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 June 30,
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 July 31, 2009 is 16,464,014 shares.
SANDY
SPRING BANCORP, INC.
INDEX
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets at June 30, 2009 (Unaudited) and December 31,
2008
|
1
|
|
|
Consolidated
Statements of Income for the Three Month and Six Month Periods Ended June
30, 2009 and 2008 (Unaudited)
|
2
|
|
|
Consolidated
Statements of Cash Flows for the Six Month Periods Ended June 30, 2009 and
2008 (Unaudited)
|
3
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Six Month Periods
Ended June 30, 2009 and 2008 (Unaudited)
|
5
|
|
|
Notes
to Consolidated Financial Statements
|
6
|
|
|
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
|
36
|
|
|
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
36
|
|
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECUITY HOLDERS
|
36
|
|
|
ITEM
6. EXHIBITS
|
37
|
|
|
SIGNATURES
|
37
|
PART I -
FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENTS
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
(Unaudited)
|
|
|
|
|
|
|
June
30,
|
|
|
December
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
43,360 |
|
|
$ |
44,738 |
|
Federal
funds sold
|
|
|
2,034 |
|
|
|
1,110 |
|
Interest-bearing
deposits with banks
|
|
|
77,090 |
|
|
|
59,381 |
|
Cash
and cash equivalents
|
|
|
122,484 |
|
|
|
105,229 |
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
14,494 |
|
|
|
11,391 |
|
Investments
available-for-sale (at fair value)
|
|
|
697,314 |
|
|
|
291,727 |
|
Investments
held-to-maturity — fair value of $150,109 (2009) and $175,908
(2008)
|
|
|
145,937 |
|
|
|
171,618 |
|
Other
equity securities
|
|
|
32,123 |
|
|
|
29,146 |
|
Total
loans and leases
|
|
|
2,389,389 |
|
|
|
2,490,646 |
|
Less: allowance for loan and lease losses
|
|
|
(58,317 |
) |
|
|
(50,526 |
) |
Net
loans and leases
|
|
|
2,331,072 |
|
|
|
2,440,120 |
|
Premises
and equipment, net
|
|
|
50,460 |
|
|
|
51,410 |
|
Other
real estate owned
|
|
|
6,829 |
|
|
|
2,860 |
|
Accrued
interest receivable
|
|
|
13,007 |
|
|
|
11,810 |
|
Goodwill
|
|
|
76,816 |
|
|
|
76,248 |
|
Other
intangible assets, net
|
|
|
10,080 |
|
|
|
12,183 |
|
Other
assets
|
|
|
116,881 |
|
|
|
109,896 |
|
Total
assets
|
|
$ |
3,617,497 |
|
|
$ |
3,313,638 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
553,604 |
|
|
$ |
461,517 |
|
Interest-bearing
deposits
|
|
|
2,096,881 |
|
|
|
1,903,740 |
|
Total
deposits
|
|
|
2,650,485 |
|
|
|
2,365,257 |
|
Short-term
borrowings
|
|
|
496,463 |
|
|
|
421,074 |
|
Other
long-term borrowings
|
|
|
14,434 |
|
|
|
66,584 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
35,000 |
|
Accrued
interest payable and other liabilities
|
|
|
29,853 |
|
|
|
33,861 |
|
Total
liabilities
|
|
|
3,226,235 |
|
|
|
2,921,776 |
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock—par value $1.00 (liquidation preference of $1,000 per
share) issued and outstanding 83,094 (discount of $3,329 and $3,654,
respectively)
|
|
|
79,765 |
|
|
|
79,440 |
|
Common
stock — par value $1.00; shares authorized 49,916,906; shares
issued and outstanding 16,460,921 (2009) and 16,398,523
(2008)
|
|
|
16,461 |
|
|
|
16,399 |
|
Warrants
|
|
|
3,699 |
|
|
|
3,699 |
|
Additional
paid in capital
|
|
|
86,883 |
|
|
|
85,486 |
|
Retained
earnings
|
|
|
209,980 |
|
|
|
214,410 |
|
Accumulated
other comprehensive loss
|
|
|
(5,526 |
) |
|
|
(7,572 |
) |
Total
stockholders' equity
|
|
|
391,262 |
|
|
|
391,862 |
|
Total
liabilities and stockholders' equity
|
|
$ |
3,617,497 |
|
|
$ |
3,313,638 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
(Dollars
in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
32,066 |
|
|
$ |
36,696 |
|
|
$ |
65,299 |
|
|
$ |
75,165 |
|
Interest
on loans held for sale
|
|
|
253 |
|
|
|
122 |
|
|
|
533 |
|
|
|
218 |
|
Interest
on deposits with banks
|
|
|
43 |
|
|
|
24 |
|
|
|
89 |
|
|
|
73 |
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
4,531 |
|
|
|
1,880 |
|
|
|
7,726 |
|
|
|
4,578 |
|
Exempt
from federal income taxes
|
|
|
1,774 |
|
|
|
2,972 |
|
|
|
3,746 |
|
|
|
5,303 |
|
Interest
on federal funds sold
|
|
|
1 |
|
|
|
151 |
|
|
|
3 |
|
|
|
430 |
|
TOTAL
INTEREST INCOME
|
|
|
38,668 |
|
|
|
41,845 |
|
|
|
77,396 |
|
|
|
85,767 |
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
9,921 |
|
|
|
10,583 |
|
|
|
19,375 |
|
|
|
23,605 |
|
Interest
on short-term borrowings
|
|
|
3,614 |
|
|
|
3,063 |
|
|
|
7,060 |
|
|
|
6,342 |
|
Interest
on long-term borrowings
|
|
|
685 |
|
|
|
1,080 |
|
|
|
1,488 |
|
|
|
2,122 |
|
TOTAL
INTEREST EXPENSE
|
|
|
14,220 |
|
|
|
14,726 |
|
|
|
27,923 |
|
|
|
32,069 |
|
NET
INTEREST INCOME
|
|
|
24,448 |
|
|
|
27,119 |
|
|
|
49,473 |
|
|
|
53,698 |
|
Provision
for loan and lease losses
|
|
|
10,615 |
|
|
|
6,189 |
|
|
|
21,228 |
|
|
|
8,856 |
|
NET
INTEREST INCOME AFTER PROVISION FOR
LOAN AND LEASE LOSSES
|
|
|
13,833 |
|
|
|
20,930 |
|
|
|
28,245 |
|
|
|
44,842 |
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
30 |
|
|
|
79 |
|
|
|
192 |
|
|
|
653 |
|
Service
charges on deposit accounts
|
|
|
2,851 |
|
|
|
3,202 |
|
|
|
5,714 |
|
|
|
6,232 |
|
Gains
on sales of mortgage loans
|
|
|
786 |
|
|
|
653 |
|
|
|
1,808 |
|
|
|
1,375 |
|
Fees
on sales of investment products
|
|
|
622 |
|
|
|
905 |
|
|
|
1,322 |
|
|
|
1,727 |
|
Trust
and investment management fees
|
|
|
2,370 |
|
|
|
2,505 |
|
|
|
4,657 |
|
|
|
4,902 |
|
Insurance
agency commissions
|
|
|
1,040 |
|
|
|
1,357 |
|
|
|
3,090 |
|
|
|
3,443 |
|
Income
from bank owned life insurance
|
|
|
725 |
|
|
|
727 |
|
|
|
1,436 |
|
|
|
1,441 |
|
Visa
check fees
|
|
|
748 |
|
|
|
761 |
|
|
|
1,386 |
|
|
|
1,457 |
|
Other
income
|
|
|
1,858 |
|
|
|
1,506 |
|
|
|
3,399 |
|
|
|
3,161 |
|
TOTAL NONINTEREST
INCOME
|
|
|
11,030 |
|
|
|
11,695 |
|
|
|
23,004 |
|
|
|
24,391 |
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
13,704 |
|
|
|
13,862 |
|
|
|
26,908 |
|
|
|
27,625 |
|
Occupancy
expense of premises
|
|
|
2,548 |
|
|
|
2,619 |
|
|
|
5,323 |
|
|
|
5,418 |
|
Equipment
expenses
|
|
|
1,374 |
|
|
|
1,560 |
|
|
|
2,888 |
|
|
|
2,999 |
|
Marketing
|
|
|
485 |
|
|
|
488 |
|
|
|
905 |
|
|
|
985 |
|
Outside
data services
|
|
|
961 |
|
|
|
1,081 |
|
|
|
1,767 |
|
|
|
2,203 |
|
FDIC
insurance
|
|
|
2,790 |
|
|
|
421 |
|
|
|
3,749 |
|
|
|
813 |
|
Amortization
of intangible assets
|
|
|
1,047 |
|
|
|
1,117 |
|
|
|
2,102 |
|
|
|
2,241 |
|
Other
expenses
|
|
|
3,949 |
|
|
|
3,738 |
|
|
|
7,466 |
|
|
|
7,305 |
|
TOTAL
NONINTEREST EXPENSES
|
|
|
26,858 |
|
|
|
24,886 |
|
|
|
51,108 |
|
|
|
49,589 |
|
Income
(loss) before income taxes
|
|
|
(1,995 |
) |
|
|
7,739 |
|
|
|
141 |
|
|
|
19,644 |
|
Income
tax expense (benefit)
|
|
|
(1,715 |
) |
|
|
2,088 |
|
|
|
(1,796 |
) |
|
|
5,788 |
|
NET
INCOME (LOSS)
|
|
$ |
(280 |
) |
|
$ |
5,651 |
|
|
$ |
1,937 |
|
|
$ |
13,856 |
|
Preferred
stock dividends and discount accretion
|
|
|
1,202 |
|
|
|
0 |
|
|
|
2,402 |
|
|
|
0 |
|
NET
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
|
|
$ |
(1,482 |
) |
|
$ |
5,651 |
|
|
$ |
(465 |
) |
|
$ |
13,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE AMOUNTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
|
(0.02 |
) |
|
|
0.35 |
|
|
|
0.12 |
|
|
|
0.85 |
|
Basic
net income (loss) per common share
|
|
|
(0.09 |
) |
|
|
0.35 |
|
|
|
(0.03 |
) |
|
|
0.85 |
|
Diluted
net income (loss) per share
|
|
|
(0.02 |
) |
|
|
0.34 |
|
|
|
0.12 |
|
|
|
0.84 |
|
Diluted
net income (loss) per common share
|
|
|
(0.09 |
) |
|
|
0.34 |
|
|
|
(0.03 |
) |
|
|
0.84 |
|
Dividends
declared per share
|
|
|
0.12 |
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.48 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,937 |
|
|
$ |
13,856 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,121 |
|
|
|
5,480 |
|
Provision
for loan and lease losses
|
|
|
21,228 |
|
|
|
8,856 |
|
Charge-offs
on loans and leases
|
|
|
(13,437 |
) |
|
|
(512 |
) |
Stock
compensation expense
|
|
|
527 |
|
|
|
392 |
|
Deferred
income taxes (benefits)
|
|
|
(3,833 |
) |
|
|
(3,615 |
) |
Origination
of loans held for sale
|
|
|
(227,197 |
) |
|
|
(100,250 |
) |
Proceeds
from sales of loans held for sale
|
|
|
226,093 |
|
|
|
96,490 |
|
Common
stock issued pursuant to West Financial Services
acquisition
|
|
|
628 |
|
|
|
0 |
|
Gains
on sales of loans held for sale
|
|
|
(1,999 |
) |
|
|
(1,238 |
) |
Securities
gains
|
|
|
(192 |
) |
|
|
(653 |
) |
Gains
on sales of premises and equipment
|
|
|
0 |
|
|
|
(66 |
) |
Net
(increase) decrease in accrued interest receivable
|
|
|
(1,197 |
) |
|
|
2,297 |
|
Net
increase in other assets
|
|
|
(3,396 |
) |
|
|
(4,971 |
) |
Net
(decrease) increase in accrued expenses and other
liabilities
|
|
|
(4,238 |
) |
|
|
1,220 |
|
Other
– net
|
|
|
1,414 |
|
|
|
(1,246 |
) |
Net
cash (used) provided by operating activities
|
|
|
1,459 |
|
|
|
16,040 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of
other equity securities
|
|
|
(2,978 |
) |
|
|
(4,587 |
) |
Purchases
of investments available-for-sale
|
|
|
(513,343 |
) |
|
|
(174,975 |
) |
Proceeds
from the sales of other real estate owned
|
|
|
104 |
|
|
|
34 |
|
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
25,819 |
|
|
|
54,218 |
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
109,841 |
|
|
|
142,424 |
|
Net
decrease (increase) in loans and leases
|
|
|
97,204 |
|
|
|
(152,842 |
) |
Proceeds
from redemption of VISA stock
|
|
|
0 |
|
|
|
429 |
|
Contingent
consideration payout
|
|
|
(2,308 |
) |
|
|
(1,620 |
) |
Expenditures
for premises and equipment
|
|
|
(1,503 |
) |
|
|
(1,101 |
) |
Net
cash (used) provided in investing activities
|
|
|
(287,164 |
) |
|
|
(138,020 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
285,229 |
|
|
|
20,923 |
|
Net
increase in short-term borrowings
|
|
|
23,239 |
|
|
|
47,426 |
|
Proceeds
from issuance of long-term borrowings
|
|
|
0 |
|
|
|
50,000 |
|
Proceeds
from issuance of common stock
|
|
|
304 |
|
|
|
422 |
|
Dividends
paid
|
|
|
(5,812 |
) |
|
|
(7,873 |
) |
Net
cash provided by financing activities
|
|
|
302,960 |
|
|
|
110,898 |
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
17,255 |
|
|
|
(11,082 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
105,229 |
|
|
|
85,852 |
|
Cash
and cash equivalents at end of period
|
|
$ |
122,484 |
|
|
$ |
74,770 |
|
Sandy
Spring Bancorp and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
|
|
Six Months Ended
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
28,092 |
|
|
$ |
31,895 |
|
Income
tax payments
|
|
|
3,900 |
|
|
|
13,424 |
|
Transfers
from loans to other real estate owned
