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 September 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 October 31, 2009 is 16,472,693
shares.
SANDY
SPRING BANCORP, INC.
INDEX
|
Page
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
ITEM
1. FINANCIAL STATEMENTS
|
|
|
|
Consolidated
Balance Sheets at
|
|
September
30, 2009 (Unaudited) and December 31, 2008
|
1
|
|
|
Consolidated
Statements of Income for the Three Month and Nine Month
|
|
Periods
Ended September 30, 2009 and 2008 (Unaudited)
|
2
|
|
|
Consolidated
Statements of Cash Flows for the Nine
|
|
Month
Periods Ended September 30, 2009 and 2008 (Unaudited)
|
3
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the
|
|
Nine
Month Periods Ended September 30, 2009 and 2008
(Unaudited)
|
4
|
|
|
Notes
to Consolidated Financial Statements
|
5
|
|
|
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
3. DEFAULTS UPON SENIOR SECURITIES
|
36
|
|
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECUITY HOLDERS
|
36
|
|
|
ITEM
5. OTHER INFORMATION
|
36
|
|
|
ITEM
6. EXHIBITS
|
36
|
|
|
SIGNATURES
|
37
|
PART I -
FINANCIAL INFORMATION
Item 1.
FINANCIAL STATEMENT
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
(Dollars in thousands)
|
|
(Unaudited)
September 30,
2009
|
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
42,079 |
|
|
$ |
44,738 |
|
Federal
funds sold
|
|
|
1,271 |
|
|
|
1,110 |
|
Interest-bearing
deposits with banks
|
|
|
45,660 |
|
|
|
59,381 |
|
Cash
and cash equivalents
|
|
|
89,010 |
|
|
|
105,229 |
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
10,926 |
|
|
|
11,391 |
|
Investments
available-for-sale (at fair value)
|
|
|
807,145 |
|
|
|
291,727 |
|
Investments
held-to-maturity — fair value of $146,800 (2009) and $175,908
(2008)
|
|
|
140,528 |
|
|
|
171,618 |
|
Other
equity securities
|
|
|
32,773 |
|
|
|
29,146 |
|
Total
loans and leases
|
|
|
2,334,282 |
|
|
|
2,490,646 |
|
Less:
allowance for loan and lease losses
|
|
|
(62,937 |
) |
|
|
(50,526 |
) |
Net
loans and leases
|
|
|
2,271,345 |
|
|
|
2,440,120 |
|
Premises
and equipment, net
|
|
|
49,827 |
|
|
|
51,410 |
|
Other
real estate owned
|
|
|
6,873 |
|
|
|
2,860 |
|
Accrued
interest receivable
|
|
|
13,325 |
|
|
|
11,810 |
|
Goodwill
|
|
|
76,816 |
|
|
|
76,248 |
|
Other
intangible assets, net
|
|
|
9,033 |
|
|
|
12,183 |
|
Other
assets
|
|
|
124,790 |
|
|
|
109,896 |
|
Total
assets
|
|
$ |
3,632,391 |
|
|
$ |
3,313,638 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
573,601 |
|
|
$ |
461,517 |
|
Interest-bearing
deposits
|
|
|
2,109,886 |
|
|
|
1,903,740 |
|
Total
deposits
|
|
|
2,683,487 |
|
|
|
2,365,257 |
|
Short-term
borrowings
|
|
|
491,702 |
|
|
|
421,074 |
|
Other
long-term borrowings
|
|
|
4,263 |
|
|
|
66,584 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
35,000 |
|
Accrued
interest payable and other liabilities
|
|
|
37,368 |
|
|
|
33,861 |
|
Total
liabilities
|
|
|
3,251,820 |
|
|
|
2,921,776 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock—par value $1.00 (liquidation preference of $1,000 per share) shares
issued and outstanding 83,094 (discount of $3,164 and $3,654,
respectively)
|
|
|
79,930 |
|
|
|
79,440 |
|
Common
stock — par value $1.00; shares authorized 49,916,906; shares issued and
outstanding 16,470,078 (2009) and 16,398,523 (2008)
|
|
|
16,470 |
|
|
|
16,399 |
|
Warrants
|
|
|
3,699 |
|
|
|
3,699 |
|
Additional
paid in capital
|
|
|
87,572 |
|
|
|
85,486 |
|
Retained
earnings
|
|
|
193,210 |
|
|
|
214,410 |
|
Accumulated
other comprehensive loss
|
|
|
(310 |
) |
|
|
(7,572 |
) |
Total
stockholders' equity
|
|
|
380,571 |
|
|
|
391,862 |
|
Total
liabilities and stockholders' equity
|
|
$ |
3,632,391 |
|
|
$ |
3,313,638 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
31,280 |
|
|
$ |
37,263 |
|
|
$ |
96,579 |
|
|
$ |
112,428 |
|
Interest
on loans held for sale
|
|
|
121 |
|
|
|
100 |
|
|
|
654 |
|
|
|
318 |
|
Interest
on deposits with banks
|
|
|
23 |
|
|
|
6 |
|
|
|
112 |
|
|
|
79 |
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,947 |
|
|
|
3,171 |
|
|
|
13,673 |
|
|
|
7,749 |
|
Exempt
from federal income taxes
|
|
|
1,814 |
|
|
|
1,409 |
|
|
|
5,560 |
|
|
|
6,712 |
|
Interest
on federal funds sold
|
|
|
- |
|
|
|
99 |
|
|
|
3 |
|
|
|
529 |
|
TOTAL
INTEREST INCOME
|
|
|
39,185 |
|
|
|
42,048 |
|
|
|
116,581 |
|
|
|
127,815 |
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
8,743 |
|
|
|
9,325 |
|
|
|
28,118 |
|
|
|
32,930 |
|
Interest
on short-term borrowings
|
|
|
3,697 |
|
|
|
3,544 |
|
|
|
10,757 |
|
|
|
9,886 |
|
Interest
on long-term borrowings
|
|
|
343 |
|
|
|
1,092 |
|
|
|
1,831 |
|
|
|
3,214 |
|
TOTAL
INTEREST EXPENSE
|
|
|
12,783 |
|
|
|
13,961 |
|
|
|
40,706 |
|
|
|
46,030 |
|
NET
INTEREST INCOME
|
|
|
26,402 |
|
|
|
28,087 |
|
|
|
75,875 |
|
|
|
81,785 |
|
Provision
for loan and lease losses
|
|
|
34,450 |
|
|
|
6,545 |
|
|
|
55,678 |
|
|
|
15,401 |
|
NET
INTEREST INCOME AFTER PROVISION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FOR
LOAN AND LEASE LOSSES
|
|
|
(8,048 |
) |
|
|
21,542 |
|
|
|
20,197 |
|
|
|
66,384 |
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
15 |
|
|
|
9 |
|
|
|
207 |
|
|
|
662 |
|
Service
charges on deposit accounts
|
|
|
2,823 |
|
|
|
3,249 |
|
|
|
8,537 |
|
|
|
9,481 |
|
Gains
on sales of mortgage loans
|
|
|
1,011 |
|
|
|
397 |
|
|
|
2,819 |
|
|
|
1,772 |
|
Fees
on sales of investment products
|
|
|
740 |
|
|
|
820 |
|
|
|
2,062 |
|
|
|
2,547 |
|
Trust
and investment management fees
|
|
|
2,406 |
|
|
|
2,380 |
|
|
|
7,063 |
|
|
|
7,282 |
|
Insurance
agency commissions
|
|
|
1,048 |
|
|
|
1,282 |
|
|
|
4,138 |
|
|
|
4,725 |
|
Income
from bank owned life insurance
|
|
|
740 |
|
|
|
742 |
|
|
|
2,176 |
|
|
|
2,183 |
|
Visa
check fees
|
|
|
758 |
|
|
|
727 |
|
|
|
2,144 |
|
|
|
2,184 |
|
Other
income
|
|
|
1,121 |
|
|
|
1,273 |
|
|
|
4,520 |
|
|
|
4,434 |
|
TOTAL
NONINTEREST INCOME
|
|
|
10,662 |
|
|
|
10,879 |
|
|
|
33,666 |
|
|
|
35,270 |
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
14,411 |
|
|
|
11,949 |
|
|
|
41,319 |
|
|
|
39,574 |
|
Occupancy
expense of premises
|
|
|
2,685 |
|
|
|
2,732 |
|
|
|
8,008 |
|
|
|
8,150 |
|
Equipment
expenses
|
|
|
1,444 |
|
|
|
1,515 |
|
|
|
4,332 |
|
|
|
4,514 |
|
Marketing
|
|
|
484 |
|
|
|
526 |
|
|
|
1,389 |
|
|
|
1,511 |
|
Outside
data services
|
|
|
987 |
|
|
|
1,116 |
|
|
|
2,754 |
|
|
|
3,319 |
|
FDIC
insurance
|
|
|
1,219 |
|
|
|
480 |
|
|
|
4,968 |
|
|
|
1,293 |
|
Amortization
of intangible assets
|
|
|
1,048 |
|
|
|
1,103 |
|
|
|
3,150 |
|
|
|
3,344 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
2,250 |
|
|
|
- |
|
|
|
2,250 |
|
Other
expenses
|
|
|
4,289 |
|
|
|
3,596 |
|
|
|
11,755 |
|
|
|
10,901 |
|
TOTAL
NONINTEREST EXPENSES
|
|
|
26,567 |
|
|
|
25,267 |
|
|
|
77,675 |
|
|
|
74,856 |
|
Income
(loss) before income taxes
|
|
|
(23,953 |
) |
|
|
7,154 |
|
|
|
(23,812 |
) |
|
|
26,798 |
|
Income
tax expense (benefit)
|
|
|
(10,379 |
) |
|
|
1,795 |
|
|
|
(12,175 |
) |
|
|
7,583 |
|
NET
INCOME (LOSS)
|
|
$ |
(13,574 |
) |
|
$ |
5,359 |
|
|
$ |
(11,637 |
) |
|
$ |
19,215 |
|
Preferred
stock dividends and discount accretion
|
|
|
1,205 |
|
|
|
- |
|
|
|
3,607 |
|
|
|
- |
|
NET
INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
|
|
$ |
(14,779 |
) |
|
$ |
5,359 |
|
|
$ |
(15,244 |
) |
|
$ |
19,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) PER SHARE AMOUNTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
(0.83 |
) |
|
$ |
0.33 |
|
|
$ |
(0.71 |
) |
|
$ |
1.18 |
|
Basic
net income (loss) per common share
|
|
|
(0.90 |
) |
|
|
0.33 |
|
|
|
(0.93 |
) |
|
|
1.18 |
|
Diluted
net income (loss) per share
|
|
$ |
(0.83 |
) |
|
$ |
0.33 |
|
|
$ |
(0.71 |
) |
|
$ |
1.17 |
|
Diluted
net income (loss) per common share
|
|
|
(0.90 |
) |
|
|
0.33 |
|
|
|
(0.93 |
) |
|
|
1.17 |
|
Dividends
declared per share
|
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.36 |
|
|
$ |
0.72 |
|
See Notes
to Consolidated Financial Statements.
