|
Time
deposits
|
|
|
851,479 |
|
|
|
6,863 |
|
|
|
3.27 |
|
|
|
744.917 |
|
|
|
8,064 |
|
|
|
4.35 |
|
Total
interest-bearing deposits
|
|
|
1,955,110 |
|
|
|
9,455 |
|
|
|
1.96 |
|
|
|
1,848,468 |
|
|
|
13,022 |
|
|
|
2.83 |
|
Short-term
borrowings
|
|
|
457,071 |
|
|
|
3,446 |
|
|
|
3.54 |
|
|
|
366,986 |
|
|
|
3,279 |
|
|
|
3.59 |
|
Long-term
borrowings
|
|
|
59,581 |
|
|
|
802 |
|
|
|
5.41 |
|
|
|
96,175 |
|
|
|
1,042 |
|
|
|
4.36 |
|
Total
interest-bearing liabilities
|
|
|
2,471,762 |
|
|
|
13,703 |
|
|
|
2.25 |
|
|
|
2,311,629 |
|
|
|
17,343 |
|
|
|
3.01 |
|
Noninterest-bearing
demand deposits
|
|
|
476,361 |
|
|
|
|
|
|
|
|
|
|
|
412,369 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
35,917 |
|
|
|
|
|
|
|
|
|
|
|
32,675 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
391,675 |
|
|
|
|
|
|
|
|
|
|
|
315,755 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,375,715 |
|
|
|
|
|
|
|
|
|
|
$ |
3,072,428 |
|
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
|
$ |
26,034 |
|
|
|
2.92 |
% |
|
|
|
|
|
$ |
27,719 |
|
|
|
3.47 |
% |
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
|
1,140 |
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
25,025 |
|
|
|
|
|
|
|
|
|
|
$ |
26,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.39 |
% |
|
|
|
|
|
|
|
|
|
|
3.99 |
% |
Ratio
of average earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities
|
|
|
126.13 |
% |
|
|
|
|
|
|
|
|
|
|
120.93 |
% |
|
|
|
|
|
|
|
|
(1) Interest
income includes the effects of taxable-equivalent adjustments (reduced by the
nondeductible portion of interest expense) using the appropriate federal income
tax rate of 35.00% and, where applicable, the marginal state income tax rate of
7.50% (or a combined marginal federal and state rate of 39.88%) for 2009 and
2008, to increase tax-exempt interest income to a taxable-equivalent basis. The
net taxable-equivalent adjustment amounts utilized in the above table to compute
yields were $1.0 million and $1.1 million for the three months ended March 31,
2009 and 2008, respectively.
(2)
Non-accrual loans are included in the average balances.
(3) Net
interest margin equals annualized net interest income on a tax-equivalent basis
divided by total interest-earning assets.
Net
Interest Income
Net interest income for the first
three months of the year was $25.0 million in 2009, a decrease of 6% from $26.6
million in 2008, due primarily to a 131 basis point decline in tax equivalent
yield on earning assets which exceeded a 76 basis point decline in the cost of
interest bearing liabilities. Non-GAAP tax-equivalent net interest income, which
takes into account the benefit of tax advantaged investment securities,
decreased by 6%, to $26.0 million in 2009 from $27.7 million in
2008. The effects of changes in average balances, yields and rates
are presented in Table 5.
For the first three months, total
interest income decreased by $5.2 million or 12% in 2009, compared to
2008. On a non-GAAP tax-equivalent basis, interest income also
decreased by 12%. Average earning assets increased by 12% versus the
prior period to $3.1 billion from $2.8 billion; while the average yield earned
on those assets decreased by 131 basis points to 5.17%. Comparing the
first three months of 2009 versus the same period in 2008, average total loans
and leases grew by 8% to $2.5 billion (80% of average earning assets, versus 83%
a year ago), while recording a 125 basis point decrease in average yield to
5.41%. Average commercial loans and leases increased by 10% (due to
increases in commercial mortgages and other commercial loans and leases);
average consumer loans increased by 8% (attributable primarily to home equity
line growth); and residential real estate loans increased by 3% (reflecting
increases in both mortgage and construction lending). Over the same
period, average total securities increased by 26% to $537.0 million (17% of
average earning assets, versus 15% a year ago), while the average yield earned
on those assets decreased by 110 basis points to 4.74%. The lower level of
growth in average total loans and leases reflects the lack of quality loan
demand in the marketplace as a result of the current negative economic
conditions on both a regional and local basis. The increased growth in average
total securities was due mainly to the investment of the proceeds resulting from
the successful launch of the Company’s new Premier Money Market
product.