|
|
|
4,053 |
|
|
|
925 |
|
Reclassification of borrowings from long-term to
short-term
|
|
|
52,150 |
|
|
|
483 |
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,937 |
|
|
|
|
|
|
|
1,937 |
|
Other
comprehensive income, net of tax effects
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,046 |
|
|
|
2,046 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends - $.24 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,965 |
) |
|
|
|
|
|
|
(3,965 |
) |
Preferred
Stock dividends – $24.98 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,077 |
) |
|
|
|
|
|
|
(2,077 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527 |
|
|
|
|
|
|
|
|
|
|
|
527 |
|
Discount
accretion
|
|
|
325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration relating to 2005 acquisition of West Financial – 31,663
shares
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
596 |
|
|
|
|
|
|
|
|
|
|
|
628 |
|
Employee
stock purchase plan – 20,562 shares
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
222 |
|
|
|
|
|
|
|
|
|
|
|
242 |
|
Director
Stock purchase plan – 2,988 shares
|
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Restricted
stock- 5,441 shares
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
DRIP
plan – 1,744 shares
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Balances
at June 30, 2009
|
|
$ |
79,765 |
|
|
$ |
16,461 |
|
|
$ |
3,699 |
|
|
$ |
86,883 |
|
|
$ |
209,980 |
|
|
$ |
(5,526 |
) |
|
$ |
391,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,856 |
|
|
|
|
|
|
|
13,856 |
|
Other
comprehensive income (loss), net of tax effects and reclassification
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(572 |
) |
|
|
(572 |
) |
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends- $0.24 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,873 |
) |
|
|
|
|
|
|
(7,873 |
) |
Stock
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
stock purchase plan – 1,479 shares
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Stock
option plan – 9,127 shares (16,837 shares issued less
7,710 shares retired)
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Employee
stock purchase plan- 13,758 shares
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
306 |
|
|
|
|
|
|
|
|
|
|
|
320 |
|
Balances
at June 30, 2008
|
|
$ |
- |
|
|
$ |
16,374 |
|
|
$ |
- |
|
|
$ |
84,759 |
|
|
$ |
220,712 |
|
|
$ |
(1,627 |
) |
|
$ |
320,218 |
|
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.
Subsequent events have been evaluated
through August 6, 2009, which is the date the financial statements were
available to be issued.
Cash
Flows
For purposes of reporting cash flows,
cash and cash equivalents include cash and due from banks and federal funds sold
(which have original maturities of three months or less).
Note 2 -
New Accounting Pronouncements
Adopted
Accounting Pronouncements
In April
2009, the FASB issued FSP FAS 115-2 and 124-2, “Recognition and Presentation of
Other-Than-Temporary Impairments” (“FSP FAS 115-2 and 124-2”), which is
effective for interim and annual reporting periods ending after June 15, 2009,
with early adoption permitted for periods ending after March 15, 2009. This FSP
changes the requirements for recognizing OTTI for debt securities and modifies
the criteria used to assess the collectability of cash flows when determining
the potential for OTTI. The FSP further modifies the presentation of OTTI losses
and increases the frequency of and expands existing disclosure requirements. The
Company’s adoption of this FSP in the second quarter of 2009 did not have a
material impact on the Company’s 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” (“FSP FAS 157-4”), which is
effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. This FSP provides additional guidance related to the use of judgment in
evaluating the relevance of inputs when determining fair value, estimating fair
values when the volume and level of activity for an asset or liability has
significantly decreased and identifying transactions that are not
orderly. The Company’s adoption of this FSP in the second quarter of
2009 did not have a material impact on the Company’s financial position, results
of operations or cash flows.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (“FSP FAS 107-1”), which is effective for
interim periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. This FSP requires disclosures
about the fair value of its financial instruments whenever it issues summarized
financial information for interim reporting periods. The Company’s adoption of
this FSP in the second quarter of 2009 did not have a material impact on the
Company’s financial position, results of operations or cash
flows.
In June
2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted
in Share-Based Payment Transactions Are Participating Securities.” The FSP
concludes that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents are participating securities that
should be included in the earnings allocation in computing earnings per share
under the two class method. The FSP is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior period per share data presented must be adjusted
retrospectively. The Company’s adoption of this FSP did not have a material
impact on the Company’s financial position, results of operations or cash
flows.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No.
165”). The Statement establishes general standards of accounting for
and disclosure of events that occurred after the balance sheet date but before
financial statements are issued or are available to be issued. This Statement
will be effective for interim or annual financial periods ending after June 15,
2009 and shall be applied prospectively. The Statement defines two
types of subsequent events that must be evaluated: recognized and nonrecognized
subsequent events. An entity must recognize in the financial statements the
effects of all subsequent events that provide additional evidence about
conditions that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing financial statements. An entity
may not recognize subsequent events that provide evidence about conditions that
did not exist at the date of the balance sheet but that arose after the balance
sheet date but prior to the issuance of the financial statements. The
Statement stipulates that certain nonrecognized subsequent events may be of such
a nature that they must be disclosed to keep the financial statements from being
misleading. The adoption of this Statement did not have a material impact on the
Company’s 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 (“FSP FASB
132(R)-1"). The FSP is effective for financial statements issued for
fiscal years ending after December 15, 2009. 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.” 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 June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets an amendment of FASB Statement No. 140” (“SFAS No. 166”). The disclosure
requirements apply to transfers that occur both before and after the effective
date of the statement. SFAS No. 166 is effective as of the beginning of a
reporting entity’s first annual reporting period beginning after November 15,
2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited. This statement changes the derecognition guidance for transferors of
financial assets, including entities that sponsor securitizations, to align that
guidance with the original intent of FASB Statement No. 140, “Accounting for the
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
In addition, on and after the effective date, existing qualifying
special-purpose entities must be evaluated for consolidation by the reporting
entity.
The
Statement eliminates the concept of a qualifying special purpose entity
(“QSPE”). The Statement eliminates any reference to a QSPE and requires a
transferor to evaluate transfers to such entities under the amended guidance.
SFAS No. 166 also introduces the concept of a participating interest. A
participating interest is defined as a proportionate interest ownership interest
in a financial asset in which the cash flows from the asset are allocated to the
participating interest holders in proportion to their ownership
share.
Additionally,
the Statement significantly modifies the conditions required for a transfer of a
financial asset or a participating interest therein to qualify as a sale. SFAS
No. 166 also changes the measurement guidance for transfers of financial assets
in that it requires that a transferor recognize and initially measure at fair
value any servicing assets, servicing liabilities, and any other assets obtained
and liabilities incurred in a sale. The Statement amends the
disclosure requirements that will allow financial statement users to understand
the nature and extent of the transferor’s continuing involvement with financial
assets that have been transferred. 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
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.46(R)”
(“SFAS No. 167”). The Statement is effective as of the beginning of a reporting
entity’s first annual reporting period that begins after November 15, 2009 and
for interim periods within the first annual reporting period. Earlier
application is prohibited. The objective of this Statement is to improve the
accounting and disclosure of any involvement with variable interest entities
(“VIEs”). The Statement eliminates the existing approach for identifying the
primary beneficiary of a VIE. It changes that approach with an analysis to
determine if an enterprise’s variable interests give it a controlling financial
interest in the VIE. The statement also expands the disclosure requirements for
an enterprise that have a variable interest in a VIE. 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
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
No. 162” (“SFAS No. 168”). This Statement is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Statement modifies the hierarchy of generally accepted
accounting principles (“GAAP”) to include two levels of GAAP: authoritative and
nonauthoritative to be applied by nongovernmental
entities. Authoritative GAAP will include all rules and interpretive
releases of the Securities and Exchange Commission
(“SEC”). Subsequent to the effective date of the SFAS No. 168, all
references to GAAP will conform to the codification
standards. Management has determined that this guidance does not
impact the financial statements of the Company.