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(11,637 |
) |
|
$ |
19,215 |
|
Adjustments
to reconcile net income (loss) to net cash (used in ) provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,849 |
|
|
|
10,420 |
|
Provision
for loan and lease losses
|
|
|
55,678 |
|
|
|
15,401 |
|
Charge-offs
on loans and leases
|
|
|
(43,267 |
) |
|
|
(2,226 |
) |
Stock
compensation expense
|
|
|
1,105 |
|
|
|
551 |
|
Deferred
income tax benefit
|
|
|
(5,868 |
) |
|
|
(5,401 |
) |
Origination
of loans held for sale
|
|
|
(285,116 |
) |
|
|
(136,330 |
) |
Proceeds
from sales of loans held for sale
|
|
|
288,253 |
|
|
|
140,614 |
|
Common
stock issued pursuant to West Financial Services
acquisition
|
|
|
628 |
|
|
|
- |
|
Gains
on sales of loans held for sale
|
|
|
(2,672 |
) |
|
|
(1,772 |
) |
Securities
gains
|
|
|
(207 |
) |
|
|
(662 |
) |
Gains
on sales of premises and equipment
|
|
|
- |
|
|
|
(66 |
) |
Net
(increase) decrease in accrued interest receivable
|
|
|
(1,515 |
) |
|
|
2,464 |
|
Net
increase in other assets
|
|
|
(13,083 |
) |
|
|
(344 |
) |
Net
increase in accrued expenses and other liabilities
|
|
|
3,278 |
|
|
|
2,262 |
|
Other –
net
|
|
|
2,675 |
|
|
|
(2,340 |
) |
Net
cash (used) provided by operating activities
|
|
|
(3,899 |
) |
|
|
41,786 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of other equity securities
|
|
|
(3,628 |
) |
|
|
(8,581 |
) |
Purchases
of investments available-for-sale
|
|
|
(719,202 |
) |
|
|
(176,327 |
) |
Proceeds
from the sales of other real estate owned
|
|
|
788 |
|
|
|
240 |
|
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
31,229 |
|
|
|
56,065 |
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
213,407 |
|
|
|
152,748 |
|
Net
decrease (increase) in loans and leases
|
|
|
151,475 |
|
|
|
(206,858 |
) |
Proceeds
from redemption of VISA stock
|
|
|
- |
|
|
|
429 |
|
Contingent
consideration payout
|
|
|
(2,308 |
) |
|
|
(1,620 |
) |
Expenditures
for premises and equipment
|
|
|
(2,200 |
) |
|
|
(1,821 |
) |
Net
cash used in investing activities
|
|
|
(330,439 |
) |
|
|
(185,725 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
318,230 |
|
|
|
(25,056 |
) |
Net
increase in short-term borrowings
|
|
|
8,307 |
|
|
|
109,898 |
|
Proceeds
from issuance of long-term borrowings
|
|
|
- |
|
|
|
60,000 |
|
Proceeds
from issuance of common stock
|
|
|
424 |
|
|
|
579 |
|
Dividends
paid
|
|
|
(8,842 |
) |
|
|
(11,818 |
) |
Net
cash provided by financing activities
|
|
|
318,119 |
|
|
|
133,603 |
|
Net
decrease in cash and cash equivalents
|
|
|
(16,219 |
) |
|
|
(10,336 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
105,229 |
|
|
|
85,852 |
|
Cash
and cash equivalents at end of period
|
|
$ |
89,010 |
|
|
$ |
75,516 |
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
41,378 |
|
|
$ |
45,597 |
|
Income
tax payments
|
|
|
3,920 |
|
|
|
13,715 |
|
Transfers
from loans to other real estate owned
|
|
|
4,889 |
|
|
|
1,471 |
|
Reclassification
of borrowings from long-term to short-term
|
|
|
62,321 |
|
|
|
725 |
|
See Notes
to Consolidated Financial Statements.
Sandy
Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Preferred
|
|
|
Common
|
|
|
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
(Dollars
in thousands, except per share data)
|
|
Stock
|
|
|
Stock
|
|
|
Warrants
|
|
|
Capital
|
|
|
Earnings
|
|
|
Loss
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2008
|
|
$ |
79,440 |
|
|
$ |
16,399 |
|
|
$ |
3,699 |
|
|
$ |
85,486 |
|
|
$ |
214,410 |
|
|
$ |
(7,572 |
) |
|
$ |
391,862 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,637 |
) |
|
|
- |
|
|
|
(11,637 |
) |
Other
comprehensive income, net of tax effects
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
7,262 |
|
|
|
7,262 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,375 |
) |
Cash
dividends - $0.36 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,957 |
) |
|
|
- |
|
|
|
(5,957 |
) |
Preferred
stock dividends – $34.98 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,116 |
) |
|
|
- |
|
|
|
(3,116 |
) |
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,105 |
|
|
|
- |
|
|
|
- |
|
|
|
1,105 |
|
Discount
accretion
|
|
|
490 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(490 |
) |
|
|
- |
|
|
|
- |
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration relating to 2005 acquisition of West Financial – 31,663
shares
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
|
|
596 |
|
|
|
- |
|
|
|
- |
|
|
|
628 |
|
Employee
stock purchase plan – 28,909 shares
|
|
|
- |
|
|
|
29 |
|
|
|
- |
|
|
|
324 |
|
|
|
- |
|
|
|
- |
|
|
|
353 |
|
Director
stock purchase plan – 2,988 shares
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
37 |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Restricted
stock- 5,608 shares
|
|
|
- |
|
|
|
5 |
|
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1 |
) |
DRIP
plan – 2,441 shares
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
Balances
at September 30, 2009
|
|
$ |
79,930 |
|
|
$ |
16,470 |
|
|
$ |
3,699 |
|
|
$ |
87,572 |
|
|
$ |
193,210 |
|
|
$ |
(310 |
) |
|
$ |
380,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,215 |
|
|
|
- |
|
|
|
19,215 |
|
Other
comprehensive income (loss), net of tax effects and reclassification
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,820 |
) |
|
|
(2,820 |
) |
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,395 |
|
Cash
dividends- $0.72 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(11,818 |
) |
|
|
- |
|
|
|
(11,818 |
) |
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
551 |
|
|
|
- |
|
|
|
- |
|
|
|
551 |
|
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- 23,748 shares
|
|
|
- |
|
|
|
24 |
|
|
|
- |
|
|
|
453 |
|
|
|
- |
|
|
|
- |
|
|
|
477 |
|
Balances
at September 30, 2008
|
|
$ |
- |
|
|
$ |
16,384 |
|
|
$ |
- |
|
|
$ |
85,065 |
|
|
$ |
222,126 |
|
|
$ |
(3,875 |
) |
|
$ |
319,700 |
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 – Principles of Consolidation and
Basis of Presentation
The
unaudited Consolidated Financial Statements include the accounts of Sandy Spring
Bancorp (“the Company”) and its wholly owned subsidiary, Sandy Spring Bank (“the
Bank”) and its subsidiaries, Sandy Spring Insurance Corporation, The Equipment
Leasing Company, and West Financial Services, Inc. Consolidation has resulted in
the elimination of all significant intercompany accounts and
transactions. 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 that may be expected for any future quarters or for the
year ending December 31, 2009.
The
accounting and reporting policies of the Company 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
those amounts used in the current classifications. These
reclassifications have no effect on stockholders’ equity or net income as
previously reported. Subsequent events have been evaluated through
November 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
The
Company applies the guidance by the Financial Accounting Standards Board
(“FASB”) Accounting Standards Topic (“ASC”) 820-10-35 regarding the measurement
of the fair value of a liability. This guidance is effective for the
first reporting period subsequent to August 2009. The guidance provides
clarification regarding what techniques may be used to measure the fair value of
a liability when a quoted price for a liability in an active market is not
available. It further clarifies that an adjustment to the fair value
is not required due to the existence of a restriction that prevents the transfer
of the liability.
The
Company accounts for other-than-temporary impairment (“OTTI”) of debt securities
and uses the criteria used to assess the collectability of cash flows to
determine potential OTTI under the provision of FASB ASC
320-10-65. This topic is effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 31, 2009. This topic modifies the presentation of
OTTI losses and increases the frequency of and expands existing disclosure
requirements. The Company’s adoption of this accounting standard in the second
quarter of 2009 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
The
Company applies the guidance provided by FASB ASC 820-10-65 relating 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 decreased significantly and identifying transactions that are not
orderly. The Company’s adoption of this accounting standard in the
second quarter of 2009 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
Required
disclosures about the fair value of the Company’s financial instruments for
interim reporting periods are outlined in FASB ASC 825-10-65. These
disclosures are effective for interim periods ending after June 15,
2009. The adoption of the disclosure requirements in the second
quarter of 2009 did not have a material impact on the Company’s financial
position, results of operations or cash flows.
The
Company includes non-forfeitable rights to dividends or dividend equivalents on
unvested shared based payment awards on participating securities in the earnings
allocation when computing earnings per share (“EPS”) as outlined in FASB ASC
260-10. These EPS computation requirements are effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. All prior period per share data presented
must be adjusted retrospectively. The adoption of these EPS calculation
requirements did not have a material impact on the Company’s financial position,
results of operations or cash flows.
The
Company applies the 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 as outlined by FASB ASC 855. These
accounting and disclosure requirements are effective for interim or annual
financial periods ending after June 15, 2009 and shall be applied
prospectively. There are two types of subsequent events that must be
evaluated: recognized and non-recognized 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. Certain non-recognized subsequent events may be
of such a nature that they must be disclosed to keep the financial statements
from being misleading. The adoption of these accounting and disclosure standards
did not have an impact on the Company’s financial position, results of
operations or cash flows.
Pending Accounting
Pronouncements
In
December 2008, the FASB issued FASB staff position (“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 currently required disclosures about 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.
SFAS No.
166 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 SFAS No. 166 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”). This 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”). SFAS No. 167 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 has 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. SFAS No. 168 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 – Investments
Portfolio
quality discussion
At
September 30, 2009, any unrealized losses associated with AAA-rated U.S.
Government Agencies are caused by changes in interest rates and are not
considered credit related as the contractual cash flows of these investments are
either explicitly or implicitly backed by the full faith and credit of the U.S.
government. Unrealized losses that are related to the prevailing
interest rate environment will decline over time and recover as these securities
approach maturity. The municipal securities portfolio segment is not
experiencing any significant credit problems at September 30, 2009 and the
Company believes it will receive all contractual cash flows due on this
portfolio. The mortgage-backed securities portfolio at September 30,
2009 is composed entirely of either the most senior tranches of GNMA
collateralized mortgage obligations ($106.6 million), or GNMA, FNMA or FHLMC
mortgage-backed securities ($283.7 million). Any associated
unrealized losses are caused by changes in interest rates and are not considered
credit related as the contractual cash flows of these investments are either
explicitly or implicitly backed by the full faith and credit of the U.S.
government. Unrealized losses that are related to the prevailing
interest rate environment will decline over time and recover as these securities
approach maturity. Trust preferred securities are comprised of the
senior tranches of three securities. The Company has received all
payments on a timely basis. At September 30, 2009, the Company
believes that the credit quality of these securities remains adequate to absorb
further economic declines. The unrealized losses on this portfolio
are the result of illiquidity and reduced demand for these securities resulting
in widening credit spreads. Marketable equity securities are composed
almost entirely of FHLB stock and Federal Reserve Bank stock, at
cost. With respect to the FHLB stock, the Company has received the
most recent quarterly dividend that was due. The Company has
determined through a comprehensive earnings and liquidity review that there have
been no other events that would result in a significant adverse effect on the
fair value of the FHLB stock and that the par value of this investment will
ultimately be recovered.