Interest expense for the first three
months of the year decreased by $3.6 million or 21% in 2009 compared to 2008.
Average total interest-bearing liabilities increased by 7% over the prior year
period, while the average rate paid on these funds decreased by 76 basis points
to 2.25%. As shown in Table 4, all categories of interest-bearing
liabilities showed decreases in the average rate as market interest rates
continued to decline.
Table 5 –
Effect of Volume and Rate Changes on Net Interest Income
|
|
|
|
|
2009 vs. 2008
|
|
|
|
|
|
2008 vs. 2007
|
|
|
|
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
|
|
$ |
(5,052 |
) |
|
$ |
2,721 |
|
|
$ |
(7,773 |
) |
|
$ |
3,796 |
|
|
$ |
6,970 |
|
|
$ |
(3,174 |
) |
Securities
|
|
|
7 |
|
|
|
1,339 |
|
|
|
(1,332 |
) |
|
|
(1,714 |
) |
|
|
(1,689 |
) |
|
|
(25 |
) |
Other
earning assets
|
|
|
(280 |
) |
|
|
144 |
|
|
|
(424 |
) |
|
|
(199 |
) |
|
|
29 |
|
|
|
(228 |
) |
Total
interest income
|
|
|
(5,325 |
) |
|
|
4,204 |
|
|
|
(9,529 |
) |
|
|
1,883 |
|
|
|
5,310 |
|
|
|
(3,427 |
) |
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(50 |
) |
|
|
1 |
|
|
|
(51 |
) |
|
|
(18 |
) |
|
|
9 |
|
|
|
(27 |
) |
Regular
savings deposits
|
|
|
(65 |
) |
|
|
(4 |
) |
|
|
(61 |
) |
|
|
(36 |
) |
|
|
(9 |
) |
|
|
(27 |
) |
Money
market savings deposits
|
|
|
(2,251 |
) |
|
|
27 |
|
|
|
(2,278 |
) |
|
|
(307 |
) |
|
|
1,291 |
|
|
|
(1,598 |
) |
Time
deposits
|
|
|
(1,201 |
) |
|
|
1,011 |
|
|
|
(2,212 |
) |
|
|
(405 |
) |
|
|
(41 |
) |
|
|
(364 |
) |
Total
borrowings
|
|
|
(73 |
) |
|
|
450 |
|
|
|
(523 |
) |
|
|
230 |
|
|
|
1,134 |
|
|
|
(904 |
) |
Total
interest expense
|
|
|
(3,640 |
) |
|
|
1,485 |
|
|
|
(5,125 |
) |
|
|
(536 |
) |
|
|
2,384 |
|
|
|
(2,920 |
) |
Net
interest income
|
|
$ |
(1,685 |
) |
|
$ |
2,719 |
|
|
$ |
(4,404 |
) |
|
$ |
2,419 |
|
|
$ |
2,926 |
|
|
$ |
(507 |
) |
*
Where volume and rate have a combined effect that cannot be separately
identified with either, the variance is allocated to volume and rate based on
the relative size of the variance that can be separately identified with
each.
Credit
Risk Management
The Company’s loan and lease
portfolio (the “credit portfolio”) is subject to varying degrees of credit risk.