Note 3 –
Stock Based Compensation
At June
30, 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 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 1,200,222 are available for issuance at June 30,
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. 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. 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 $0.5 million and $0.4 million for the six month
periods ended June 30, 2009 and 2008, respectively.
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 six months ended June 30, 2009
and 2008 was $0 million and $0.2 million, respectively
A summary
of share option activity for the two plans for the six month period ended June
30, 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
|
|
|
(163,314 |
) |
|
|
32.55 |
|
|
|
3.2 |
|
|
|
|
|
Balance
at June 30, 2009
|
|
|
883,976 |
|
|
$ |
31.85 |
|
|
|
4.8 |
|
|
$ |
201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2009
|
|
|
718,448 |
|
|
$ |
33.86 |
|
|
|
|
|
|
$ |
8 |
|
A summary
of the status of the Company’s nonvested options and restricted stock as of June
30, 2009, and changes during the six 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
|
|
|
(7,586 |
) |
|
|
4.62 |
|
Nonvested
at June 30, 2009
|
|
|
165,528 |
|
|
$ |
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
|
|
|
(2,074 |
) |
|
|
25.83 |
|
Restricted
stock at June 30, 2009
|
|
|
130,695 |
|
|
$ |
17.20 |
|
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 $2.1 million as of June 30, 2009. That
cost is expected to be recognized over a weighted average period of
approximately 3.5 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 and six month periods ended June 30, 2009 and 2008
are shown in the following table. Basic net income per common 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 common 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 common stock
equivalents.
(Dollars and amounts in thousands, except
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
per share data)
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income(loss)
|
|
$ |
(280 |
) |
|
$ |
5,651 |
|
|
$ |
1,937 |
|
|
$ |
13,856 |
|
Net
income loss) available to common stockholders
|
|
|
(1,482 |
) |
|
|
5,651 |
|
|
|
(465 |
) |
|
|
13,856 |
|
Average
common shares outstanding
|
|
|
16,444 |
|
|
|
16,367 |
|
|
|
16,424 |
|
|
|
16,361 |
|
Basic
net income (loss)
|
|
$ |
(0.02 |
) |
|
$ |
0.35 |
|
|
$ |
0.12 |
|
|
$ |
0.85 |
|
Basic
net income (loss) per common share
|
|
$ |
(0.09 |
) |
|
$ |
0.35 |
|
|
$ |
(0.03 |
) |
|
$ |
0.85 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(280 |
) |
|
$ |
5,651 |
|
|
$ |
1,937 |
|
|
$ |
13,856 |
|
Net
income (loss) available to common stockholders
|
|
|
(1,482 |
) |
|
|
5,651 |
|
|
|
(465 |
) |
|
|
13,856 |
|
Average
common shares outstanding
|
|
|
16,444 |
|
|
|
16,367 |
|
|
|
16,424 |
|
|
|
16,361 |
|
Stock
option and restricted stock adjustment
|
|
|
0 |
|
|
|
60 |
|
|
|
0 |
|
|
|
57 |
|
Average
common shares outstanding–diluted
|
|
|
16,444 |
|
|
|
16,427 |
|
|
|
16,424 |
|
|
|
16,418 |
|
Diluted
net income (loss) per share
|
|
$ |
(0.02 |
) |
|
$ |
0.34 |
|
|
$ |
0.12 |
|
|
$ |
0.84 |
|
Diluted
net income (loss) per common share
|
|
$ |
(0.09 |
) |
|
$ |
0.34 |
|
|
$ |
(0.03 |
) |
|
$ |
0.84 |
|
Options for 883,976 shares and
1,047,087 shares of common stock were not included in computing diluted net
income per share for the six month periods ended June 30, 2009 and 2008,
respectively, because their effects are antidilutive. For the three months ended
June 30, 2009 and 2008, options for 883,976 shares and 1,047,087 shares of
common stock were not included, respectively.
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 and six month periods ended June 30 includes
the following components:
|
|
Three Months Ended
June 30,
|
|
|
Six Months Ended
June 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
cost on projected benefit obligation
|
|
$ |
360 |
|
|
$ |
355 |
|
|
$ |
715 |
|
|
$ |
710 |
|
Expected
return on plan assets
|
|
|
(300 |
) |
|
|
(326 |
) |
|
|
(642 |
) |
|
|
(652 |
) |
Amortization
of prior service cost
|
|
|
0 |
|
|
|
(44 |
) |
|
|
0 |
|
|
|
(88 |
) |
Recognized
net actuarial loss
|
|
|
342 |
|
|
|
99 |
|
|
|
678 |
|
|
|
198 |
|
Net
periodic benefit cost
|
|
$ |
402 |
|
|
$ |
84 |
|
|
$ |
751 |
|
|
$ |
168 |
|
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 $0.7 million for both of
the six month periods ended June 30, 2009 and 2008, respectively,
and $0.3 million for both of the three month periods ended June 30,
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 $0.4 million for the six month periods
ended June 30, 2009 and 2008, respectively, and $0 and $0.2 million for the
three month periods ended June 30, 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 $0.4 million for the six months ended June 30, 2009
and June 30, 2008, respectively, and 0 and $0.2 million for the three month
periods ended June 30, 2009 and 2008, respectively.
Note 6 –
Investments
The
amortized cost and estimated fair values of investments available for sale are
as follows:
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
$ |
420,527 |
|
|
$ |
2,932 |
|
|
$ |
(313
|
) |
|
$ |
423,146 |
|
|
$ |
135,418 |
|
|
$ |
2,003 |
|
|
$ |
(101
|
) |
|
$ |
137,320 |
|
State
and municipal
|
|
|
2,664 |
|
|
|
81 |
|
|
|
(35
|
) |
|
|
2,710 |
|
|
|
2,663 |
|
|
|
78 |
|
|
|
(41
|
) |
|
|
2,700 |
|
Mortgage-backed
|
|
|
262,419 |
|
|
|
3,270 |
|
|
|
(723
|
) |
|
|
264,966 |
|
|
|
144,638 |
|
|
|
1,358 |
|
|
|
(920
|
) |
|
|
145,076 |
|
Trust
preferred
|
|
|
7,860 |
|
|
|
0 |
|
|
|
(1,718
|
) |
|
|
6,142 |
|
|
|
7,890 |
|
|
|
24 |
|
|
|
(1,633
|
) |
|
|
6,281 |
|
Total
debt securities
|
|
|
693,470 |
|
|
|
6,283 |
|
|
|
(2,789
|
) |
|
|
696,964 |
|
|
|
290,609 |
|
|
|
3,463 |
|
|
|
(2,695
|
) |
|
|
291,377 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
0 |
|
|
|
0 |
|
|
|
350 |
|
|
|
350 |
|
|
|
0 |
|
|
|
0 |
|
|
|
350 |
|
Total
investments available for sale
|
|
$ |
693,820 |
|
|
$ |
6,283 |
|
|
$ |
(2,789
|
) |
|
$ |
697,314 |
|
|
$ |
290,959 |
|
|
$ |
3,463 |
|
|
$ |
(2,695
|
) |
|
$ |
291,727 |
|
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 June 30, 2009 and December 31, 2008 are as follows:
(In thousands)
|
|
|
|
|
|
|
|
Continuous unrealized losses existing for:
|
|
|
|
|
Available for sale as of June 30, 2009
|
|
Number
of
securities
|
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12 months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
12 |
|
|
$ |
70,983 |
|
|
$ |
313 |
|
|
$ |
0 |
|
|
$ |
313 |
|
Mortgage-backed
|
|
|
21 |
|
|
|
60,963 |
|
|
|
661 |
|
|
|
62 |
|
|
|
723 |
|
Trust
preferred
|
|
|
3 |
|
|
|
4,342 |
|
|
|
1,718 |
|
|
|
0 |
|
|
|
1,718 |
|
State
and municipal
|
|
|
4 |
|
|
|
1,136 |
|
|
|
20 |
|
|
|
15 |
|
|
|
35 |
|
|
|
|
40 |
|
|
$ |
137,424 |
|
|
$ |
2,712 |
|
|
$ |
77 |
|
|
$ |
2,789 |
|
(In thousands)
|
|
|
|
|
|
|
|
Continuous unrealized losses existing for:
|
|
|
|
|
Available for sale as of December
31, 2008
|
|
Number
of
securities
|
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12
months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Agencies and Corporations
|
|
|
2 |
|
|
$ |
14,898 |
|
|
$ |
101 |
|
|
$ |
0 |
|
|
$ |
101 |
|
Mortgage-backed
|
|
|
30 |
|
|
|
66,640 |
|
|
|
911 |
|
|
|
9 |
|
|
|
920 |
|
Trust
preferred
|
|
|
6 |
|
|
|
4,950 |
|
|
|
1,633 |
|
|
|
0 |
|
|
|
1,633 |
|
State
and municipal
|
|
|
4 |
|
|
|
1,131 |
|
|
|
41 |
|
|
|
0 |
|
|
|
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
$ |
87,619 |
|
|
$ |
2,686 |
|
|
$ |
9 |
|
|
$ |
2,695 |
|
Approximately
96% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of June 30, 2009 are rated AAA, 2% are rated A
and 2% are rated Ca. Approximately 94% of the bonds carried in the
available-for-sale investment portfolio experiencing losses as of December 31,
2008 are rated AAA, 4% are rated B1 and 2% are not rated. The
securities representing the unrealized losses in the available-for-sale
portfolio as of June 30, 2009 and December 31, 2008 all have modest duration
risk (2.84 years in 2009 and 2.41 years in 2008), low credit risk,
and minimal loss (approximately 1.99% in 2009 and 2.98% in 2008) when compared
to book value. The unrealized losses that exist are the result of
changes in market interest rates since the original purchase. These
factors coupled with the fact that the Company has both the intent and ability
to hold these investments for a sufficient period of time, which may be
maturity, to allow for any anticipated recovery in fair value substantiates that
the unrealized losses in the available-for-sale portfolio are
temporary.
The
amortized cost, and estimated fair values, of debt securities available for sale
at June 30, 2009 and December 31, 2008 by contractual maturity are shown below.
The Company has allocated mortgage-backed securities into the four maturity
groupings shown using the expected average life of the individual securities
based upon statistics provided by independent third party industry
sources. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
Estimated
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
233,575 |
|
|
$ |
232,314 |
|
|
$ |
99,232 |
|
|
$ |
99,677 |
|
Due
after one year through five years
|
|
|
442,091 |
|
|
|
446,789 |
|
|
|
190,302 |
|
|
|
190,625 |
|
Due
after five years through ten years
|
|
|
17,804 |
|
|
|
17,861 |
|
|
|
1,075 |
|
|
|
1,075 |
|
Due
after ten years
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Total
debt securities available for sale
|
|
$ |
693,470 |
|
|
$ |
696,964 |
|
|
$ |
290,609 |
|
|
$ |
291,377 |
|
There
were no sales of investments available for sale during 2009 or
2008.