Investments
available-for-sale
The
amortized cost and estimated fair values of investments available-for-sale for
the periods indicated are as follows:
|
|
As of September 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.
government agencies
|
|
$ |
376,992 |
|
|
$ |
4,242 |
|
|
$ |
(18 |
) |
|
$ |
381,216 |
|
|
$ |
135,418 |
|
|
$ |
2,003 |
|
|
$ |
(101 |
) |
|
$ |
137,320 |
|
State
and municipal
|
|
|
27,772 |
|
|
|
1,817 |
|
|
|
(1 |
) |
|
|
29,588 |
|
|
|
2,663 |
|
|
|
78 |
|
|
|
(41 |
) |
|
|
2,700 |
|
Mortgage-backed
|
|
|
382,363 |
|
|
|
7,557 |
|
|
|
(262 |
) |
|
|
389,658 |
|
|
|
144,638 |
|
|
|
1,358 |
|
|
|
(920 |
) |
|
|
145,076 |
|
Trust
preferred
|
|
|
7,841 |
|
|
|
167 |
|
|
|
(1,675 |
) |
|
|
6,333 |
|
|
|
7,890 |
|
|
|
24 |
|
|
|
(1,633 |
) |
|
|
6,281 |
|
Total
debt securities
|
|
|
794,968 |
|
|
|
13,783 |
|
|
|
(1,956 |
) |
|
|
806,795 |
|
|
|
290,609 |
|
|
|
3,463 |
|
|
|
(2,695 |
) |
|
|
291,377 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
|
|
350 |
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
Total
investments available-for-sale
|
|
$ |
795,318 |
|
|
$ |
13,783 |
|
|
$ |
(1,956 |
) |
|
$ |
807,145 |
|
|
$ |
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 an unrealized loss position for the
periods indicated are as follows:
As of September 30, 2009
|
|
|
|
|
|
|
|
Continuous Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses Existing for:
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
Less than
|
|
|
More than
|
|
|
Unrealized
|
|
(In thousands)
|
|
securities
|
|
|
Fair Value
|
|
|
12 months
|
|
|
12 months
|
|
|
Losses
|
|
U.S.
government agencies
|
|
|
2 |
|
|
$ |
9,975 |
|
|
$ |
18 |
|
|
$ |
- |
|
|
$ |
18 |
|
State
and municipal
|
|
|
1 |
|
|
|
199 |
|
|
|
- |
|
|
|
1 |
|
|
|
1 |
|
Mortgage-backed
|
|
|
16 |
|
|
|
32,964 |
|
|
|
221 |
|
|
|
41 |
|
|
|
262 |
|
Trust
preferred
|
|
|
3 |
|
|
|
6,017 |
|
|
|
24 |
|
|
|
1,651 |
|
|
|
1,675 |
|
Total
|
|
|
22 |
|
|
$ |
49,155 |
|
|
$ |
263 |
|
|
$ |
1,693 |
|
|
$ |
1,956 |
|
As of December 31, 2008
|
|
|
|
|
|
|
|
Continuous Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses Existing for:
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
Less than
|
|
|
More than
|
|
|
Unrealized
|
|
(In thousands)
|
|
securities
|
|
|
Fair Value
|
|
|
12 months
|
|
|
12 months
|
|
|
Losses
|
|
U.S.
government agencies
|
|
|
2 |
|
|
$ |
14,898 |
|
|
$ |
101 |
|
|
$ |
- |
|
|
$ |
101 |
|
State
and municipal
|
|
|
4 |
|
|
|
1,131 |
|
|
|
41 |
|
|
|
- |
|
|
|
41 |
|
Mortgage-backed
|
|
|
30 |
|
|
|
66,640 |
|
|
|
911 |
|
|
|
9 |
|
|
|
920 |
|
Trust
preferred
|
|
|
6 |
|
|
|
4,950 |
|
|
|
1,633 |
|
|
|
- |
|
|
|
1,633 |
|
Total
|
|
|
42 |
|
|
$ |
87,619 |
|
|
$ |
2,686 |
|
|
$ |
9 |
|
|
$ |
2,695 |
|
Approximately
86% of the bonds carried in the available-for-sale investment portfolio
experiencing unrealized losses as of September 30, 2009 were rated AAA, 1% were
rated B, 3% were rated BBB+ and 10% were rated CC. Approximately 94% of the
bonds carried in the available-for-sale investment portfolio experiencing losses
as of December 31, 2008 were rated AAA, 4% were rated B+ and 2% were not
rated. The securities representing the unrealized losses in the
available-for-sale portfolio as of September 30, 2009 and December 31, 2008 all
have modest duration risk (2.54 years in 2009 and 2.41 years in
2008), low credit risk, and minimal loss (approximately 3.96% 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 that have occurred
subsequent to the original purchase and not considered credit
related. These factors coupled with the fact that the Company has
both the intent and sufficient liquidity to hold these investments for an
adequate 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 investment securities
available-for-sale at September 30, 2009 and December 31, 2008 by contractual
maturity are shown on the following page. 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 as borrowers may have the
right to prepay obligations with or without prepayment
penalties.
There
were no sales of investments available-for-sale during 2009 or
2008.
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
204,274 |
|
|
$ |
203,739 |
|
|
$ |
99,232 |
|
|
$ |
99,677 |
|
Due
after one year through five years
|
|
|
549,710 |
|
|
|
560,165 |
|
|
|
190,302 |
|
|
|
190,625 |
|
Due
after five years through ten years
|
|
|
40,984 |
|
|
|
42,891 |
|
|
|
1,075 |
|
|
|
1,075 |
|
Due
after ten years
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
debt securities available for sale
|
|
$ |
794,968 |
|
|
$ |
806,795 |
|
|
$ |
290,609 |
|
|
$ |
291,377 |
|
At
September 30, 2009 and December 31, 2008, investments available-for-sale with a
book value of $212.5 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 September 30, 2009 and December 31, 2008.
Investments
held-to-maturity
The
amortized cost and estimated fair values of investments held-to-maturity for the
periods indicated are as follows:
|
|
As of September 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
|
|
State
and municipal
|
|
$ |
139,904 |
|
|
$ |
6,233 |
|
|
$ |
(3 |
) |
|
$ |
146,134 |
|
|
$ |
170,871 |
|
|
$ |
4,415 |
|
|
$ |
(159 |
) |
|
$ |
175,127 |
|
Mortgage-backed
|
|
|
624 |
|
|
|
42 |
|
|
|
- |
|
|
|
666 |
|
|
|
747 |
|
|
|
34 |
|
|
|
- |
|
|
|
781 |
|
Total investments
held-to-maturity
|
|
$ |
140,528 |
|
|
$ |
6,275 |
|
|
$ |
(3 |
) |
|
$ |
146,800 |
|
|
$ |
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
for the periods indicated are as follows:
As of September 30, 2009
|
|
|
|
|
|
|
|
Continuous Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses Existing for:
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
Less than
|
|
|
More than
|
|
|
Unrealized
|
|
(In thousands)
|
|
securities
|
|
|
Fair Value
|
|
|
12 months
|
|
|
12 months
|
|
|
Losses
|
|
State
and municipal
|
|
|
3 |
|
|
$ |
657 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
3 |
|
Total
|
|
|
3 |
|
|
$ |
657 |
|
|
$ |
3 |
|
|
$ |
- |
|
|
$ |
3 |
|
As
of December 31, 2008
|
|
|
|
|
|
|
|
Continuous
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses Existing for:
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
of
|
|
|
|
|
|
Less
than
|
|
|
More
than
|
|
|
Unrealized
|
|
(In thousands)
|
|
securities
|
|
|
Fair Value
|
|
|
12 months
|
|
|
12 months
|
|
|
Losses
|
|
State
and municipal
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
- |
|
|
$ |
159 |
|
Total
|
|
|
14 |
|
|
$ |
10,658 |
|
|
$ |
159 |
|
|
$ |
- |
|
|
$ |
159 |
|
All of
the bonds carried in the held-to-maturity investment portfolio experiencing
continuous unrealized losses as of September 30, 2009, were rated AAA. As of
December 31, 2008, approximately 16% of such bonds were rated AAA and
approximately 84% were rated AA. The securities representing the
unrealized losses in the held-to-maturity portfolio had duration risk of 12.28
years in 2009 compared to 6.27 years in 2008. These securities have
low credit risk and minimal unrealized losses (approximately 0.51% 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 September 30, 2009 and December
31, 2008 by contractual maturity are shown below. Expected maturities will
differ from contractual maturities as borrowers may have the right to
prepay obligations with or without prepayment penalties.
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
42,965 |
|
|
$ |
43,708 |
|
|
$ |
55,231 |
|
|
$ |
55,941 |
|
Due
after one year through five years
|
|
|
90,582 |
|
|
|
95,591 |
|
|
|
108,406 |
|
|
|
111,718 |
|
Due
after five years through ten years
|
|
|
898 |
|
|
|
936 |
|
|
|
1,997 |
|
|
|
2,043 |
|
Due
after ten years
|
|
|
6,083 |
|
|
|
6,565 |
|
|
|
5,984 |
|
|
|
6,206 |
|
Total
debt securities held-to-maturity
|
|
$ |
140,528 |
|
|
$ |
146,800 |
|
|
$ |
171,618 |
|
|
$ |
175,908 |
|
At September 30, 2009 and December 31,
2008, investments held to maturity with a book value of $116.4 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 September 30, 2009
or December 31, 2008.
Other
equity securities for the periods indicated are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Federal
Reserve Bank stock
|
|
$ |
7,531 |
|
|
$ |
5,037 |
|
Federal
Home Loan Bank of Atlanta stock
|
|
|
25,167 |
|
|
|
24,034 |
|
Atlantic
Central Bank stock
|
|
|
75 |
|
|
|
75 |
|
Total
|
|
$ |
32,773 |
|
|
$ |
29,146 |
|
Note
4 – Stock Based Compensation
At
September 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 1,184,750 are available for issuance at
September 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 upon
the exercise of such options. Options granted under the expired 1999
Stock Option Plan remain outstanding until exercised or they
expire. The Company generally issues authorized but previously
unissued shares to satisfy option exercises.
During
2009, 73,560 stock options were granted, subject to a three year vesting
schedule with one third of the options vesting each year on the anniversary date
of the grant. Additionally, 97,008 shares of restricted stock were
granted, subject to a five year vesting schedule with one fifth of the shares
vesting each year on the grant date anniversary. Compensation expense is
recognized on a straight-line basis over the vesting period of the respective
stock option or restricted stock grant. The fair value method for expense
recognition of employee awards resulted in stock compensation expense of
approximately $1.1 million and $0.6 million for the nine month periods ended
September 30, 2009 and 2008, respectively. The fair values of all of the options
granted have been estimated using a binomial option-pricing
model.
For the
nine months ended September 30, 2009, no stock options have been exercised
resulting in no intrinsic value for options exercised during this
period. The total intrinsic value of options exercised during
the nine months ended September 30, 2008 was $0.2 million.
A summary
of share option activity for the six month period ended September 30, 2009 is
reflected in the table below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Common
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Value
|
|
(In thousands, except per share data):
|
|
Shares
|
|
|
Share Price
|
|
|
Life(Years)
|
|
|
(in thousands)
|
|
Balance
at January 1, 2009
|
|
|
973,730 |
|
|
$ |
33.51 |
|
|
|
|
|
$ |
112 |
|
Granted
|
|
|
73,560 |
|
|
|
12.01 |
|
|
|
|
|
|
314 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
Forfeited
or expired
|
|
|
(176,684 |
) |
|
|
32.13 |
|
|
|
|
|
|
(37 |
) |
Balance
at September 30, 2009
|
|
|
870,606 |
|
|
$ |
31.98 |
|
|
|
4.0 |
|
|
$ |
389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at September 30, 2009
|
|
|
707,846 |
|
|
$ |
34.13 |
|
|
|
3.6 |
|
|
$ |
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
during the year
|
|
|
|
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
A summary
of the status of the Company’s nonvested options and restricted stock as of
September 30, 2009, and changes during the nine month period then ended, is
presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
(In dollars, except share data):
|
|
of Shares
|
|
|
Fair Value
|
|
Nonvested
options at January 1, 2009
|
|
|
134,010 |
|
|
$ |
5.15 |
|
Granted
|
|
|
73,560 |
|
|
|
3.22 |
|
Vested
|
|
|
(35,289 |
) |
|
|
4.55 |
|
Forfeited
or expired
|
|
|
(9,521 |
) |
|
|
4.23 |
|
Nonvested
options at September 30, 2009
|
|
|
162,760 |
|
|
$ |
4.46 |
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
(In dollars, except share data):
|
|
Of Shares
|
|
|
Fair Value
|
|
Restricted
stock at January 1, 2009
|
|
|
41,202 |
|
|
$ |
29.91 |
|
Granted
|
|
|
97,008 |
|
|
|
12.01 |
|
Vested
|
|
|
(5,608 |
) |
|
|
24.65 |
|
Forfeited
or expired
|
|
|
(3,292 |
) |
|
|
22.51 |
|
Restricted
stock at September 30, 2009
|
|
|
129,310 |
|
|
$ |
16.90 |
|
Total
unrecognized compensation cost related to nonvested share-based compensation
arrangements was approximately $2.3 million as of September 30,
2009. That cost is expected to be recognized over a weighted average
period of approximately 3.2 years.