Credit risk is mitigated through portfolio diversification, limiting exposure to
any single customer, industry or collateral type. The Company maintains an
allowance for loan and lease losses (the “allowance”) to absorb possible losses
in the loan and lease portfolio. The allowance is based on careful, continuous
review and evaluation of the loan and lease portfolio, along with ongoing,
quarterly assessments of the probable losses inherent in that portfolio. The
allowance represents an estimation made pursuant to Statement of Financial
Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies” and SFAS No.
114, “Accounting by Creditors for Impairment of a Loan.” The adequacy
of the allowance is determined through careful and continuous evaluation of the
credit portfolio, and involves consideration of a number of factors, as outlined
below, to establish a prudent level. Determination of the allowance
is inherently subjective and requires significant estimates, including estimated
losses on pools of homogeneous loans and leases based on historical loss
experience and consideration of current economic trends, which may be
susceptible to significant change. Loans and leases deemed
uncollectible are charged against the allowance, while recoveries are credited
to the allowance. Management adjusts the level of the allowance
through the provision for loan and lease losses, which is recorded as a current
period operating expense. The Company’s systematic methodology for
assessing the appropriateness of the allowance includes: (1) the
general allowance reflecting historical losses, as adjusted, by credit category,
and (2) the specific allowance for risk-rated credits on an individual or
portfolio basis.
The general allowance, which is based
upon historical loss factors, as adjusted, establishes allowances for the major
loan and lease categories based upon adjusted historical loss experience over
the prior eight quarters, weighted so that losses in the most recent quarters
have the greatest effect. The factors used to adjust the historical loss
experience address various risk characteristics of the Company’s loan and lease
portfolio including: (1) trends in delinquencies and other non-performing loans,
(2) changes in the risk profile related to large loans in the portfolio, (3)
changes in the categories of loans comprising the loan portfolio, (4)
concentrations of loans to specific industry segments, (5) changes in economic
conditions on both a local and national level, (6) changes in the Company’s
credit administration and loan and lease portfolio management processes, and (7)
quality of the Company’s credit risk identification processes.
The specific allowance is used to
allocate an allowance for internally risk rated commercial loans where
significant conditions or circumstances indicate that a loss may be
imminent. Analysis resulting in specific allowances, including those
on loans identified for evaluation of impairment, includes consideration of the
borrower’s overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of
collateral. These factors are combined to estimate the probability
and severity of inherent losses. Then a specific allowance is
established based on the Company’s calculation of the potential loss imbedded in
the individual loan. Allowances are also established by application of credit
risk factors to other internally risk rated loans, individual consumer and
residential loans and commercial leases having reached nonaccrual or 90-day past
due status. Each risk rating category is assigned a credit risk factor based on
management’s estimate of the associated risk, complexity, and size of the
individual loans within the category. Additional allowances may also
be established in special circumstances involving a particular group of credits
or portfolio within a risk category when management becomes aware that losses
incurred may exceed those determined by application of the risk factor
alone.
The amount of the allowance is
reviewed monthly by the Senior Loan Committee, and reviewed and approved
quarterly by the Board of Directors.
The provision for loan and lease
losses totaled $10.6 million for the first three months of 2009 compared to $2.7
million in the same period of 2008. The Company experienced net charge-offs
during the first three months of 2009 of $1.3 million compared to net recoveries
of $128 thousand for the first three months of 2008.
Management believes that the
allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses inherent in the credit
portfolio can vary significantly from the amounts actually
observed. While management uses available information to recognize
probable losses, future additions to the allowance may be necessary based on
changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic
conditions. In addition, regulatory agencies, as an integral part of
their examination process, and independent consultants engaged by Sandy Spring
Bank, periodically review the credit portfolio and the
allowance. Such review may result in additional provisions based on
these third-party judgments of information available at the time of each
examination. During the first three months of 2009, there were no changes in
estimation methods or assumptions that affected the allowance methodology. The
allowance for loan and lease losses was 2.43% of total loans and leases at March
31, 2009 and 2.03% at December 31, 2008. The allowance increased during the
first three months of 2009 by $9.3 million, to $59.8 million at March 31, 2009,
from $50.5 million at December 31, 2008. The increase in the
allowance during the first three months of 2009 was due primarily to a higher
level of nonperforming loans.