At June
30, 2009 and December 31, 2008, investments available for sale with a book value
of $219.3 million and $217.2 million, respectively, were pledged as collateral
for certain government deposits and for other purposes as required or permitted
by law. The outstanding balance of no single issuer, except for U.S. Agencies
and Corporations securities, exceeded ten percent of stockholders' equity at
June 30, 2009 and December 31, 2008.
The
amortized cost and estimated fair values of investments held to maturity are as
follows:
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Value
|
|
U.S.
Agencies and Corporations
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Mortgage-backed
|
|
|
688 |
|
|
|
37 |
|
|
|
0 |
|
|
|
725 |
|
|
|
747 |
|
|
|
34 |
|
|
|
0 |
|
|
|
781 |
|
State
and municipal
|
|
|
145,249 |
|
|
|
4,242 |
|
|
|
(107 |
) |
|
|
149,384 |
|
|
|
170,871 |
|
|
|
4,415 |
|
|
|
(159
|
) |
|
|
175,127 |
|
Total
investments held to maturity
|
|
$ |
145,937 |
|
|
$ |
4,279 |
|
|
$ |
(107 |
) |
|
$ |
150,109 |
|
|
$ |
171,618 |
|
|
$ |
4,449 |
|
|
$ |
(159 |
) |
|
$ |
175,908 |
|
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 June 30, 2009 and December 31, 2008 are as follows:
(In thousands)
|
|
|
|
|
|
|
|
Continuous unrealized losses existing for:
|
|
|
|
|
Held to Maturity as of
June 30, 2009
|
|
Number
of
securities
|
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12 months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
9 |
|
|
$ |
7,526 |
|
|
$ |
107 |
|
|
$ |
0 |
|
|
$ |
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
$ |
7,526 |
|
|
$ |
107 |
|
|
$ |
0 |
|
|
$ |
107 |
|
(In
thousands)
|
|
|
|
|
|
|
|
Continuous unrealized losses existing
for:
|
|
|
|
|
Held
to Maturity as of December 31, 2008
|
|
Number
of
securities
|
|
|
Fair Value
|
|
|
Less than 12
months
|
|
|
More than 12 months
|
|
|
Total Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
0 |
|
|
$ |
159 |
|
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
0 |
|
|
$ |
159 |
|
Approximately
61% of the bonds carried in the held-to-maturity investment portfolio
experiencing continuous unrealized losses as of June 30, 2009, are rated AA- and
39% are rated A. As of December 31, 2008, approximately 16% of such bonds are
rated AAA and approximately 84% are rated AA. The securities
representing the unrealized losses in the held-to-maturity portfolio all have
modest duration risk (5.53 years in 2009 and 6.27 years in 2008), low credit
risk, and minimal losses (approximately 1.40% in 2009 and 1.47% in 2008) when
compared to book value. The unrealized losses that exist are the
result of changes in market interest rates since the original
purchase. These factors coupled with the Company’s intent and ability
to hold these investments for a sufficient period of time, which may be
maturity, to allow for any anticipated recovery in fair value substantiates that
the unrealized losses in the held-to-maturity portfolio are
temporary.
The
amortized cost and estimated fair values of debt securities held to maturity at
June 30, 2009 and December 31, 2008 by contractual maturity are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
|
|
June 30, 2009
|
|
December 31, 2008
|
|
|
|
|
|
Estimated
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
Fair
|
|
Amortized
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
Value
|
|
Cost
|
|
Value
|
|
Due
in one year or less
|
|
|
$ |
44,855 |
|
|
$ |
45,428 |
|
|
$ |
55,231 |
|
|
$ |
55,941 |
|
Due
after one year through five years
|
|
|
|
94,086 |
|
|
|
97,439 |
|
|
|
108,406 |
|
|
|
111,718 |
|
Due
after five years through ten years
|
|
|
|
947 |
|
|
|
978 |
|
|
|
1,997 |
|
|
|
2,043 |
|
Due
after ten years
|
|
|
|
6,049 |
|
|
|
6,264 |
|
|
|
5,984 |
|
|
|
6,206 |
|
Total
debt securities held to maturity
|
|
|
$ |
145,937 |
|
|
$ |
150,109 |
|
|
$ |
171,618 |
|
|
$ |
175,908 |
|
At June
30, 2009 and December 31, 2008, investments held to maturity with a book value
of $119.4 million and $140.6 million, respectively, were pledged as collateral
for certain government deposits and for other purposes as required or permitted
by law. The outstanding balance of no single issuer, except for U.S.
Agency and Corporations securities, exceeded ten percent of stockholders' equity
at June 30, 2009 or December 31, 2008.
Other
equity securities are as follows:
(In thousands)
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Federal Reserve Bank stock
|
|
$ |
7,531 |
|
|
$ |
5,037 |
|
Federal
Home Loan Bank of Atlanta stock
|
|
|
24,517 |
|
|
|
24,034 |
|
Atlantic
Central Bank stock
|
|
|
75 |
|
|
|
75 |
|
Total
|
|
$ |
32,123 |
|
|
$ |
29,146 |
|
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 $.8 million and $.9 million for the three month periods ended
June 30, 2009 and 2008 respectively. For the six month periods ended June 30,
2009 and 2008, the amortization related to acquired entities totaled $1.6
million and $1.7 million, respectively.
The
Insurance segment is conducted through Sandy Spring Insurance Corporation, a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. In addition, Sandy Spring Insurance Corporation
operates the Chesapeake Insurance Group 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 and $0.1 million for the
three month periods ended June 30, 2009 and 2008, respectively. For the six
month periods ended June 30, 2009 and 2008, respectively, amortization related
to acquired entities totaled $0.1 million and $0.2 million.
The
Leasing segment is conducted through The Equipment Leasing Company, a subsidiary
of the Bank that provides leases for essential commercial equipment used by
small to medium sized businesses. Equipment leasing is conducted
through vendor relations and direct solicitation to end-users located primarily
in states along the east coast from New Jersey to Florida. The
typical lease is categorized as a financing lease and is characterized as a
“small ticket” by industry standards, averaging less than $100 thousand, with
individual leases generally not exceeding $500 thousand. Major
revenue sources include interest income. Expenses include personnel
and support charges.
The
Investment Management segment is conducted through West Financial Services,
Inc., a subsidiary of the Bank that was acquired in October
2005. This asset management and financial planning firm, located in
McLean, Virginia, provides comprehensive financial planning to individuals,
families, small businesses and associations including cash flow analysis,
investment review, tax planning, retirement planning, insurance analysis and
estate planning. West Financial has approximately $652.0 million in
assets under management as of June 30, 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
June, 2009 and 2008, and $0.4 million for both of the six month periods ended
June 30, 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 June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,290 |
|
|
$ |
1 |
|
|
$ |
592 |
|
|
$ |
1 |
|
|
$ |
(216 |
) |
|
$ |
38,668 |
|
Interest
expense
|
|
|
14,222 |
|
|
|
0 |
|
|
|
214 |
|
|
|
0 |
|
|
|
(216 |
) |
|
|
14,220 |
|
Provision
for loan and lease losses
|
|
|
10,615 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
10,615 |
|
Noninterest
income
|
|
|
8,713 |
|
|
|
1,265 |
|
|
|
78 |
|
|
|
1,127 |
|
|
|
(153 |
) |
|
|
11,030 |
|
Noninterest
expenses
|
|
|
24,814 |
|
|
|
1,159 |
|
|
|
124 |
|
|
|
914 |
|
|
|
(153 |
) |
|
|
26,858 |
|
Income
(loss) before income taxes
|
|
|
(2,648 |
) |
|
|
107 |
|
|
|
332 |
|
|
|
214 |
|
|
|
0 |
|
|
|
(1,995 |
) |
Income
tax expense (benefit)
|
|
|
(1,975 |
) |
|
|
43 |
|
|
|
134 |
|
|
|
83 |
|
|
|
0 |
|
|
|
(1,715 |
) |
Net
income (loss)
|
|
$ |
(673 |
) |
|
$ |
64 |
|
|
$ |
198 |
|
|
$ |
131 |
|
|
$ |
0 |
|
|
$ |
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,622,330 |
|
|
$ |
12,039 |
|
|
$ |
30,644 |
|
|
$ |
11,721 |
|
|
$ |
(59,237 |
) |
|
$ |
3,617,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
41,398 |
|
|
$ |
12 |
|
|
$ |
749 |
|
|
$ |
6 |
|
|
$ |
(320 |
) |
|
$ |
41,845 |
|
Interest
expense
|
|
|
14,743 |
|
|
|
0 |
|
|
|
303 |
|
|
|
0 |
|
|
|
(320 |
) |
|
|
14,726 |
|
Provision
for loan and lease losses
|
|
|
6,009 |
|
|
|
0 |
|
|
|
180 |
|
|
|
0 |
|
|
|
0 |
|
|
|
6,189 |
|
Noninterest
income
|
|
|
9,002 |
|
|
|
1,558 |
|
|
|
121 |
|
|
|
1,167 |
|
|
|
(153 |
) |
|
|
11,695 |
|
Noninterest
expenses
|
|
|
22,305 |
|
|
|
1,416 |
|
|
|
396 |
|
|
|
922 |
|
|
|
(153 |
) |
|
|
24,886 |
|
Income
(loss) before income taxes
|
|
|
7,343 |
|
|
|
154 |
|
|
|
(9 |
) |
|
|
251 |
|
|
|
0 |
|
|
|
7,739 |
|
Income
tax expense
|
|
|
1,859 |
|
|
|
62 |
|
|
|
70 |
|
|
|
97 |
|
|
|
0 |
|
|
|
2,088 |
|
Net
income (loss)
|
|
$ |
5,484 |
|
|
$ |
92 |
|
|
$ |
(79 |
) |
|
$ |
154 |
|
|
$ |
0 |
|
|
$ |
5,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,169,169 |
|
|
$ |
11,929 |
|
|
$ |
39,999 |
|
|
$ |
11,238 |
|
|
$ |
(68,212 |
) |
|
$ |
3,164,123 |
|
(In thousands)
|
|
Community
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Investment
Mgmt.