Note
5 - Per Share Data
The
calculations of net income (loss) per common share for the three and nine month
periods ended September 30, 2009 and 2008 are reflected in the following
table. Basic net income (loss) per common share is computed by
dividing net income (loss) 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 income
(loss) per common share calculation method is derived by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding adjusted for the dilutive effect of common stock
equivalents.
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
(Dollars and amounts in thousands, except per
share data)
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(13,574 |
) |
|
$ |
5,359 |
|
|
$ |
(11,637 |
) |
|
$ |
19,215 |
|
Less:
Dividends - preferred stock
|
|
|
1,205 |
|
|
|
- |
|
|
|
3,607 |
|
|
|
- |
|
Net
income (loss) available to common stockholders
|
|
$ |
(14,779 |
) |
|
$ |
5,359 |
|
|
$ |
(15,244 |
) |
|
$ |
19,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS shares
|
|
|
16,467 |
|
|
|
16,380 |
|
|
|
16,439 |
|
|
|
16,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss)
|
|
$ |
(0.83 |
) |
|
$ |
0.33 |
|
|
$ |
(0.71 |
) |
|
$ |
1.18 |
|
Basic
net income (loss) per common share
|
|
$ |
(0.90 |
) |
|
$ |
0.33 |
|
|
$ |
(0.93 |
) |
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(13,574 |
) |
|
$ |
5,359 |
|
|
$ |
(11,637 |
) |
|
$ |
19,215 |
|
Less:
Dividends - preferred stock
|
|
|
1,205 |
|
|
|
- |
|
|
|
3,607 |
|
|
|
- |
|
Net
income (loss) available to common stockholders
|
|
$ |
(14,779 |
) |
|
$ |
5,359 |
|
|
$ |
(15,244 |
) |
|
$ |
19,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS shares
|
|
|
16,467 |
|
|
|
16,380 |
|
|
|
16,439 |
|
|
|
16,367 |
|
Dilutive
common stock equivalents
|
|
|
- |
|
|
|
39 |
|
|
|
- |
|
|
|
52 |
|
Dilutive
EPS shares
|
|
|
16,467 |
|
|
|
16,419 |
|
|
|
16,439 |
|
|
|
16,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$ |
(0.83 |
) |
|
$ |
0.33 |
|
|
$ |
(0.71 |
) |
|
$ |
1.17 |
|
Diluted
net income (loss) per common share
|
|
$ |
(0.90 |
) |
|
$ |
0.33 |
|
|
$ |
(0.93 |
) |
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
shares
|
|
|
789 |
|
|
|
909 |
|
|
|
961 |
|
|
|
924 |
|
Note
6 – Comprehensive Income (Loss)
The
components of total comprehensive income (loss) for the periods indicated are as
follows:
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Net
income (loss)
|
|
$ |
(11,637 |
) |
|
$ |
19,215 |
|
Investments
available-for-sale:
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains (losses) on investments
available-for-sale
|
|
|
10,852 |
|
|
|
(2,733 |
) |
Related
income tax expense (loss)
|
|
|
(4,328 |
) |
|
|
1,088 |
|
Net
investment gains (losses) reclassified into earnings
|
|
|
207 |
|
|
|
(662 |
) |
Related
income tax (expense) benefit
|
|
|
(82 |
) |
|
|
265 |
|
Net
effect on other comprehensive income (loss) for the period
|
|
|
6,649 |
|
|
|
(2,042 |
) |
|
|
|
|
|
|
|
|
|
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs
|
|
|
- |
|
|
|
(1,589 |
) |
Related
income tax benefit (expense)
|
|
|
- |
|
|
|
634 |
|
Recognition
of unrealized gain
|
|
|
1,020 |
|
|
|
295 |
|
Related
income tax benefit (expense)
|
|
|
(407 |
) |
|
|
(118 |
) |
Net
effect on other comprehensive income (loss) for the period
|
|
|
613 |
|
|
|
(778 |
) |
Total
other comprehensive income (loss)
|
|
|
7,262 |
|
|
|
(2,820 |
) |
Comprehensive
income (loss)
|
|
$ |
(4,375 |
) |
|
$ |
16,395 |
|
The
activity in accumulated other comprehensive income for the periods
indicated:
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
Defined Benefit
|
|
|
(Losses) on Investments
|
|
|
|
|
(In thousands)
|
|
Pension Plan
|
|
|
Available-for-Sale
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
$ |
(2,097 |
) |
|
$ |
1,042 |
|
|
$ |
(1,055 |
) |
Period
change, net of tax
|
|
|
(778 |
) |
|
|
(2,042 |
) |
|
|
(2,820 |
) |
Balance
at September 30, 2008
|
|
$ |
(2,875 |
) |
|
$ |
(1,000 |
) |
|
$ |
(3,875 |
) |
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
Defined Benefit
|
|
|
(Losses) on Investments
|
|
|
|
|
(In thousands)
|
|
Pension Plan
|
|
|
Available-for-Sale
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
$ |
(8,033 |
) |
|
$ |
461 |
|
|
$ |
(7,572 |
) |
Period
change, net of tax
|
|
|
613 |
|
|
|
6,649 |
|
|
|
7,262 |
|
Balance
at September 30, 2009
|
|
$ |
(7,420 |
) |
|
$ |
7,110 |
|
|
$ |
(310 |
) |
Note
7 - 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 has
not yet determined the amount of its 2009 contribution to the plan.
Net
periodic benefit cost for the periods indicated includes the following
components:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
cost on projected benefit obligation
|
|
$ |
361 |
|
|
$ |
356 |
|
|
$ |
1,076 |
|
|
$ |
1,066 |
|
Expected
return on plan assets
|
|
|
(300 |
) |
|
|
(326 |
) |
|
|
(942 |
) |
|
|
(978 |
) |
Amortization
of prior service cost
|
|
|
- |
|
|
|
(1,501 |
) |
|
|
- |
|
|
|
(1,589 |
) |
Recognized
net actuarial loss
|
|
|
342 |
|
|
|
97 |
|
|
|
1,020 |
|
|
|
295 |
|
Net
periodic benefit cost
|
|
$ |
403 |
|
|
$ |
(1,374 |
) |
|
$ |
1,154 |
|
|
$ |
(1,206 |
) |
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. 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 $1.0 million and $1.1
million for the nine month periods ended September 30, 2009 and 2008,
respectively, and $0.3 million and $0.4 million for the three month
periods ended September 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. There was no expense recognized for the nine
and three months ended September 30, 2009. The expense recognized for
the nine month periods ended September 30, 2008 was $0.4
million. There was no expense for the three month period ended
September 30, 2008.
Executive Incentive
Retirement Plan
In past
years, the Company had Supplemental Executive Retirement Agreements ("SERAs")
with its executive officers providing for retirement income benefits as well as
pre-retirement death benefits. Retirement benefits payable under the SERAs, if
any, were integrated with other pension plan and Social Security retirement
benefits expected to be received by the executive. The Company accrued the
present value of these benefits over the remaining number of years to the
executives' retirement dates. Effective January 1, 2008, these agreements were
replaced with a defined contribution plan, the “Executive Incentive Retirement
Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as
of December 31, 2007, and those amounts accrued were transferred to the new plan
on behalf of each participant. Additionally, under the new Plan, officers
designated by the board of directors earn a deferral bonus which is accrued
annually based on the Company’s financial performance compared to a selected
group of peer banks. For current participants, accruals after January 1, 2008
vest immediately. Amounts transferred to the Plan from the SERAs on
behalf of each participant continue to vest based on years of
service. 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 $0.3 million and $0.4 million for the nine months ended September
30, 2009 and 2008, respectively, and $0.1 million and $0.2 million for the three
month periods ended September 30, 2009 and 2008, respectively.
Note
8 - Segment Reporting
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing, and Investment Management. Each of the operating segments is a
strategic business unit that offers a specific set of products and services. The
Insurance, Leasing, and Investment Management segments are businesses that were
acquired in previous years in acquisition transactions. 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 the
acquired entities totaling $0.8 million and $0.6 million for the three month
periods ended September 30, 2009 and 2008, respectively. For the nine month
periods ended September 30, 2009 and 2008, the amortization related to acquired
entities totaled $2.4 million and $2.5 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 $0.1 million for both the
three month periods ended September 30, 2009 and 2008, respectively. For the
nine month periods ended September 30, 2009 and 2008, respectively, amortization
related to acquired entities totaled $0.2 million and $0.3
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 $695.0 million in
assets under management as of September 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 September 30, 2009 and 2008, and $0.6
million for both of the nine month periods ended September 30, 2009 and
2008.