Nonperforming loans and leases
increased by $51.3 million to $120.7 million at March 31, 2009 from $69.4
million at December 31, 2008, while nonperforming assets increased by $53.6
million for the same period to $125.8 million at March 31, 2009. As a percentage
of total assets, nonperforming assets increased to 3.57% at March 31, 2009 from
2.18% at December 31, 2008. The increase in non performing loans and leases was
mainly the result of five relationships in the amount of $46.2 million which
management believes are adequately reserved or well secured. The allowance for
loan and lease losses represented 50% of nonperforming loans and leases at March
31, 2009, compared to coverage of 73% at December 31,
2008. Significant variation in this coverage ratio may occur
from period to period because the amount of nonperforming loans and leases
depends largely on the condition of a small number of individual credits and
borrowers relative to the total loan and lease portfolio. Other real estate
owned was $5.1 million at March 31, 2009 and $2.9 million at December 31, 2008.
The balance of impaired loans and leases was $97.6 million at March 31, 2009,
with specific reserves against those loans of $22.5 million, compared to $52.6
million at December 31, 2008, with specific reserves of $13.8
million.
Table 6 -
Analysis of Credit Risk
(Dollars
in thousands)
Activity
in the allowance for credit losses is shown below:
|
|
Three Months Ended
March 31, 2009
|
|
|
Twelve Months Ended
December 31, 2008
|
|
Balance,
January 1
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
Provision
for loan and lease losses
|
|
|
10,613 |
|
|
|
33,192 |
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(532 |
) |
|
|
(4,798 |
) |
Commercial
loans and leases
|
|
|
(580 |
) |
|
|
(2,677 |
) |
Consumer
|
|
|
(313
|
) |
|
|
(988 |
) |
Total
charge-offs
|
|
|
(1,425 |
) |
|
|
(8,463 |
) |
Loan
recoveries:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0 |
|
|
|
21 |
|
Commercial
loans and leases
|
|
|
59 |
|
|
|
475 |
|
Consumer
|
|
|
25 |
|
|
|
209 |
|
Total
recoveries
|
|
|
84 |
|
|
|
705 |
|
Net
charge-offs
|
|
|
(1,341 |
) |
|
|
(7,758 |
) |
Balance,
period end
|
|
$ |
59,798 |
|
|
$ |
50,526 |
|
Net
charge-offs to average loans and leases
(annual basis)
|
|
|
0.22 |
% |
|
|
0.32 |
% |
Allowance
to total loans and leases
|
|
|
2.43 |
% |
|
|
2.03 |
% |
The
following table presents nonperforming assets at the dates
indicated:
|
|
March 31, 2009
|
|
|
December 31, 2008
|
|
Non-accrual
loans and leases
|
|
$ |
110,761 |
|
|
$ |
67,950 |
|
Loans
and leases 90 days past due
|
|
|
9,545 |
|
|
|
1,038 |
|
Restructured
loans and leases
|
|
|
395 |
|
|
|
395 |
|
Total
nonperforming loans and leases*
|
|
|
120,701 |
|
|
|
69,383 |
|
Other
real estate owned, net
|
|
|
5,094 |
|
|
|
2,860 |
|
Total
nonperforming assets
|
|
$ |
125,795 |
|
|
$ |
72,243 |
|
Nonperforming
assets to total assets
|
|
|
3.57 |
% |
|
|
2.18 |
% |
* Those
performing loans and leases considered potential problem credits (which the
Company classifies as substandard), as defined and identified by management,
amounted to approximately $124.4 million at March 31, 2009, compared to $125.7
million at December 31, 2008. These are credits where known
information about the borrowers' possible credit problems causes management to
have doubts as to their ability to comply with the present repayment terms. This
could result in their reclassification as nonperforming credits in the future,
however most are well collateralized and are not believed to present significant
risk of loss. Loans classified for regulatory purposes not included in either
non-performing or potential problem loans consist only of "other loans
especially mentioned" and do not, in management's opinion, represent or result
from trends or uncertainties reasonably expected to materially impact future
operating results, liquidity or capital resources, or represent material credits
where known information about the borrowers' possible credit problems causes
management to have doubts as to the borrowers' ability to comply with the loan
repayment terms.