|
|
|
Inter-Segment
Elimination
|
|
|
Total
|
|
Year
to Date June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
76,611 |
|
|
$ |
3 |
|
|
$ |
1,234 |
|
|
$ |
3 |
|
|
$ |
(455 |
) |
|
$ |
77,396 |
|
Interest
expense
|
|
|
27,929 |
|
|
|
0 |
|
|
|
449 |
|
|
|
0 |
|
|
|
(455 |
) |
|
|
27,923 |
|
Provision
for loan and lease losses
|
|
|
21,228 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
21,228 |
|
Noninterest
income
|
|
|
17,471 |
|
|
|
3,509 |
|
|
|
143 |
|
|
|
2,187 |
|
|
|
(306 |
) |
|
|
23,004 |
|
Noninterest
expenses
|
|
|
46,684 |
|
|
|
2,593 |
|
|
|
353 |
|
|
|
1,784 |
|
|
|
(306 |
) |
|
|
51,108 |
|
Income
(loss) before income taxes
|
|
|
(1,759 |
) |
|
|
919 |
|
|
|
575 |
|
|
|
406 |
|
|
|
0 |
|
|
|
141 |
|
Income
tax expense (benefit)
|
|
|
(2,557 |
) |
|
|
371 |
|
|
|
232 |
|
|
|
158 |
|
|
|
0 |
|
|
|
(1,796 |
) |
Net
income
|
|
$ |
798 |
|
|
$ |
548 |
|
|
$ |
343 |
|
|
$ |
248 |
|
|
$ |
0 |
|
|
$ |
1,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,622,330 |
|
|
$ |
12,039 |
|
|
$ |
30,644 |
|
|
$ |
11,721 |
|
|
$ |
(59,237 |
) |
|
$ |
3,617,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
to Date June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
84,897 |
|
|
$ |
32 |
|
|
$ |
1,456 |
|
|
$ |
20 |
|
|
$ |
(638 |
) |
|
$ |
85,767 |
|
Interest
expense
|
|
|
32,120 |
|
|
|
0 |
|
|
|
587 |
|
|
|
0 |
|
|
|
(638 |
) |
|
|
32,069 |
|
Provision
for loan and lease losses
|
|
|
8,676 |
|
|
|
0 |
|
|
|
180 |
|
|
|
0 |
|
|
|
0 |
|
|
|
8,856 |
|
Noninterest
income
|
|
|
18,400 |
|
|
|
3,729 |
|
|
|
258 |
|
|
|
2,309 |
|
|
|
(305 |
) |
|
|
24,391 |
|
Noninterest
expenses
|
|
|
44,575 |
|
|
|
2,779 |
|
|
|
687 |
|
|
|
1,853 |
|
|
|
(305 |
) |
|
|
49,589 |
|
Income
before income taxes
|
|
|
17,926 |
|
|
|
982 |
|
|
|
260 |
|
|
|
476 |
|
|
|
0 |
|
|
|
19,644 |
|
Income
tax expense
|
|
|
5,028 |
|
|
|
397 |
|
|
|
178 |
|
|
|
185 |
|
|
|
0 |
|
|
|
5,788 |
|
Net
income
|
|
$ |
12,898 |
|
|
$ |
585 |
|
|
$ |
82 |
|
|
$ |
291 |
|
|
$ |
0 |
|
|
$ |
13,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,169,169 |
|
|
$ |
11,929 |
|
|
$ |
39,999 |
|
|
$ |
11,238 |
|
|
$ |
(68,212 |
) |
|
$ |
3,164,123 |
|
Note 8 –
Comprehensive Income
The
components of total comprehensive income for the six month periods ended June
30, 2009 and 2008 are as follows:
|
|
For the six months ended
June 30
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
(In
Thousands)
|
|
|
|
|
|
|
Net
Income
|
|
$ |
1,937 |
|
|
$ |
13,856 |
|
Securities
available for sale:
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains (losses) on securities available for
sale
|
|
|
2,916 |
|
|
|
(408 |
) |
Related
income tax expense
|
|
|
(1,163 |
) |
|
|
163 |
|
Net
securities gains reclassified into earnings
|
|
|
(192 |
) |
|
|
(653 |
) |
Related
income tax benefit
|
|
|
77 |
|
|
|
260 |
|
Net
effect on other comprehensive income for the period
|
|
|
1,638 |
|
|
|
(638 |
) |
|
|
|
|
|
|
|
|
|
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs
|
|
|
0 |
|
|
|
(88 |
) |
Related
income tax benefit (expense)
|
|
|
0 |
|
|
|
36 |
|
Recognition
of unrealized gain
|
|
|
678 |
|
|
|
196 |
|
Related
income tax expense
|
|
|
(270 |
) |
|
|
(78 |
) |
Net
effect on other comprehensive income for the period
|
|
|
408 |
|
|
|
66 |
|
Total
other comprehensive income
|
|
|
2,046 |
|
|
|
(572 |
) |
Comprehensive
income
|
|
$ |
3,983 |
|
|
$ |
13,284 |
|
The
activity in accumulated other comprehensive income for the periods ended June
30, 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
|
|
|
66 |
|
|
|
(638 |
) |
|
|
(572 |
) |
Balance
at June 30, 2008
|
|
$ |
(2,031 |
) |
|
$ |
404 |
|
|
$ |
(1,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2009
|
|
$ |
(8,033 |
) |
|
$ |
461 |
|
|
$ |
(7,572 |
) |
Period
change, net of tax
|
|
|
408 |
|
|
|
1,638 |
|
|
|
2,046 |
|
Balance
at March 31, 2009
|
|
$ |
(7,625 |
) |
|
$ |
2,099 |
|
|
$ |
(5,526 |
) |
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 and six month periods ending June 30,
2009 and June 30, 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 totaled $105.7 million at June 30, 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
June 30, 2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
Mortgage loans held for sale
|
|
$ |
- |
|
|
$ |
14,494 |
|
|
$ |
|
|
|
$ |
14,494 |
|
Investments
securities, available for sale
|
|
|
|
|
|
|
694,174 |
|
|
|
3,140 |
|
|
|
697,314 |
|
Interest
rate swap agreements
|
|
|
- |
|
|
|
89 |
|
|
|
- |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
- |
|
|
$ |
(89 |
) |
|
$ |
- |
|
|
$ |
(89 |
) |
(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
|
|
|
(14 |
) |
|
|
|
|
|
Ending
balance June 30, 2009
|
|
$ |
3,140 |
|
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 June
30, 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 June 30,
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)
|
|
|
June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
89,038 |
|
|
$ |
89,038 |
|
In
accordance with SFAS No. 114, “Accounting for Creditors for
Impairment of a Loan” impaired loans totaling $105.7 million were written
down to fair value of $89.0 million resulting in an impairment charge of $16.7
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 management’s review and analysis. Appraised
and reported values may be discounted based on management’s historical
knowledge, changes in market conditions from the time of valuation, and/or
management’s expertise and knowledge of the client and client’s
business. Impaired loans are reviewed and evaluated on at least a
quarterly basis for additional impairment and adjusted accordingly, based on the
same factors identified above.
Fair
Value of Financial Instruments
The
Company discloses fair value information about financial instruments for which
it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial
instruments have been defined broadly to encompass 95.0% of the Company's assets
and 99.0% of its liabilities at June 30, 2009 and December 31,
2008. Fair value is the amount at which a financial instrument could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation, and is best evidenced by a quoted market price, if
one exists.
Quoted
market prices, where available, are shown as estimates of fair market values.
Because no quoted market prices are available for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on the amount and timing of future cash flows and estimated
discount rates.
Present
value techniques used in estimating the fair value of many of the Company's
financial instruments are significantly affected by the assumptions used. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities, and should not be considered an
indication of the fair value of the Company.
The
estimated fair values of the Company's financial instruments are as
follows:
|
|
As of June 30, 2009
|
|
|
As of December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$ |
136,978 |
|
|
$ |
136,978 |
|
|
$ |
116,620 |
|
|
$ |
116,620 |
|
Investments
available for sale
|
|
|
697,314 |
|
|
|
697,314 |
|
|
|
291,727 |
|
|
|
291,727 |
|
Investments
held to maturity and other equity securities
|
|
|
178,060 |
|
|
|
182,232 |
|
|
|
200,764 |
|
|
|
205,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
net of allowances
|
|
|
2,331,072 |
|
|
|
2,300,767 |
|
|
|
2,440,120 |
|
|
|
2,467,993 |
|
Accrued
interest receivable and other assets (2)
|
|
|
87,914 |
|
|
|
87,914 |
|
|
|
85,219 |
|
|
|
85,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
2,650,485 |
|
|
$ |
2,659,945 |
|
|
$ |
2,365,257 |
|
|
$ |
2,380,527 |
|
Short-term
borrowings
|
|
|
496,463 |
|
|
|
527,311 |
|
|
|
421,074 |
|
|
|
462,130 |
|
Long-term
borrowings
|
|
|
49,434 |
|
|
|
36,442 |
|
|
|
101,584 |
|
|
|
103,495 |
|
Accrued
interest payable and other liabilities (2)
|
|
|
3,860 |
|
|
|
3,860 |
|
|
|
4,330 |
|
|
|
4,330 |
|
(1) Temporary
investments include federal funds sold, interest-bearing deposits with banks and
residential mortgage loans held for sale.
(2) Only
financial instruments as defined in SFAS No. 107, “Disclosure about Fair Value
of Financial Instruments,” are included in other assets and other
liabilities.
The
following methods and assumptions were used to estimate the fair value of each
category of financial instruments for which it is practicable to estimate that
value:
Cash
and Temporary Investments:
Cash and due from banks, federal
funds sold and interest-bearing deposits with banks. The carrying amount
approximated the fair value.
Residential mortgage loans held for
sale. The fair value of residential mortgage loans held for sale was
derived from secondary market quotations for similar instruments.
Investments. The fair value
for U.S. Treasury, U.S. Agency, state and municipal, corporate debt and some
trust preferred securities was based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and, for equity securities upon quoted market prices. Certain trust
preferred securities were estimated by utilizing the discounted value of
estimated cash flows.
Loans. The fair value was
estimated by computing the discounted value of estimated cash flows, adjusted
for potential loan and lease losses, for pools of loans having similar
characteristics. The discount rate was based upon the current loan origination
rate for a similar loan. Non-performing loans have an assumed interest rate of
0%.
Accrued interest receivable.
The carrying amount approximated the fair value of accrued interest, considering
the short-term nature of the receivable and its expected
collection.
Other assets. The carrying
amount approximated the fair value considering their short-term
nature.
Deposits. The fair value of
demand, money market savings and regular savings deposits, which have no stated
maturity, were considered equal to their carrying amount, representing the
amount payable on demand. While management believes that the Bank’s core deposit
relationships provide a relatively stable, low-cost funding source that has a
substantial intangible value separate from the value of the deposit balances,
these estimated fair values do not include the intangible value of core deposit
relationships, which comprise a significant portion of the Bank’s deposit
base.
The fair
value of time deposits was based upon the discounted value of contractual cash
flows at current rates for deposits of similar remaining maturity.
Short-term borrowings. The
carrying amount approximated the fair value of repurchase agreements due to
their variable interest rates. The fair value of Federal Home Loan Bank of
Atlanta advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
Long-term borrowings. The fair
value of the Federal Home Loan Bank of Atlanta advances and subordinated
debentures was estimated by computing the discounted value of contractual cash
flows payable at current interest rates for obligations with similar remaining
terms.