Information
about operating segments and reconciliation of such information to the
Consolidated Financial Statements is reflected in the following tables for the
periods indicated:
|
|
Three Months Ended September 30,
2009
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
38,823 |
|
|
$ |
2 |
|
|
$ |
551 |
|
|
$ |
1 |
|
|
$ |
(192 |
) |
|
$ |
39,185 |
|
Interest
expense
|
|
|
12,785 |
|
|
|
- |
|
|
|
190 |
|
|
|
- |
|
|
|
(192 |
) |
|
|
12,783 |
|
Provision
for loan and lease losses
|
|
|
34,450 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
34,450 |
|
Noninterest
income
|
|
|
8,302 |
|
|
|
1,224 |
|
|
|
88 |
|
|
|
1,201 |
|
|
|
(153 |
) |
|
|
10,662 |
|
Noninterest
expenses
|
|
|
24,563 |
|
|
|
1,174 |
|
|
|
126 |
|
|
|
857 |
|
|
|
(153 |
) |
|
|
26,567 |
|
Income
(loss) before income taxes
|
|
|
(24,673 |
) |
|
|
52 |
|
|
|
323 |
|
|
|
345 |
|
|
|
- |
|
|
|
(23,953 |
) |
Income
tax expense (benefit)
|
|
|
(10,653 |
) |
|
|
21 |
|
|
|
118 |
|
|
|
135 |
|
|
|
- |
|
|
|
(10,379 |
) |
Net
income (loss)
|
|
$ |
(14,020 |
) |
|
$ |
31 |
|
|
$ |
205 |
|
|
$ |
210 |
|
|
$ |
- |
|
|
$ |
(13,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,644,641 |
|
|
$ |
12,348 |
|
|
$ |
28,147 |
|
|
$ |
11,931 |
|
|
$ |
(64,676 |
) |
|
$ |
3,632,391 |
|
|
|
Three Months Ended September 30,
2008
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
41,618 |
|
|
$ |
8 |
|
|
$ |
730 |
|
|
$ |
6 |
|
|
$ |
(314 |
) |
|
$ |
42,048 |
|
Interest
expense
|
|
|
13,975 |
|
|
|
- |
|
|
|
300 |
|
|
|
- |
|
|
|
(314 |
) |
|
|
13,961 |
|
Provision
for loan and lease losses
|
|
|
6,545 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,545 |
|
Noninterest
income
|
|
|
8,292 |
|
|
|
1,474 |
|
|
|
128 |
|
|
|
1,137 |
|
|
|
(152 |
) |
|
|
10,879 |
|
Noninterest
expenses
|
|
|
21,033 |
|
|
|
1,273 |
|
|
|
2,301 |
|
|
|
812 |
|
|
|
(152 |
) |
|
|
25,267 |
|
Income
(loss) before income taxes
|
|
|
8,357 |
|
|
|
209 |
|
|
|
(1,743 |
) |
|
|
331 |
|
|
|
- |
|
|
|
7,154 |
|
Income
tax expense (benefit)
|
|
|
2,355 |
|
|
|
88 |
|
|
|
(778 |
) |
|
|
130 |
|
|
|
- |
|
|
|
1,795 |
|
Net
income (loss)
|
|
$ |
6,002 |
|
|
$ |
121 |
|
|
$ |
(965 |
) |
|
$ |
201 |
|
|
$ |
- |
|
|
$ |
5,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,201,243 |
|
|
$ |
12,296 |
|
|
$ |
36,421 |
|
|
$ |
11,432 |
|
|
$ |
(66,275 |
) |
|
$ |
3,195,117 |
|
|
|
Nine Months Ended September 30,
2009
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
115,434 |
|
|
$ |
5 |
|
|
$ |
1,785 |
|
|
$ |
4 |
|
|
$ |
(647 |
) |
|
$ |
116,581 |
|
Interest
expense
|
|
|
40,714 |
|
|
|
- |
|
|
|
639 |
|
|
|
- |
|
|
|
(647 |
) |
|
|
40,706 |
|
Provision
for loan and lease losses
|
|
|
55,678 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
55,678 |
|
Noninterest
income
|
|
|
25,773 |
|
|
|
4,733 |
|
|
|
231 |
|
|
|
3,388 |
|
|
|
(459 |
) |
|
|
33,666 |
|
Noninterest
expenses
|
|
|
71,247 |
|
|
|
3,767 |
|
|
|
479 |
|
|
|
2,641 |
|
|
|
(459 |
) |
|
|
77,675 |
|
Income
(loss) before income taxes
|
|
|
(26,432 |
) |
|
|
971 |
|
|
|
898 |
|
|
|
751 |
|
|
|
- |
|
|
|
(23,812 |
) |
Income
tax expense (benefit)
|
|
|
(13,210 |
) |
|
|
392 |
|
|
|
350 |
|
|
|
293 |
|
|
|
- |
|
|
|
(12,175 |
) |
Net
income (loss)
|
|
$ |
(13,222 |
) |
|
$ |
579 |
|
|
$ |
548 |
|
|
$ |
458 |
|
|
$ |
- |
|
|
$ |
(11,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,644,641 |
|
|
$ |
12,348 |
|
|
$ |
28,147 |
|
|
$ |
11,931 |
|
|
$ |
(64,676 |
) |
|
$ |
3,632,391 |
|
|
|
Nine Months Ended September 30,
2008
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
126,515 |
|
|
$ |
40 |
|
|
$ |
2,186 |
|
|
$ |
26 |
|
|
$ |
(952 |
) |
|
$ |
127,815 |
|
Interest
expense
|
|
|
46,095 |
|
|
|
- |
|
|
|
887 |
|
|
|
- |
|
|
|
(952 |
) |
|
|
46,030 |
|
Provision
for loan and lease losses
|
|
|
15,221 |
|
|
|
- |
|
|
|
180 |
|
|
|
- |
|
|
|
- |
|
|
|
15,401 |
|
Noninterest
income
|
|
|
26,692 |
|
|
|
5,203 |
|
|
|
386 |
|
|
|
3,446 |
|
|
|
(457 |
) |
|
|
35,270 |
|
Noninterest
expenses
|
|
|
65,608 |
|
|
|
4,052 |
|
|
|
2,988 |
|
|
|
2,665 |
|
|
|
(457 |
) |
|
|
74,856 |
|
Income
(loss) before income taxes
|
|
|
26,283 |
|
|
|
1,191 |
|
|
|
(1,483 |
) |
|
|
807 |
|
|
|
- |
|
|
|
26,798 |
|
Income
tax expense (benefit)
|
|
|
7,383 |
|
|
|
485 |
|
|
|
(600 |
) |
|
|
315 |
|
|
|
- |
|
|
|
7,583 |
|
Net
income (loss)
|
|
$ |
18,900 |
|
|
$ |
706 |
|
|
$ |
(883 |
) |
|
$ |
492 |
|
|
$ |
- |
|
|
$ |
19,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,201,243 |
|
|
$ |
12,296 |
|
|
$ |
36,421 |
|
|
$ |
11,432 |
|
|
$ |
(66,275 |
) |
|
$ |
3,195,117 |
|
Note
9- Fair Value Measurements
Generally
accepted accounting principles provides entities the option to measure eligible
financial assets, financial liabilities and 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 commitment. Subsequent changes in fair value must be
recorded in earnings
As of
January 1, 2008, the Company adopted the fair value option for mortgage loans
held for sale. The Company believes by electing the fair value option
on residential mortgage loans held for sale, it will allow the accounting for
gains on sale of 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 nine month
periods ending September 30, 2009 and 2008, respectively.
Simultaneously
with the adoption of the fair value option, the Company adopted the standards
for fair value measurement which 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. Fair value measurements are not adjusted for
transaction costs. The standard for fair value measurement
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 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 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
are 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.
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.
Assets Measured at Fair
Value on a Recurring Basis
The
following table set forth the Company’s financial assets and liabilities at
September 30, 2009, 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:
|
|
At September 30, 2009
|
|
(In thousands)
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans held-for-sale
|
|
$ |
- |
|
|
$ |
10,926 |
|
|
$ |
- |
|
|
$ |
10,926 |
|
Investments
available-for-sale
|
|
|
- |
|
|
|
804,065 |
|
|
|
3,080 |
|
|
|
807,145 |
|
Interest
rate swap agreements
|
|
|
- |
|
|
|
565 |
|
|
|
- |
|
|
|
565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
- |
|
|
$ |
(565 |
) |
|
$ |
- |
|
|
$ |
(565 |
) |
|
|
At December 31, 2008
|
|
(In thousands)
|
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans held-for-sale
|
|
$ |
- |
|
|
$ |
11,391 |
|
|
$ |
- |
|
|
$ |
11,391 |
|
Investments
available-for-sale
|
|
|
- |
|
|
|
288,573 |
|
|
|
3,154 |
|
|
|
291,727 |
|
Interest
rate swap agreements
|
|
|
- |
|
|
|
307 |
|
|
|
- |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
- |
|
|
$ |
(307 |
) |
|
$ |
- |
|
|
$ |
(307 |
) |
The
Company owns $4.7 million of collateralized debt obligation securities that are
backed by pooled trust preferred securities issued by banks, thrifts, and
insurance companies that have exhibited limited activity due to the state
of the economy at September 30, 2009 and December 31, 2008. 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 September 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.
|
The
following table provides unrealized losses included in assets measured in the
consolidated balance sheets at fair value on a recurring basis that are still
held at September 30, 2009.
|
|
Significant
Unobservable
|
|
|
|
Inputs
|
|
(In thousands)
|
|
(Level 3)
|
|
Investments
available-for-sale:
|
|
|
|
Balance
at December 31, 2008
|
|
$ |
3,154 |
|
Total
unrealized losses included in other comprehensive income
(loss)
|
|
|
(74 |
) |
Balance
at September 30, 2009
|
|
$ |
3,080 |
|
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:
|
|
At September 30, 2009
|
|
|
|
Quoted
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets for
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Identical
Assets
|
|
|
Observable
Inputs
|
|
|
Unobservable
Inputs
|
|
|
|
|
|
Total
|
|
(In thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Losses
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
93,121 |
|
|
$ |
93,121 |
|
|
$ |
4,385 |
|
Impaired
loans totaling $110.2 million were written down to fair value of $93.1 million
as a result of loan loss reserves of $17.1 million associated with the impaired
loans which was included in our allowance for loan losses. Impaired
loans totaled $52.6 million at December 31, 2008.
Impaired
loans are evaluated and valued at the lower of cost or market value at the time
the loan is identified as impaired. Market value is measured based on
the value of the collateral securing these loans and is classified at a
level 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 96.5% of the Company's assets
and 99.0% of its liabilities at September 30, 2009 and December 31, 2008,
respectively. 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 for
the periods indicated:
|
|
At
September 30, 2009
|
|
|
At
December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In
thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$ |
99,936 |
|
|
$ |
99,936 |
|
|
$ |
116,620 |
|
|
$ |
116,620 |
|
Investments
available-for-sale
|
|
|
807,145 |
|
|
|
807,145 |
|
|
|
291,727 |
|
|
|
291,727 |
|
Investments
held-to-maturity and other equity securities
|
|
|
173,301 |
|
|
|
179,573 |
|
|
|
200,764 |
|
|
|
205,054 |
|
Loans,
net of allowances
|
|
|
2,334,282 |
|
|
|
2,235,808 |
|
|
|
2,440,120 |
|
|
|
2,467,993 |
|
Accrued
interest receivable and other assets (2)
|
|
|
89,377 |
|
|
|
89,377 |
|
|
|
85,219 |
|
|
|
85,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
2,683,487 |
|
|
$ |
2,575,949 |
|
|
$ |
2,365,257 |
|
|
$ |
2,380,527 |
|
Short-term
borrowings
|
|
|
491,702 |
|
|
|
518,740 |
|
|
|
421,074 |
|
|
|
462,130 |
|
Long-term
borrowings
|
|
|
39,263 |
|
|
|
25,005 |
|
|
|
101,584 |
|
|
|
103,495 |
|
Accrued
interest payable and other liabilities (2)
|
|
|
3,366 |
|
|
|
3,366 |
|
|
|
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
|
GENERAL
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 September 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) the requirement 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) the
requirement 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: a
general reserve 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 Credit Risk Committee of the
board of directors and formally approved quarterly by that same committee of the
board.
The
general reserve 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 82% of the total allowance at
September 30, 2009 and 70% at December 31, 2008.
The
specific allowance is used primarily to establish allowances for risk-rated
credits on an individual basis, and accounted for 18% of the total allowance at
September 30, 2009 and 30% at 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 current accounting guidance, 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 use 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 October 1 of 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 typically 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
September 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 by recording 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. The Company’s
accounting policy follows the prescribed authoritative guidance that a minimal
probability threshold of a tax position must be met 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 statement of income. Assessment of uncertain tax positions
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 applicable reporting and accounting
requirements.
Management
expects that the Company’s adherence to the required accounting guidance may
result in increased volatility in quarterly and annual effective income tax
rates because of the requirement 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, in accordance with applicable accounting standards, measures certain
financial assets and liabilities at fair value. Significant financial
instruments that are measured at fair value on a recurring basis are investment
securities available for sale and interest rate swap agreements. In
addition, the Company has elected, at its option, to measure mortgage loans held
for sale at fair value. Loans where it is probable that the Company will not
collect all principal and interest payments according to the contractual terms
are considered impaired loans and are measured on a nonrecurring
basis.