Noninterest
Income and Expenses
Total noninterest income was $12.0
million for the three month period ended March 31, 2009, a 6% or $0.7 million
decrease from the same period of 2008. The decrease in noninterest
income for the first three months of 2009 was due primarily to a decrease of
$0.2 million or 6% in service charges on deposits resulting from lower overdraft
fees while fees on sales of investment products decreased $0.1 million or 15%
due to reduced assets under management. Trust and investment management fees
declined $0.1 million or 5% due to a decrease in assets under management. In
addition, Visa check fees also decreased $0.1 million or 8% compared to the
first quarter of 2008 as a result of lower consumer spending due to the state of
the economy. These decreases were somewhat offset by an increase in gains on
sales of mortgage loans of $0.3 million or 42% due largely to higher mortgage
refinancing volumes reflecting market conditions. Other noninterest income also
decreased $0.1 million or 7% compared to the first quarter of 2008. Insurance
agency commissions remained virtually the same with the prior year period due to
higher fees on physician’s liability lines offset by reduced contingency
fees.
Total noninterest expenses were $24.3
million for the three month period ended March 31, 2009, a 2% or $0.5 million
decrease from the same period in 2008. Salaries and employee benefits decreased
$0.6 million or 4% during the first three months of 2009 due to a decrease in
incentive compensation and a reduction in the number of full time equivalent
employees. Outside data services decreased by $0.3 million or 28%. Average
full-time equivalent employees decreased to 669 during the first three months of
2009, from 706 during the like period in 2008, a 5% decrease.
Income
Taxes
The effective tax rate decreased to a
tax benefit of 3.8% for the three month period ended March 31, 2009, from a tax
expense of 31.3% for the prior year period. This decrease was
primarily due to the level of tax exempt income from investment securities and
bank owned life insurance which more than offset the decreased level of net
income before income taxes.
Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
See “Financial Condition - Market
Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of
Financial Condition and Results of Operations, above, which is incorporated
herein by reference. Management has determined that no additional
disclosures are necessary to assess changes in information about market risk
that have occurred since December 31, 2008.
Item
4. CONTROLS AND PROCEDURES
The Company’s management, under the
supervision and with the participation of the Company’s Chief Executive Officer
and Chief Financial Officer, evaluated as of the last day of the period covered
by this report, the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rule 13a-15 under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company’s disclosure
controls and procedures were effective. There were no significant changes in the
Company’s internal controls over financial reporting (as defined in Rule 13a-15
under the Securities Act of 1934) during the quarter ended March 31, 2009, that
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
PART II -
OTHER INFORMATION
Item 1A.
RISK FACTORS
There
have been no material changes in the risk factors as disclosed in the 2008
Annual Report on Form 10-K.
Item 6.
EXHIBITS
Exhibit
31(a)
|
|
Certification
of Chief Executive Officer
|
Exhibit
31(b)
|
|
Certification
of Chief Financial Officer
|
Exhibit
32 (a)
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S. Section
1350
|
Exhibit
32 (b)
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S. Section
1350
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this quarterly report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SANDY
SPRING BANCORP, INC.
|
(Registrant)
|
|
By:
|
/S/ DANIEL J. SCHRIDER
|
|
Daniel
J. Schrider
|
Chief
Executive Officer
|
|
Date:
May 6, 2009
|
|
By:
|
/S/ PHILIP J. MANTUA
|
|
Philip
J. Mantua
|
Executive
Vice President and Chief Financial Officer
|
|
Date:
May 6, 2009
|