Accrued interest payable and other
liabilities. The carrying amount approximated the fair value of accrued
interest payable, accrued dividends and premiums payable, considering their
short-term nature and expected payment.
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, 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 June
30, 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 a
loss be accrued when it is probable that the loss has occurred at the date of
the financial statements and the amount of the loss can be reasonably estimated
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 Report 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 70% of the total allowance at
June 30, 2009 and December 31, 2008.
The
specific allowance is used primarily to establish allowances for risk-rated
credits on an individual or portfolio basis, and accounted for 30% of the total
allowance at June 30, 2009 and December 31, 2008. 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 June 30, 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. 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, 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, which is 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 that 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 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 non-GAAP efficiency
ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency
ratios reported by other financial institutions.
In
general, the efficiency ratio is noninterest expenses as a percentage of net
interest income plus total noninterest income. This is a GAAP
financial measure. Noninterest expenses used in the calculation of
the non-GAAP efficiency ratio exclude intangible asset
amortization. Income for the non-GAAP 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 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 non-GAAP and GAAP efficiency ratios are presented and
reconciled in Table 1.
Table 1 –
GAAP based and Non-GAAP efficiency ratios
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
26,858 |
|
|
$ |
24,886 |
|
|
$ |
51,108 |
|
|
$ |
49,589 |
|
Net
interest income plus noninterest income
|
|
|
35,478 |
|
|
|
38,814 |
|
|
|
72,477 |
|
|
|
78,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–GAAP
|
|
|
75.70 |
% |
|
|
64.12 |
% |
|
|
70.52 |
% |
|
|
63.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
26,858 |
|
|
$ |
24,886 |
|
|
$ |
51,108 |
|
|
$ |
49,589 |
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
1,047 |
|
|
|
1,117 |
|
|
|
2,102 |
|
|
|
2,241 |
|
Noninterest
expenses as adjusted
|
|
|
25,811 |
|
|
|
23,769 |
|
|
|
49,006 |
|
|
|
47,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income
|
|
|
35,478 |
|
|
|
38,814 |
|
|
|
72,477 |
|
|
|
78,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalency
|
|
|
1,123 |
|
|
|
1,061 |
|
|
|
2,132 |
|
|
|
2,201 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains (losses)
|
|
|
30 |
|
|
|
79 |
|
|
|
192 |
|
|
|
653 |
|
Net
interest income plus noninterest income – as adjusted
|
|
|
36,571 |
|
|
|
39,796 |
|
|
|
74,417 |
|
|
|
79,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio – Non-GAAP
|
|
|
70.58 |
% |
|
|
59.73 |
% |
|
|
65.85 |
% |
|
|
59.45 |
% |
A.
FINANCIAL CONDITION
The Company's total assets were $3.6
billion at June 30, 2009, increasing $303.9 million or 9% during the first six
months of 2009. Earning assets increased by 10% or $303.4 million in
the first six months of 2009 to $3.4 billion at June 30, 2009. These
increases were mainly the result of an increase of 78% in investments which was
driven by the growth in deposits.
Total loans and leases, excluding
loans held for sale, decreased 4% or $101.3 million during the first six months
of 2009, to $2.4 billion. This decrease was due primarily to a decline in the
residential mortgage loan portfolio which decreased by $57.4 million or 9% due
primarily to a decline in residential construction loans. Consumer
loans remained virtually level during the period while commercial loans
decreased $43.0 million or 3% due mainly to declines in commercial and
commercial construction loans. Residential mortgage loans held for sale
increased by $3.1 million from December 31, 2008, to $14.5 million at June 30,
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)
|
|
June 30, 2009
|
|
|
%
|
|
|
December 31, 2008
|
|
|
%
|
|
Residential
real estate
|
|
$ |
589,423 |
|
|
|
25 |
% |
|
$ |
646,820 |
|
|
|
26 |
% |
Commercial
loans and leases
|
|
|
1,394,618 |
|
|
|
58 |
|
|
|
1,437,599 |
|
|
|
58 |
|
Consumer
|
|
|
405,348 |
|
|
|
17 |
|
|
|
406,227 |
|
|
|
16 |
|
Total
Loans and Leases
|
|
|
2,389,389 |
|
|
|
100 |
% |
|
|
2,490,646 |
|
|
|
100 |
% |
Less: Allowance
for credit losses
|
|
|
(58,317 |
) |
|
|
|
|
|
|
(50,526 |
) |
|
|
|
|
Net
loans and leases
|
|
$ |
2,331,072 |
|
|
|
|
|
|
$ |
2,440,120 |
|
|
|
|
|
The total
investment portfolio increased by 78% or $382.9 million from December 31, 2008,
to $875.4 million at June 30, 2009. The increase was due mainly to
increases of $405.6 million or 139% in available-for-sale securities and $3.0
million or 10% in other equity securities, which were somewhat offset by a
decrease of $25.7 million or 15% 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 $18.6 million during the
first six months of 2009, reaching $79.1 million at June 30, 2009.
Table 3 –
Analysis of Deposits
The
following table presents the trends in the composition of deposits at the dates
indicated:
(In thousands)
|
|
June 30, 2009
|
|
|
%
|
|
|
December 31, 2008
|
|
|
%
|
|
Noninterest-bearing
deposits
|
|
$ |
553,604 |
|
|
|
21 |
% |
|
$ |
461,517 |
|
|
|
20 |
% |
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
251,281 |
|
|
|
9 |
|
|
|
243,986 |
|
|
|
10 |
|
Money
market savings
|
|
|
867,322 |
|
|
|
33 |
|
|
|
664,837 |
|
|
|
28 |
|
Regular
savings
|
|
|
155,911 |
|
|
|
6 |
|
|
|
146,140 |
|
|
|
6 |
|
Time
deposits less than $100,000
|
|
|
457,698 |
|
|
|
17 |
|
|
|
477,148 |
|
|
|
20 |
|
Time
deposits $100,000 or more
|
|
|
364,669 |
|
|
|
14 |
|
|
|
371,629 |
|
|
|
16 |
|
Total
interest-bearing
|
|
|
2,096,881 |
|
|
|
79 |
|
|
|
1,903,740 |
|
|
|
80 |
|
Total
deposits
|
|
$ |
2,650,485 |
|
|
|
100 |
% |
|
$ |
2,365,257 |
|
|
|
100 |
% |
Total
deposits were $2.7 billion at June 30, 2009, increasing $285.2 million or 12%
from December 31, 2008. During the first six months of 2009, growth rates of 20%
were achieved for noninterest bearing demand deposits (up $92.1 million), 30%
for money market deposits (up $202.5 million), 7% for interest-bearing regular
savings (up $9.8 million) and 3% for interest bearing demand deposits (up $7.3
million). Over the same period, decreases of 4% were recorded for time deposits
less than $100,000 (down $19.5 million) and 2% for time deposits of $100,000 or
more (down $7.0 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 $545.9 million
at June 30, 2009, which represented an increase of $23.2 million or 4% 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:
|
|
+ 400bp
|
|
|
+ 300bp
|
|
|
+ 200bp
|
|
|
+ 100bp
|
|
|
- 100bp
|
|
|
- 200bp
|
|
|
-300bp
|
|
|
-400bp
|
|
POLICY
LIMIT
|
|
|
-25 |
% |
|
|
-20 |
% |
|
|
-17.5 |
% |
|
|
-12.5 |
% |
|
|
-12.5 |
% |
|
|
-17.5 |
% |
|
|
-20 |
% |
|
|
-25 |
% |
June
2009
|
|
|
-14.89 |
|
|
|
-9.23 |
|
|
|
-5.29 |
|
|
|
-1.24 |
|
|
|
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 all shock bands over the year-end 2008. 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 -14.89%. 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:
|
|
+ 400bp
|
|
|
+ 300bp
|
|
|
+ 200bp
|
|
|
+ 100bp
|
|
|
- 100bp
|
|
|
-200bp
|
|
|
-300bp
|
|
|
-400bp
|
|
POLICY
LIMIT
|
|
|
-40 |
% |
|
|
-30 |
% |
|
|
-
22.5 |
% |
|
|
-10.0 |
% |
|
|
-12.5 |
% |
|
|
-22.5 |
% |
|
|
-30 |
% |
|
|
-40 |
% |
June
2009
|
|
|
-16.01 |
|
|
|
-8.93 |
|
|
|
-1.70 |
|
|
|
1.69 |
|
|
|
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 band. Although
assumed to be highly unlikely, the largest exposure is at the +400bp level, with
a measure of -16.01%. This is 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 360
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 June 30, 2009 showed short-term investments exceeding short-term borrowings
over the subsequent 360 days by $44.1 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 $1,054.4 million, of which $501.8 million was
available based on pledged collateral with $412.1 million outstanding at June
30, 2009. The line of credit at the Federal Reserve totaled $391.2 million, all
of which was available for borrowing based on pledged collateral, with no
borrowings against it as of June 30, 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 June 30, 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 June 30,
2009 against which there were no outstanding borrowings. Based upon its
liquidity analysis, including external sources of liquidity available,
management believes the liquidity position is appropriate at June 30,
2009.
The principal source of parent
company liquidity is dividends from the Bank. In addition to its operating
expenses, the Company is responsible for the payment of dividends to
shareholders of its common stock and preferred stock. Payment of dividends to
the Company by the Bank is limited under law. The amount that can be paid in any
calendar year, without prior regulatory approval, cannot exceed the sum of the
Bank’s net income during the current calendar year and the retained net income
of the prior two calendar years. The Company believes that such restriction will
not have an impact on the Parent Company’s ability to meet its ongoing cash
obligations.
The following is a schedule of
significant commitments at June 30, 2009:
|
|
(In
thousands)
|
|
Commitments
to extend credit:
|
|
|
|
Unused
lines of credit (home equity and business)
|
|
$ |
636,562 |
|
Other
commitments to extend credit
|
|
|
106,737 |
|
Standby
letters of credit
|
|
|
66,348 |
|
|
|
$ |
809,647 |
|
Capital
Management
The Company recorded a total
risk-based capital ratio of 13.27% at June 30, 2009, compared to 13.82% at
December 31, 2008; a tier 1 risk-based capital ratio of 12.02%, compared to
12.56%; and a tier 1 leverage ratio of 9.95%, compared to
11.00%. These decreases were mainly the result of growth in the
Company’s investment portfolio for the six month period ending June 30, 2009.
Capital adequacy, as measured by these ratios, was well above regulatory
requirements. Management believes the level of capital at June 30,
2009, is appropriate.
Stockholders' equity totaled $391.3
at June 30, 2009 and $391.9 at December 31, 2008.
Internal capital generation (net
income less dividends) reduced total stockholders’ equity by $4.1 million during
the first six months of 2009.