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 excludes intangible asset amortization, the
goodwill impairment loss and, if applicable, the pension prior service
credit. 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
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
26,567 |
|
|
$ |
25,267 |
|
|
$ |
77,675 |
|
|
$ |
74,856 |
|
Net
interest income plus noninterest income
|
|
|
37,064 |
|
|
|
38,966 |
|
|
|
109,541 |
|
|
|
117,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–GAAP
|
|
|
71.68 |
% |
|
|
64.84 |
% |
|
|
70.91 |
% |
|
|
63.95 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expenses
|
|
$ |
26,567 |
|
|
$ |
25,267 |
|
|
$ |
77,675 |
|
|
$ |
74,856 |
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
1,048 |
|
|
|
1,103 |
|
|
|
3,150 |
|
|
|
3,344 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
2,250 |
|
|
|
- |
|
|
|
2,250 |
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
prior service credit
|
|
|
- |
|
|
|
1,473 |
|
|
|
- |
|
|
|
1,473 |
|
Noninterest
expenses as adjusted
|
|
$ |
25,519 |
|
|
$ |
23,387 |
|
|
$ |
74,525 |
|
|
$ |
70,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus noninterest income
|
|
$ |
37,064 |
|
|
$ |
38,966 |
|
|
$ |
109,541 |
|
|
$ |
117,055 |
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent
income
|
|
|
1,331 |
|
|
|
1,180 |
|
|
|
3,463 |
|
|
|
3,381 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains (losses)
|
|
|
15 |
|
|
|
9 |
|
|
|
207 |
|
|
|
662 |
|
Net
interest income plus noninterest income - as adjusted
|
|
$ |
38,380 |
|
|
$ |
40,137 |
|
|
$ |
112,797 |
|
|
$ |
119,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–Non-GAAP
|
|
|
66.49 |
% |
|
|
58.27 |
% |
|
|
66.07 |
% |
|
|
59.06 |
% |
The
Company's total assets were $3.6 billion at September 30, 2009, increasing
$318.8 million or 10% during the first nine months of 2009. Earning
assets increased by 10% or $317.6 million in the first nine months of 2009 to
$3.4 billion at September 30, 2009. These increases were mainly the
result of an increase of 99% in investments which was driven by the growth in
deposits.
Total
loans and leases, excluding loans held for sale, decreased 6% or $156.4 million
during the first nine months of 2009, to $2.3 billion. This decrease was due
primarily to a decline in the residential mortgage loan portfolio which
decreased by $76.2 million or 12% due primarily to a decline in residential
construction loans. Consumer loans remained virtually level during
the period while commercial loans decreased $75.5 million or 5% due mainly to
declines in commercial and commercial construction loans. Residential mortgage
loans held for sale decreased by $0.5 million from December 31, 2008, to $10.9
million at September 30, 2009.
Table 2 –
Analysis of Loans and Leases
The
following table presents the trends in the composition of the loan and lease
portfolio for the periods indicated:
|
|
September
30,
|
|
|
|
|
|
December
31,
|
|
|
|
|
(Dollars in thousands)
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
Residential
real estate
|
|
$ |
570,570 |
|
|
|
24.4 |
% |
|
$ |
646,820 |
|
|
|
26.0 |
% |
Commercial
loans and leases
|
|
|
1,362,089 |
|
|
|
58.4 |
|
|
|
1,437,599 |
|
|
|
57.7 |
|
Consumer
|
|
|
401,623 |
|
|
|
17.2 |
|
|
|
406,227 |
|
|
|
16.3 |
|
Total
Loans and Leases
|
|
|
2,334,282 |
|
|
|
100.0 |
% |
|
|
2,490,646 |
|
|
|
100.0 |
% |
Less:
Allowance for credit losses
|
|
|
(62,937 |
) |
|
|
|
|
|
|
(50,526 |
) |
|
|
|
|
Net
loans and leases
|
|
$ |
2,271,345 |
|
|
|
|
|
|
$ |
2,440,120 |
|
|
|
|
|
The total
investment portfolio increased by 99% or $488.0 million from December 31, 2008,
to $980.4 million at September 30, 2009. The increase was due mainly
to increases of $515.4 million or 177% in available-for-sale securities and $3.6
million or 12% in other equity securities, which were somewhat offset by a
decrease of $31.1 million or 18% in held-to-maturity securities. The increases
were the result of an increase in deposits resulting primarily from the
introduction of the Company’s Premier Money Market product in the second quarter
of 2009 and a lack of loan demand. The aggregate of federal funds sold and
interest-bearing deposits with banks decreased by $13.6 million during the first
nine months of 2009, reaching $46.9 million at September 30, 2009.
Table 3 –
Analysis of Deposits
The
following table presents the trends in the composition of deposits for the
periods indicated:
(Dolloars in thousands)
|
|
September 30,
2009
|
|
|
%
|
|
|
December 31,
2008
|
|
|
%
|
|
Noninterest-bearing
deposits
|
|
$ |
573,601 |
|
|
|
21.4 |
% |
|
$ |
461,517 |
|
|
|
19.5 |
% |
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
|
|
|
251,456 |
|
|
|
9.4 |
|
|
|
243,986 |
|
|
|
10.3 |
|
Money
market savings
|
|
|
896,658 |
|
|
|
33.4 |
|
|
|
664,837 |
|
|
|
28.1 |
|
Regular
savings
|
|
|
152,099 |
|
|
|
5.6 |
|
|
|
146,140 |
|
|
|
6.2 |
|
Time
deposits less than $100,000
|
|
|
452,894 |
|
|
|
16.9 |
|
|
|
477,148 |
|
|
|
20.2 |
|
Time
deposits $100,000 or more
|
|
|
356,779 |
|
|
|
13.3 |
|
|
|
371,629 |
|
|
|
15.7 |
|
Total
interest-bearing
|
|
|
2,109,886 |
|
|
|
78.6 |
|
|
|
1,903,740 |
|
|
|
80.5 |
|
Total
deposits
|
|
$ |
2,683,487 |
|
|
|
100.0 |
% |
|
$ |
2,365,257 |
|
|
|
100.0 |
% |
Total
deposits were $2.7 billion at September 30, 2009, increasing $318.2 million or
13% from December 31, 2008. During the first nine months of 2009, growth rates
of 24% were achieved for noninterest bearing demand deposits (up $112.1
million), 35% for money market deposits (up $231.8 million), 4% for
interest-bearing regular savings (up $6.0 million) and 3% for interest bearing
demand deposits (up $7.5 million). Over the same period, decreases of 5% were
recorded for time deposits less than $100,000 (down $24.3 million) and 4% for
time deposits of $100,000 or more (down $14.9 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 Premier
money market product which has been priced very competitively.
Total
borrowings were $531.0 million at September 30, 2009, which represented an
increase of $8.3 million or 2% 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
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
-15.83%. This is also well within our prescribed policy limit of
25%.
Estimated
Changes in Net Interest Income
Change
in Interest Rates:
|
|
|
+
400 |
bp |
|
|
+
300 |
bp |
|
|
+
200 |
bp |
|
|
+
100 |
bp |
|
|
-
100 |
bp |
|
|
-
200 |
bp |
|
|
-300 |
bp |
|
|
-400 |
bp |
Policy
Limit
|
|
|
-25.00 |
% |
|
|
-20.00 |
% |
|
|
-17.50 |
% |
|
|
-12.50 |
% |
|
|
-12.50 |
% |
|
|
-17.50 |
% |
|
|
-20.00 |
% |
|
|
-25.00 |
% |
September
30, 2009
|
|
|
-15.83 |
% |
|
|
-9.72 |
% |
|
|
-4.28 |
% |
|
|
-0.99 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
December
31, 2008
|
|
|
4.19 |
% |
|
|
4.81 |
% |
|
|
4.35 |
% |
|
|
2.80 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
The
measures of equity value at risk indicate the ongoing economic value of the
Company by considering the effects of changes in interest rates on all of the
Company’s cash flows, and discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity,
which, in theory, approximates the fair value of the Company’s net
assets.
Estimated
Changes in Economic Value of Equity (EVE)
Change
in Interest Rates:
|
|
|
+
400 |
bp |
|
|
+
300 |
bp |
|
|
+
200 |
bp |
|
|
+
100 |
bp |
|
|
-
100 |
bp |
|
|
-
200 |
bp |
|
|
-300 |
bp |
|
|
-400 |
bp |
Policy
Limit
|
|
|
-40.00 |
% |
|
|
-30.00 |
% |
|
|
-22.50 |
% |
|
|
-10.00 |
% |
|
|
-12.50 |
% |
|
|
-22.50 |
% |
|
|
-30.00 |
% |
|
|
-40.00 |
% |
September
30, 2009
|
|
|
-20.33 |
% |
|
|
-10.23 |
% |
|
|
-4.90 |
% |
|
|
0.15 |
% |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
December
31, 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 -20.33%. 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 September 30, 2009 showed short-term investments exceeding short-term
borrowings over the subsequent 360 days by $53.7 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
borrowings.
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 $1.1
billion, of which $498.5 million was available based on pledged collateral with
$411.8 million outstanding at September 30, 2009. The line of credit at the
Federal Reserve totaled $332.7 million, all of which was available for borrowing
based on pledged collateral, with no borrowings against it as of September 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 September 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 September 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 September 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 and the
payment of interest to holders of its subordinated debentures. 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. As a result of dividends
paid in prior periods, in addition to net losses incurred in the past nine
months, further future dividend distributions will be subject to regulatory
review and approval.
The
following is a schedule of significant commitments:
(In thousands)
|
|
September 30,
2009
|
|
Commitments
to extend credit:
|
|
|
|
Unused
lines of credit (home equity and business)
|
|
$ |
631,840 |
|
Other
commitments to extend credit
|
|
|
98,547 |
|
Standby
letters of credit
|
|
|
65,233 |
|
Total
commitments to extend credit:
|
|
$ |
795,620 |
|
Capital
Management
The
Company recorded a total risk-based capital ratio of 13.23% at September 30,
2009, compared to 13.82% at December 31, 2008; a tier 1 risk-based capital ratio
of 11.96%, compared to 12.56%; and a tier 1 leverage ratio of 9.31%, compared to
11.00%. These decreases resulted from a combination of the decrease
in operating results and growth in the Company’s assets for the nine month
period ending September 30, 2009. Capital adequacy, as measured by these ratios,
was well above regulatory requirements. Management believes the level
of capital at September 30, 2009, is appropriate.
The net
loss for the nine months ended September 30, 2009 coupled with the dividends
paid during the same period reduced capital by $20.7 million from December 31,
2008. This reduction was partially offset by other comprehensive
gains of $7.3 million that were the result of unrealized securities gains on
securities available for sale due to the improved market condition during the
nine month period. Dividends for the first nine months of the year
were $0.36 per share in 2009, compared to $0.72 per share in
2008. This reduction was the result of the Company’s efforts to
preserve capital.
In
December 2008, as part of the Troubled Asset Relief Program (“TARP”) Capital
Purchase Program, the Company entered into a Purchase Agreement with the United
States Department of the Treasury, pursuant to which the Company sold 83,094
shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A and a
warrant to purchase 651,547 shares of the Company’s common stock, for an
aggregate price of $83.1 million in cash. This capital is considered
Tier 1 regulatory capital.
The
senior preferred stock pays a dividend of 5% per year for the first five
years and resets to 9% per year thereafter. The senior preferred shares are
callable at par after three years and can be redeemed prior to three years at
100% of the issue price, subject to the approval of the Company’s federal
regulator. Dividends paid on the senior shares are cumulative.
The
warrant was issued with an initial exercise price of $19.13. The warrant has a
ten year term and is exercisable immediately, in whole or in part. The Treasury
Department has agreed not to vote any common shares acquired upon exercise of
the warrant. Should the Company raise common or perpetual preferred equity equal
to or at least 100% of the senior preferred shares issued under TARP by
December 31, 2009, the number of shares relating to the warrant shall be
reduced by 50%.