External capital formation (equity
created through the issuance of stock under the employee stock purchase plan,
the director stock purchase plan, and the DRIP plan) totaled $0.3 million during
the six month period ended June 30, 2009.
Dividends for the first six months of
the year were $0.24 per share in 2009, compared to $0.48 per share in 2008, for
respective dividend payout ratios (dividends declared per share to diluted net
income per common share) of (480)% versus 141% for the first six
months of 2008.
Accumulated comprehensive loss
declined by $2.0 million during the first six months of 2009 to a loss of $5.5
million. This decrease in loss was due primarily to an increase in unrealized
gains on securities available for sale due to improved market conditions during
the period.
B.
RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2009 AND JUNE 30,
2008
Net income available to common
shareholders for the first six months of the year decreased $14.4 million or
103% to a loss of $0.5 million in 2009 from net income of $13.9 million in 2008,
representing annualized returns on average common equity of (0.30%)
in 2009 and 8.76% in 2008, respectively. Diluted earnings (loss) per
common share (“EPS”) for the first six months of the year was ($0.03) in 2009,
compared to $0.84 in 2008.
Net interest income declined by $4.2
million, or 8%, to $49.5 million for the first six months of 2009, while total
noninterest income decreased by $1.4 million, or 6% for the period. In addition,
noninterest expenses increased by $1.5 million, or 3% compared to the prior year
period.
The decrease in net interest income
was due to a decline of 107 basis points in the yield on loans and 148 basis
points in the yield on investments which exceeded the decline of 55 basis points
on interest-bearing liabilities. This reflects the Company’s current asset
sensitive position and the growth in nonperforming assets as well as the growth
in the Company’s new Premier Money Market product, which has been very
competitively priced to grow market share and customer relationships over the
long term. These factors produced a net interest margin decrease of 73 basis
points to 3.24% for the six months ended June 30, 2009, from 3.97% for the same
period of 2008.
Table 4 –
Consolidated Average Balances, Yields and Rates
(Dollars
in thousands and tax equivalent)
|
|
For
the six months ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
|
Average
Balance
|
|
|
Interest
(1)
|
|
|
Average
Yield/Rate
|
|
|
Average Balance
|
|
|
Interest
(1)
|
|
|
Average
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases (2)
|
|
$ |
2,481,611 |
|
|
$ |
65,832 |
|
|
|
5.34 |
% |
|
$ |
2,362,081 |
|
|
$ |
75,383 |
|
|
|
6.41 |
% |
Total
securities
|
|
|
655,581 |
|
|
|
13,604 |
|
|
|
4.22 |
|
|
|
429,500 |
|
|
|
12,082 |
|
|
|
5.70 |
|
Other
earning assets
|
|
|
71,565 |
|
|
|
92 |
|
|
|
0.26 |
|
|
|
37,151 |
|
|
|
503 |
|
|
|
2.72 |
|
TOTAL
EARNING ASSETS
|
|
|
3,208,757 |
|
|
|
79,528 |
|
|
|
5.00 |
% |
|
|
2,828,732 |
|
|
|
87,968 |
|
|
|
6.25 |
% |
Nonearning
assets
|
|
|
254,174 |
|
|
|
|
|
|
|
|
|
|
|
274,702 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,462,931 |
|
|
|
|
|
|
|
|
|
|
$ |
3,103,434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
248,627 |
|
|
|
227 |
|
|
|
0.18 |
% |
|
$ |
246,184 |
|
|
|
351 |
|
|
|
0.29 |
% |
Money
market savings deposits
|
|
|
763,912 |
|
|
|
5,822 |
|
|
|
1.54 |
|
|
|
696,836 |
|
|
|
7,350 |
|
|
|
2.12 |
|
Regular
savings deposits
|
|
|
150,945 |
|
|
|
121 |
|
|
|
0.16 |
|
|
|
156,626 |
|
|
|
247 |
|
|
|
0.32 |
|
Time
deposits
|
|
|
841,407 |
|
|
|
13,205 |
|
|
|
3.16 |
|
|
|
757,356 |
|
|
|
15,657 |
|
|
|
4.16 |
|
Total
interest-bearing deposits
|
|
|
2,004,891 |
|
|
|
19,375 |
|
|
|
1.95 |
|
|
|
1,857,002 |
|
|
|
23,605 |
|
|
|
2.56 |
|
Short-term
borrowings
|
|
|
473,814 |
|
|
|
7,060 |
|
|
|
3.00 |
|
|
|
371,759 |
|
|
|
6,342 |
|
|
|
3.43 |
|
Long-term
borrowings
|
|
|
55,169 |
|
|
|
1,488 |
|
|
|
5.41 |
|
|
|
99,186 |
|
|
|
2,122 |
|
|
|
4.29 |
|
Total
interest-bearing liabilities
|
|
|
2,533,874 |
|
|
|
27,923 |
|
|
|
2.22 |
|
|
|
2,327,947 |
|
|
|
32,069 |
|
|
|
2.77 |
|
Noninterest-bearing
demand deposits
|
|
|
502,179 |
|
|
|
|
|
|
|
|
|
|
|
426,850 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
34,436 |
|
|
|
|
|
|
|
|
|
|
|
30,555 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
392,442 |
|
|
|
|
|
|
|
|
|
|
|
318,082 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,462,931 |
|
|
|
|
|
|
|
|
|
|
$ |
3,103,434 |
|
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
|
|
51,605 |
|
|
|
2.78 |
% |
|
|
|
|
|
|
55,899 |
|
|
|
3.48 |
% |
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
2,132 |
|
|
|
|
|
|
|
|
|
|
|
2,201 |
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
49,473 |
|
|
|
|
|
|
|
|
|
|
$ |
53,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.24 |
% |
|
|
|
|
|
|
|
|
|
|
3.97 |
% |
Ratio
of average earning assets to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
interest-bearing liabilities
|
|
|
126.63 |
% |
|
|
|
|
|
|
|
|
|
|
121.51 |
% |
|
|
|
|
|
|
|
|
(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 $2.1 million and $2.2 million for the six months ended June 30, 2009
and 2008, respectively.
(2)
Non-accrual loans are included in the average balances.
(3) Net
interest margin = annualized net interest income on a tax-equivalent basis
divided by total interest-earning assets.
Net
Interest Income
Net interest income for the first six
months of 2009 was $49.5 million, a decrease of 8% from $53.7 million in 2008,
due primarily to a 125 basis point decline in tax equivalent yield on earning
assets which exceeded a 55 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 8%, to
$51.6 million in 2009 from $55.9 million in 2008. The effects of
changes in average balances, yields and rates are presented in Table
5.
For the first six months of 2009,
total interest income decreased by $8.4 million or 10%, compared to
2008. On a non-GAAP tax-equivalent basis, interest income also
decreased by 10%. Average earning assets increased by 13% versus the
prior period to $3.2 billion from $2.8 billion, while the average yield earned
on those assets decreased by 125 basis points to 5.00%. Comparing the
first six months of 2009 versus the same period in 2008, average total loans and
leases grew by 5% to $2.5 billion (a decline to 77% of average earning assets,
versus 84% a year ago), while recording a 107 basis point decrease in average
yield to 5.34%. Average commercial loans and leases increased by 7%
(due to an increase in commercial mortgages); average consumer loans increased
by 8% (attributable primarily to home equity line growth); while residential
real estate loans decreased by 1% (primarily due to a decrease in construction
lending). Over the same period, average total securities increased by
53% to $655.6 million (20% of average earning assets, versus 15% a year ago),
while the average yield earned on those assets decreased by 148 basis points to
4.22%. 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 new Premier Money Market
product as part of the Company’s Operation Take Share campaign to grow market
share.
Interest expense for the first six
months of the year decreased by $4.1million or 13% in 2009 compared to 2008.
Average total interest-bearing liabilities increased by 9% over the prior year
period, while the average rate paid on these funds decreased by 55 basis points
to 2.22%. 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
|
|
$ |
(9,551 |
) |
|
$ |
3,609 |
|
|
$ |
(13,160 |
) |
|
$ |
1,949 |
|
|
$ |
11,677 |
|
|
$ |
(9,728 |
) |
Securities
|
|
|
1,522 |
|
|
|
5,241 |
|
|
|
(3,719 |
) |
|
|
(3,496 |
) |
|
|
(3,034 |
) |
|
|
(462 |
) |
Other
earning assets
|
|
|
(411 |
) |
|
|
253 |
|
|
|
(664 |
) |
|
|
(1,042 |
) |
|
|
(452 |
) |
|
|
(590 |
) |
Total
interest income
|
|
|
(8,440 |
) |
|
|
9,103 |
|
|
|
(17,543 |
) |
|
|
(2,589 |
) |
|
|
8,191 |
|
|
|
(10,780 |
) |
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(124 |
) |
|
|
4 |
|
|
|
(128 |
) |
|
|
(51 |
) |
|
|
15 |
|
|
|
(66 |
) |
Regular
savings deposits
|
|
|
(126 |
) |
|
|
(9 |
) |
|
|
(117 |
) |
|
|
(46 |
) |
|
|
(11 |
) |
|
|
(35 |
) |
Money
market savings deposits
|
|
|
(1,528 |
) |
|
|
646 |
|
|
|
(2,174 |
) |
|
|
(3,385 |
) |
|
|
1,853 |
|
|
|
(5,238 |
) |
Time
deposits
|
|
|
(2,452 |
) |
|
|
1,598 |
|
|
|
(4,050 |
) |
|
|
(2,278 |
) |
|
|
(630 |
) |
|
|
(1,648 |
) |
Total
borrowings
|
|
|
84 |
|
|
|
962 |
|
|
|
(878 |
) |
|
|
135 |
|
|
|
2,125 |
|
|
|
(1,990 |
) |
Total
interest expense
|
|
|
(4,146 |
) |
|
|
3,201 |
|
|
|
(7,347 |
) |
|
|
(5,625 |
) |
|
|
3,352 |
|
|
|
(8,977 |
) |
Net
interest income
|
|
$ |
(4,294 |
) |
|
$ |
5,902 |
|
|
$ |
(10,196 |
) |
|
$ |
3,036 |
|
|
$ |
4,839 |
|
|
$ |
(1,803 |
) |
*
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 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 $21.2 million for the first six months of 2009 compared to $8.9
million in the same period of 2008. This increase was due to internal risk
rating downgrades primarily in the residential real estate development
portfolio. The Company experienced net charge-offs during the first six months
of 2009 of $13.4 million compared to net charge-offs of $0.5 million for the
first six 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 six months of 2009, there were no significant
changes in estimation methods or assumptions that affected the allowance
methodology. The allowance for loan and lease losses was 2.44% of total loans
and leases at June 30, 2009 and 2.03% at December 31, 2008. The allowance
increased during the first six months of 2009 by $7.8 million, to $58.3 million
at June 30, 2008, from $50.5 million at December 31, 2008. The
increase in the allowance during the first six months of 2009 was due primarily
to a higher level of nonperforming loans and internal risk rating downgrades on
a number of existing loans.