In
conjunction with the issuance of the senior preferred shares and the warrant,
the warrant was allocated a portion of the $83.1 million issuance proceeds as
required by current accounting standards. The allocation of this value was based
on the relative fair value of the senior preferred shares and the warrant to the
combined fair value. Accordingly, the allocated value of the warrant was
determined to be $3.7 million, which was allocated from the proceeds and
recorded in additional paid-in capital in the consolidated balance sheet. This
non-cash amount is considered a discount to the preferred stock and will be
amortized over a five year period using the interest method and accreted as a
dividend recorded on the senior preferred shares. The warrant is included in the
diluted average common shares outstanding.
The fair
value of the preferred stock was determined using the net present value of cash
flows projected over seven years and discounted at a 14.00% rate. The
rate selected was estimated to be the rate that the Company would have to pay
had the Company issued its own preferred stock. This rate was
comparable to the rates selected by our peer banks. The seven year
cash flow was selected for the preferred stock since it is the Company’s
intention to redeem the preferred stock prior to the ten year maturity and
minimize the impact of 9% dividend rate.
Under the
terms of the transaction documents, the preferred stock may be redeemed but the
warrant could still be outstanding. The fair value of the warrant was
determined using the binomial pricing model and incorporated the following
assumptions:
Contractual
Term
|
|
10
years
|
|
Expected
Life
|
|
10
years
|
|
Exercise
Price
|
|
$ |
19.13 |
|
Fair
Value of Company Stock
|
|
$ |
19.36 |
|
Risk-free
Rate over the Expected Life
|
|
|
2.65 |
% |
Expected
Volatility
|
|
|
30.08 |
% |
Expected
Dividend Yield
|
|
|
3.85 |
% |
The fair
value amounts of the preferred stock and the warrant were used to allocate $83.1
million proceeds received between preferred stock and additional paid-in capital
using the relative fair value approach as discussed in the previous
paragraphs.
B.
RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
SEPTEMBER 30, 2008
Net
income available to common shareholders for the first nine months of the year
decreased $34.4 million or 179% to a loss of $15.2 million in 2009 from net
income of $19.2 million in 2008, representing annualized returns on average
common equity of (6.59%) in 2009 and 8.04% in 2008,
respectively. Diluted earnings (loss) per common share (“EPS”) for
the first nine months of the year was ($0.93) in 2009, compared to $1.17 in
2008.
Net
interest income declined by $5.9 million, or 7%, to $75.9 million for the first
nine months of 2009, while total noninterest income decreased by $1.6 million,
or 5% for the period. In addition, noninterest expenses increased by $2.8
million, or 4% compared to the prior year period.
The
decrease in net interest income was due to a 98 basis point decline in the yield
on loans and a 157 basis point decline in the yield on investments which
exceeded the 52 basis point decline on interest-bearing liabilities. The decline
in the net interest margin reflects the shift of a larger proportion of
interest-earning assets into investments, the Company’s current asset sensitive
position and the growth in nonperforming assets, as well as the growth in the
Company’s 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 74 basis points to 3.25% for
the nine months ended September 30, 2009, from 3.99% for the same period of
2008.
Table 4 —
Consolidated Average Balances, Yields and Rates
|
|
For the nine months ended
September 30,
|
|
|
|
2009
|
|
|
2008
|
|
(Dollars in thousands and tax
equivalent)
|
|
Average
Balance
|
|
|
Interest (1)
|
|
|
Average
Yield/Rate
|
|
|
Average
Balance
|
|
|
Interest (1)
|
|
|
Average
Yield/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans and leases (2)
|
|
$ |
2,446,363 |
|
|
$ |
97,233 |
|
|
|
5.31 |
% |
|
$ |
2,393,470 |
|
|
$ |
112,746 |
|
|
|
6.29 |
% |
Total
securities
|
|
|
756,939 |
|
|
|
22,696 |
|
|
|
4.02 |
|
|
|
427,345 |
|
|
|
17,842 |
|
|
|
5.59 |
|
Other
earning assets
|
|
|
60,071 |
|
|
|
115 |
|
|
|
0.26 |
|
|
|
31,500 |
|
|
|
608 |
|
|
|
2.58 |
|
Total
earning assets
|
|
|
3,263,373 |
|
|
|
120,044 |
|
|
|
4.92 |
|
|
|
2,852,315 |
|
|
|
131,196 |
|
|
|
6.14 |
|
Nonearning
assets
|
|
|
255,057 |
|
|
|
|
|
|
|
|
|
|
|
272,413 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,518,430 |
|
|
|
|
|
|
|
|
|
|
$ |
3,124,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
251,257 |
|
|
|
326 |
|
|
|
0.17 |
|
|
$ |
244,943 |
|
|
|
528 |
|
|
|
0.29 |
|
Money
market savings deposits
|
|
|
809,442 |
|
|
|
8,690 |
|
|
|
1.44 |
|
|
|
680,189 |
|
|
|
9,760 |
|
|
|
1.92 |
|
Regular
savings deposits
|
|
|
151,942 |
|
|
|
177 |
|
|
|
0.16 |
|
|
|
156,093 |
|
|
|
365 |
|
|
|
0.31 |
|
Time
deposits
|
|
|
833,955 |
|
|
|
18,925 |
|
|
|
3.03 |
|
|
|
760,569 |
|
|
|
22,277 |
|
|
|
3.91 |
|
Total
interest-bearing deposits
|
|
|
2,046,596 |
|
|
|
28,118 |
|
|
|
1.84 |
|
|
|
1,841,794 |
|
|
|
32,930 |
|
|
|
2.39 |
|
Short-term
borrowings
|
|
|
480,969 |
|
|
|
10,757 |
|
|
|
3.00 |
|
|
|
397,432 |
|
|
|
9,886 |
|
|
|
3.32 |
|
Long-term
borrowings
|
|
|
52,838 |
|
|
|
1,831 |
|
|
|
4.62 |
|
|
|
100,591 |
|
|
|
3,214 |
|
|
|
4.26 |
|
Total
interest-bearing liabilities
|
|
|
2,580,403 |
|
|
|
40,706 |
|
|
|
2.11 |
|
|
|
2,339,817 |
|
|
|
46,030 |
|
|
|
2.63 |
|
Noninterest-bearing
demand deposits
|
|
|
512,384 |
|
|
|
|
|
|
|
|
|
|
|
435,725 |
|
|
|
|
|
|
|
|
|
Other
noninterest-bearing liabilities
|
|
|
33,494 |
|
|
|
|
|
|
|
|
|
|
|
30,115 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
392,149 |
|
|
|
|
|
|
|
|
|
|
|
319,071 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,518,430 |
|
|
|
|
|
|
|
|
|
|
$ |
3,124,728 |
|
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
|
|
79,338 |
|
|
|
2.81 |
% |
|
|
|
|
|
|
85,166 |
|
|
|
3.51 |
% |
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
3,463 |
|
|
|
|
|
|
|
|
|
|
|
3,381 |
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
75,875 |
|
|
|
|
|
|
|
|
|
|
$ |
81,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.25 |
% |
|
|
|
|
|
|
|
|
|
|
3.99 |
% |
Ratio
of average earning assets to Average interest-bearing
liabilities
|
|
|
126.47 |
% |
|
|
|
|
|
|
|
|
|
|
121.90 |
% |
|
|
|
|
|
|
|
|
|
(1)
|
Interest
income includes the effects of annualized tax-equivalent adjustments
(reduced by the nondeductible portion of interest expense) using the
appropriate marginal federal income tax rate of 35.00% and, where
applicable, the marginal state income tax rate of 8.25% or a combined
marginal federal and state tax of 39.88% for 2009 and 2008, to increase
tax-exempt interest income to a tax equivalent basis. The
annualized tax-equivalent adjustments utilized in the above table to
compute yields aggregated to $4.6 million in 2009 and $4.5 million in
2008.
|
|
(2)
|
Non-accrual
loans are included in the average
balances.
|
|
(3)
|
Net
interest margin is equal to the annualized net interest income on a
tax-equivalent basis divided by total interest-earning
assets.
|
Net
Interest Income
Net
interest income for the first nine months of 2009 was $75.9 million, a decrease
of 7% from $81.8 million in 2008, due primarily to a 122 basis point decline in
tax equivalent yield on earning assets, which exceeded a 52 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 7%, to $79.3 million in 2009 from $85.2
million in 2008. The effects of changes in average balances, yields
and rates are presented in Table 5.
For the
first nine months of 2009, total interest income decreased by $11.2 million or
9%, compared to 2008. On a non-GAAP tax-equivalent basis, interest
income also decreased by 9%. Average earning assets increased by 14%
versus the prior period to $3.3 billion from $2.9 billion, while the average
yield earned on those assets decreased by 122 basis points to
4.92%. Comparing the first nine months of 2009 versus the same period
in 2008, average total loans and leases grew by 2% to $2.4 billion (a decline to
75% of average earning assets, versus 84% a year ago), while recording a 98
basis point decrease in average yield to 5.31%. Average commercial
loans and leases increased by 5% (due to an increase in commercial mortgages);
average consumer loans increased by 6% (attributable primarily to home equity
line growth); while residential real estate loans decreased by 5% (primarily due
to a decrease in construction lending). Over the same period, average
total securities increased by 77% to $756.9 million (23% of average earning
assets, versus 15% a year ago), while the average yield earned on those assets
decreased by 157 basis points to 4.02%. 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 and the Company’s more conservative underwriting
standards. The increased growth in average total securities was due mainly to
the investment of the proceeds resulting from the successful launch of the
Premier Money Market product earlier in the year as part of the Company’s
Operation Take Share campaign to grow deposit market share.
Interest
expense for the first nine months of the year decreased by $5.3 million or 12%
in 2009 compared to 2008. Average total interest-bearing liabilities increased
by 10% over the prior year period, while the average rate paid on these funds
decreased by 52 basis points to 2.11%. As shown in Table 4, all
categories of interest-bearing liabilities, except long-term borrowings, 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
|
|
For the nine months ended
September 30,
|
|
|
|
2009
vs. 2008
|
|
|
2008
vs. 2007
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
|
|
|
Or
|
|
|
Due
to Change In Average:*
|
|
|
Or
|
|
|
Due
to Change In Average:*
|
|
(Dollars
in thousands and tax equivalent)
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
|
(Decrease)
|
|
|
Volume
|
|
|
Rate
|
|
Interest
income from earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases
|
|
$ |
(15,513 |
) |
|
$ |
2,410 |
|
|
$ |
(17,923 |
) |
|
$ |
(711 |
) |
|
$ |
16,205 |
|
|
$ |
(16,916 |
) |
Securities
|
|
|
4,854 |
|
|
|
10,891 |
|
|
|
(6,037 |
) |
|
|
(4,862 |
) |
|
|
(3,550 |
) |
|
|
(1,312 |
) |
Other
earning assets
|
|
|
(493 |
) |
|
|
302 |
|
|
|
(795 |
) |
|
|
(2,193 |
) |
|
|
(1,151 |
) |
|
|
(1,042 |
) |
Total
interest income
|
|
|
(11,152 |
) |
|
|
13,603 |
|
|
|
(24,755 |
) |
|
|
(7,766 |
) |
|
|
11,504 |
|
|
|
(19,270 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(202 |
) |
|
|
13 |
|
|
|
(215 |
) |
|
|
(98 |
) |
|
|
18 |
|
|
|
(116 |
) |
Regular
savings deposits
|
|
|
(188 |
) |
|
|
(10 |
) |
|
|
(178 |
) |
|
|
(56 |
) |
|
|
(31 |
) |
|
|
(25 |
) |
Money
market savings deposits
|
|
|
(1,070 |
) |
|
|
1,651 |
|
|
|
(2,721 |
) |
|
|
(7,589 |
) |
|
|
1,749 |
|
|
|
(9,338 |
) |
Time
deposits
|
|
|
(3,352 |
) |
|
|
1,980 |
|
|
|
(5,332 |
) |
|
|
(4,590 |
) |
|
|
(805 |
) |
|
|
(3,785 |
) |
Total
borrowings
|
|
|
(512 |
) |
|
|
887 |
|
|
|
(1,399 |
) |
|
|
923 |
|
|
|
4,143 |
|
|
|
(3,220 |
) |
Total
interest expense
|
|
|
(5,324 |
) |
|
|
4,521 |
|
|
|
(9,845 |
) |
|
|
(11,410 |
) |
|
|
5,074 |
|
|
|
(16,484 |
) |
Net
interest income
|
|
$ |
(5,827 |
) |
|
$ |
9,082 |
|
|
$ |
(14,910 |
) |
|
$ |
3,644 |
|
|
$ |
6,430 |
|
|
$ |
(2,786 |
) |
*
|
Variances
that are the combined effect of volume and rate, but cannot be separately
identified, are allocated to the volume and rate variances based on their
respective relative amounts.
|
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 probable 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 of the
losses that may be sustained in the loan and lease portfolio. 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 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.
General
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
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.
As part
of its continuing review of the adequacy of the allowance, management also
considers certain types of loans that by their nature, may carry a higher degree
of risk. At September, 30, 2009 the Company had a portfolio of ten Shared
National Credits with outstanding balances totaling $65.2 million. One credit
totaling $14.6 million was in nonperforming status at September 30, 2009. The
remaining credits were performing with no delinquencies as to principal or
interest. At September 30, 2009 the Company had $245.3 million in interest-only
residential first mortgage loans and first mortgage residential construction
loans of which $3.6 million (8 loans) were delinquent 90 days or more. As of
September 30, 2009 the Company had no option ARMs, defined as adjustable rate
mortgage loans on which the monthly interest payment is not equal to the total
monthly interest accrued, thus requiring interest to be capitalized into the
loan principal balance.
The
amount of the allowance is reviewed monthly by the Credit Risk Committee of the
board of directors and formally approved quarterly by that same committee of the
board.
The
provision for loan and lease losses totaled $55.7 million for the first nine
months of 2009 compared to $15.4 million in the same period of 2008. This
increase was due a higher level of nonperforming loans due to: internal risk
rating downgrades to a combination of previously identified problem credits plus
several newly identified credits; reserve adjustments based on historical
experience; and a higher level of overall charge-offs, primarily related to the
residential real estate development portfolio. The Company experienced net
charge-offs during the first nine months of 2009 of $43.3 million compared to
net charge-offs of $2.2 million for the first nine 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 nine 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 2.70% of total loans
and leases at September 30, 2009 and 2.03% at December 31, 2008. The allowance
increased by $12.4 million, to $62.9 million at September 30, 2009, from $50.5
million at December 31, 2008. The increase in the allowance during
the first nine 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 $74.0 million to $143.4 million at September 30,
2009 from $69.4 million at December 31, 2008, while nonperforming assets
increased by $78.0 million for the same period to $150.2 million at September
30, 2008. Expressed as a percentage of total assets, nonperforming assets
increased to 4.14% at September 30, 2009 from 2.18% at December 31, 2008. The
increase in non-accrual loans and leases was mainly the result of $80.9 million
in residential real estate development loans which was somewhat offset by
charge-offs on existing credits. Management believes these loans are adequately
reserved or well secured. The allowance for loan and lease losses represented
44% of nonperforming loans and leases at September 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
September 30, 2009 compared to $2.9 million at December 31, 2008. The balance of
impaired loans and leases was $110.2 million at September 30, 2009, with
specific reserves against those loans of $17.1 million, compared to $52.6
million at December 31, 2008, with specific reserves of $13.8
million.
Table 6 —
Analysis of Credit Risk
Activity
in the allowance for credit losses is shown below for the periods
indicated:
|
|
Nine
Months Ended
|
|
|
Year
Ended
|
|
(Dollars in thousands)
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Balance,
January 1
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
Provision
for loan and lease losses
|
|
|
55,678 |
|
|
|
33,192 |
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(3,470 |
) |
|
|
(4,798 |
) |
Commercial
loans and leases
|
|
|
(39,001 |
) |
|
|
(2,677 |
) |
Consumer
|
|
|
(1,400 |
) |
|
|
(988 |
) |
Total
charge-offs
|
|
|
(43,871 |
) |
|
|
(8,463 |
) |
Loan
recoveries:
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
33 |
|
|
|
21 |
|
Commercial
loans and leases
|
|
|
494 |
|
|
|
475 |
|
Consumer
|
|
|
77 |
|
|
|
209 |
|
Total
recoveries
|
|
|
604 |
|
|
|
705 |
|
Net
charge-offs
|
|
|
(43,267 |
) |
|
|
(7,758 |
) |
Balance,
period end
|
|
$ |
62,937 |
|
|
$ |
50,526 |
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans and leases
|
|
|
2.38 |
% |
|
|
0.32 |
% |
Allowance
to total loans and leases
|
|
|
2.70 |
% |
|
|
2.03 |
% |
The
following table presents nonperforming assets at the dates
indicated:
(Dollars in thousands)
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
Non-accrual
loans and leases
|
|
$ |
127,473 |
|
|
$ |
67,950 |
|
Loans
and leases 90 days past due
|
|
|
15,491 |
|
|
|
1,038 |
|
Restructured
loans and leases
|
|
|
395 |
|
|
|
395 |
|
Total
nonperforming loans and leases*
|
|
|
143,359 |
|
|
|
69,383 |
|
Other
real estate owned, net
|
|
|
6,873 |
|
|
|
2,860 |
|
Total
nonperforming assets
|
|
$ |
150,232 |
|
|
$ |
72,243 |
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans to total loans
|
|
|
6.14 |
% |
|
|
2.79 |
% |
Nonperforming
assets to total assets
|
|
|
4.14 |
% |
|
|
2.18 |
% |
Allowance
for loan and leases to non-performing loans and
leases
|
|
|
43.90 |
% |
|
|
72.82 |
% |
Noninterest
Income and Expenses
Total
noninterest income was $33.7 million for the nine month period ended September
30, 2009, a 5% or $1.6 million decrease from the same period of
2008. The decrease in noninterest income for the first nine months of
2009 was due primarily to a decrease of $0.9 million or 10% in service charges
on deposits resulting from lower overdraft fees while insurance agency
commissions decreased $0.6 million or 12%. Fees on sales of
investment products decreased $0.5 million or 19% and trust and investment
management fees declined $0.2 million or 3%, both of which were due primarily to
reduced average assets under management. These decreases were somewhat offset by
an increase in gains on sales of mortgage loans of $1.0 million or 59% due
largely to higher mortgage refinancing volumes reflecting market conditions.
Other noninterest income also increased $0.1 million or 2% compared to the first
nine months of 2008.
Total
noninterest expenses were $77.7 million for the nine month period ended
September 30, 2009, a 4% or $2.8 million increase from the same period in 2008.
Excluding the one time special assessment by the FDIC of $1.7 million in 2009,
and a goodwill impairment charge of $2.3 million and pre-tax pension credit of
$1.5 million in 2008, noninterest expenses increased $1.9 million or 3% over the
prior year period. Salaries and employee benefits increased $1.7
million or 4% during the first nine months of 2009 due to a pre-tax pension
credit of $1.5 million in 2008 and a decrease in incentive compensation along
with a reduction in the number of full time equivalent employees. Occupancy and
equipment expenses decreased $0.3 million or 3% for the period while outside
data services decreased by $0.6 million or 17%. FDIC insurance expense totaled
$5.0 million for the first nine months of 2009, an increase of $3.7 million.
This increase included a one time special assessment by the FDIC of $1.7 million
in the second quarter. Average full-time equivalent employees
decreased to 668 during the first nine months of 2009, from 702 during the like
period in 2008, a 5% decrease.
Income
Taxes
The
effective tax rate decreased to a tax benefit for the nine month period ended
September 30, 2009, from a tax expense of 28.3% for the prior year
period. This decrease was primarily due to the level of tax exempt
income from investment securities and bank owned life insurance which more than
offset the decreased level of net income before income taxes.
C.
RESULTS OF OPERATIONS – THIRD QUARTER 2009 COMPARED TO THE THIRD
QUARTER 2008
Net
income (loss) available to common shareholders for the third quarter of the year
decreased $20.1 million to a net loss of $14.8 million in 2009 from net income
$5.4 million in 2008, representing annualized returns on average common equity
of (19.01%) in 2009 and 6.64% in 2008, respectively. Diluted net
income (loss) per common share for the third quarter of the year was ($0.90) in
2009, compared to $0.33 in 2008.
Net
interest income declined by $1.7 million, or 6%, to $26.4 million for the three
months ended September 30, 2009, while total noninterest income decreased by
$0.2 million, or 2% for the period. Noninterest expenses increased $1.3 million
or 5% for the quarter.
The
decrease in net interest income was due to a 91 basis point decline in the yield
on loans and a 162 basis point decline in the yield on investments which
exceeded the 45 basis point decline 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 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 75 basis points to 3.27% for the three months ended September 30,
2009, from 4.02% for the same period of 2008.
The
provision for loan and lease losses totaled $34.5 million for the third quarter
of 2009 compared to $6.5 million in the same period of 2008. The main drivers of
this increase were: increased nonperforming loans due to internal risk rating
downgrades to both previously identified problem credits plus several newly
identified credits; allowance adjustments based on historical experience; and a
higher level of overall charge-offs, primarily in the residential real estate
development portfolio. The Company experienced net charge-offs during the third
quarter of 2009 of $29.8 million compared to net charge-offs of $1.7 million for
the same quarter of 2008.
Third
quarter noninterest income was $10.7 million for 2009, representing a 2% or $0.2
million decrease from the third quarter of 2008. The decrease
in noninterest income for the quarter was due primarily to a decrease of $0.4
million or 13% in service charges on deposits due to lower overdraft fees while
insurance agency commissions decreased $0.2 million or 18% due to the effect of
the overall economy. Fees on sales of investment products decreased $0.1 million
or 10% compared to the third quarter of 2008 due primarily to a decline in
assets under management. Other noninterest income also decreased $0.2 million or
12%. These decreases were partially offset by an increase in gains on
sales of mortgages of $0.6 million or 155% due largely to higher mortgage
refinancing volumes reflecting market conditions.
Noninterest
expenses totaled $26.6 million for the third quarter of 2009, a 5% or $1.3
million increase over the third quarter of 2008. This increase was due in large
part to an increase of $0.7 million in FDIC insurance expense resulting
primarily from higher assessment rates and increased deposit balances. Salaries
and employee benefits increased $2.5 million during the quarter due primarily to
a pre-tax pension credit of $1.5 million recognized in the third quarter of
2008. Excluding this credit, salaries and benefits expenses increased
$1.0 million or 7%. Occupancy and equipment expenses decreased $0.1 million or
3% for the quarter due to a move of staff from leased to owned facilities. Other
noninterest expenses increased $0.7 million or 19% due primarily to higher legal
fees necessary to manage nonperforming loan credits and to losses on valuation
of loan swaps.
Income
Taxes
The
effective tax rate decreased to a benefit for the third quarter of 2009, from an
expense of 25.1% 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 three months ended September 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
1. Legal Proceedings
In the
normal course of business, The Company becomes involved in litigation arising
form the banking, financial and other activities it
conducts. Management, after consultation with legal counsel, does not
anticipate that the ultimate liability, if any, arising from these matters will
have a material effect on the Company’s financial condition, operating results
or liquidity.
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
3. Defaults Upon Senior Securities – None
Item
4. Submission of Matters to a Vote of Security Holders – None
Item
5. Other Information - None
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:
November
10, 2009
|
/S/
PHILIP J. MANTUA
|
|
|
|
Executive
Vice President and Chief Financial
Officer
|
Date:
November
10, 2009