Nonperforming loans and leases
increased by $70.1 million to $139.5 million at June 30, 2009 from $69.4 million
at December 31, 2008, while nonperforming assets increased by $74.1 million for
the same period to $146.3 million at June 30, 2008. Expressed as a percentage of
total assets, nonperforming assets increased to 4.05% at June 30, 2009 from
2.18% at December 31, 2008. The increase in non-accrual loans and leases was
mainly the result of $64.9 million in residential real estate development loans,
$3.2 million in commercial loans, $1.2 million in commercial real estate loans
and $6.2 million in residential mortgage loans. Management believes these loans
are adequately reserved or well secured. The allowance for loan and lease losses
represented 42% of nonperforming loans and leases at June 30, 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 increased to $6.8 million at June
30, 2009 compared to $2.9 million at December 31, 2008. The balance of impaired
loans and leases was $105.7 million at June 30, 2009, with specific reserves
against those loans of $16.7 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:
|
|
Six Months Ended
June 30, 2009
|
|
|
Twelve Months Ended
December 31, 2008
|
|
Balance,
January 1
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
Provision
for loan and lease losses
|
|
|
21,228 |
|
|
|
33,192 |
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(764 |
) |
|
|
(4,798 |
) |
Commercial
loans and leases
|
|
|
(12,056 |
) |
|
|
(2,677 |
) |
Consumer
|
|
|
(977 |
) |
|
|
(988 |
) |
Total
charge-offs
|
|
|
(13,797 |
) |
|
|
(8,463 |
) |
Loan
recoveries:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
0 |
|
|
|
21 |
|
Commercial
loans and leases
|
|
|
313 |
|
|
|
475 |
|
Consumer
|
|
|
47 |
|
|
|
209 |
|
Total
recoveries
|
|
|
360 |
|
|
|
705 |
|
Net
charge-offs
|
|
|
(13,437 |
) |
|
|
(7,758 |
) |
Balance,
period end
|
|
$ |
58,317 |
|
|
$ |
50,526 |
|
Net
charge-offs (recoveries) to average loans and leases (annual
basis)
|
|
|
1.10 |
% |
|
|
0.32 |
% |
Allowance
to total loans and leases
|
|
|
2.44 |
% |
|
|
2.03 |
% |
The
following table presents nonperforming assets at the dates
indicated:
|
|
June 30, 2009
|
|
|
December 31, 2008
|
|
Non-accrual
loans and leases
|
|
$ |
123,117 |
|
|
$ |
67,950 |
|
Loans
and leases 90 days past due
|
|
|
16,004 |
|
|
|
1,038 |
|
Restructured
loans and leases
|
|
|
395 |
|
|
|
395 |
|
Total
nonperforming loans and leases*
|
|
|
139,516 |
|
|
|
69,383 |
|
Other
real estate owned, net
|
|
|
6,829 |
|
|
|
2,860 |
|
Total
nonperforming assets
|
|
$ |
146,345 |
|
|
$ |
72,243 |
|
Nonperforming assets to total
assets
|
|
|
4.05 |
% |
|
|
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 $134.7 million at June 30, 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
nonperforming 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 $23.0
million for the six month period ended June 30, 2009, a 6% or $1.4 million
decrease from the same period of 2008. The decrease in noninterest
income for the first six months of 2009 was due primarily to a decrease of $0.5
million or 8% in service charges on deposits resulting from lower overdraft fees
while insurance agency commissions decreased $0.4 million or
10%. Fees on sales of investment products decreased $0.4 million or
23% and trust and investment management fees declined $0.2 million or 5%, both
of which were due primarily to reduced assets under management. These decreases
were somewhat offset by an increase in gains on sales of mortgage loans of $0.4
million or 31% due largely to higher mortgage refinancing volumes reflecting
market conditions. Other noninterest income also increased $0.2 million or 8%
compared to the first six months of 2008.
Total noninterest expenses were $51.1
million for the six month period ended June 30, 2009, a 3% or $1.5 million
increase from the same period in 2008. Excluding the one time special assessment
by the FDIC of $1.7 million in 2009, noninterest expenses totaled $49.4 million
which was virtually even with the prior year period. Salaries and
employee benefits decreased $0.7 million or 3% during the first six months of
2009 due to a decrease in incentive compensation and a reduction in the number
of full time equivalent employees. Occupancy and equipment expenses decreased
$0.2 million or 2% for the period while outside data services decreased by $0.4
million or 20%. FDIC insurance expense totaled $3.7 million for the first six
months of 2009, an increase of $2.9 million. This increase was due primarily to
a one time special assessment by the FDIC of $1.7 million in the second
quarter. Average full-time equivalent employees decreased to 669
during the first six months of 2009, from 705 during the like period in 2008, a
5% decrease. These results reflect the continuing effect of project LIFT, a
previously disclosed initiative for improved management of operating
expenses.
Income
Taxes
The effective tax rate decreased to a
tax benefit for the six month period ended June 30, 2009, from a tax expense of
29.5% 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.
C.
RESULTS OF OPERATIONS – SECOND QUARTER 2009 AND 2008
Net income (loss) available to common
shareholders for the second quarter of the year decreased $7.2 million or 126%
to a net loss of $1.5 million in 2009 from net income $5.7 million in 2008,
representing annualized returns on average common equity of (1.90%) in 2009 and
7.09% in 2008, respectively. Diluted net income (loss) per common
share for the second quarter of the year was ($0.09) in 2009, compared to $0.34
in 2008.
Net interest income declined by $2.7
million, or 10%, to $24.4 million for the three months ended June 30, 2009,
while total noninterest income decreased by $0.7 million, or 6% for the period.
Noninterest expenses increased $2.0 million or 8% for the quarter.
The decrease in net interest income
was due to a decline of 89 basis points in the yield on loans and 168 basis
points in the yield on investments which exceeded the decline of 33 basis points
on interest-bearing liabilities. This reflects the Company’s current asset
sensitive position and the growth in nonperforming 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 85 basis points
to 3.11% for the three months ended June 30, 2009, from 3.96% for the same
period of 2008.
The provision for loan and lease
losses totaled $10.6 million for the second quarter of 2009 compared to $6.2
million in the same period of 2008. This increase was due to internal risk
rating downgrades primarily in the residential real estate development
portfolio. The Company experienced net charge-offs during the second quarter of
2009 of $12.1 million compared to net charge-offs of $0.6 million for the same
quarter of 2008.
Second quarter noninterest income was
$11.0 million for 2009, representing a 6% or $0.7 million decrease from the
second quarter of 2008. The decrease in noninterest income for
the quarter was due primarily to a decrease of $0.4 million or 11% in service
charges on deposits due to lower overdraft fees while insurance agency
commissions decreased $0.3 million or 23% due to the effect of the overall
economy. Fees on sales of investment products decreased $0.3 million or 31%
compared to the second quarter of 2008 and trust and investment management fees
declined $0.1 million or 5%, both of which were due primarily to a decline in
assets under management. These decreases were partially offset by an
increase in gains on sales of mortgages of $0.1 million or 20% due largely to
higher mortgage refinancing volumes reflecting market
conditions. Other noninterest income also increased $0.4 million or
23% for the quarter due largely to valuation adjustments on matched commercial
loan swaps.
Noninterest expenses totaled $26.9
million for the second quarter of 2009, an 8% or $2.0 million increase over the
second quarter of 2008. This increase was due in large part to an increase of
$2.4 million in FDIC insurance expense resulting primarily from a one time
special assessment by the FDIC which totaled $1.7 million. Salaries and employee
benefits decreased $0.2 million during the quarter due primarily to a decrease
in incentive compensation and a decline in the number of full-time equivalent
employees. Occupancy and equipment expenses decreased $0.3 million or 6% for the
quarter due to a move of staff from leased to owned facilities.
Income
Taxes
The effective tax rate decreased to a
benefit for the second quarter of 2009, from an expense of 27.0% 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 six months ended June 30, 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 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Previously
the Company had a stock repurchase program that permitted the repurchase of up
to 5%, or approximately 786,000 shares, of its outstanding common stock. A total
of 1,332,689 shares had been repurchased since 1997, when stock repurchases
began, through March 31, 2009. There were no shares repurchased in 2008 or 2009.
This program expired on March 31, 2009 and was not renewed. As a result of
participating in the Department of the Treasury’s Troubled Asset Relief Program
(“TARP”) Capital Purchase Program, until December 31, 2011, the Company may not
repurchase any shares of its common stock, other than in connection with the
administration of an employee benefit plan, without the consent of the Treasury
Department.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the
Company’s annual shareholders’ meeting held on April 22, 2009, the shareholders
of the Company elected four directors by the following vote:
Nominee
|
|
For
|
|
|
Withheld
|
|
Susan
D. Goff
|
|
|
12,389,710 |
|
|
|
404,010 |
|
Robert
L. Orndorff
|
|
|
12,307,381 |
|
|
|
486,340 |
|
David
E. Rippeon
|
|
|
12,401,266 |
|
|
|
392,455 |
|
Daniel
J. Schrider
|
|
|
12,504,560 |
|
|
|
289,161 |
|
There
were no solicitations in opposition to management’s nominees and all such
nominees were elected. Daniel J. Schrider had been appointed to the board in
2009. The remaining three directors were incumbent directors previously elected
by the shareholders to three-year terms. Directors continuing in office are Mark
E. Friis, Hunter R. Hollar, Solomon Graham, Gilbert L. Hardesty, Pamela A.
Little, Craig A. Ruppert and Lewis R. Schumann.
The
American Recovery and Reinvestment Act of 2009 requires Bancorp, during the
period in which any obligation arising from Bancorp’s participation in the TARP
Capital Purchase Program remains outstanding, to submit to the shareholders a
non-binding vote on the compensation of Bancorp’s named executive officers, as
described in the Compensation Discussion and Analysis, the compensation tables,
and related material in the proxy statement dated April 22, 2009. Accordingly,
at the annual meeting, the shareholders voted to approve such compensation as
follows:
For
|
|
Against
|
|
|
Withheld
|
|
|
Non Votes
|
|
9,341,076
|
|
|
3,211,511 |
|
|
|
241,121 |
|
|
|
0 |
|
Also at
the annual meeting, the shareholders ratified the appointment of Grant Thornton
LLP, as the independent auditors for 2009 by the following vote:
For
|
|
Against
|
|
|
Withheld
|
|
|
Non Votes
|
|
12,662,359
|
|
|
68,316 |
|
|
|
63,041 |
|
|
|
0 |
|
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:
August
10, 2009
|
|
|
By:
|
/S/ PHILIP J.
MANTUA
|
|
Philip
J. Mantua
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
Date:
August
10,
2009
|