Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Fiscal Year Ended December 31, 2009
Commission
File Number 0-19065
SANDY SPRING BANCORP,
INC.
(Exact
name of registrant as specified in its charter)
Maryland
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52-1532952
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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17801 Georgia Avenue, Olney, Maryland
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20832
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(Address of principal executive offices)
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(Zip Code)
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Registrant's
telephone number, including area code: 301-774-6400.
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, par value $1.00 per share
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The NASDAQ Stock Market, LLC
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Securities
registered pursuant to Section 12(g) of the Act: None.
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o Yes x No*
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. x Yes o
No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, 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 shorter period that the registrant was required to submit and
post such files). o Yes x No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o
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Accelerated filer x
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Non-accelerated filer o
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Smaller reporting company o
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). ¨ Yes x No
The
aggregate market value of the voting common stock of the registrant held by
non-affiliates on June 30, 2008, the last day of the registrant’s most recently
completed second fiscal quarter, was approximately $236 million, based on the
closing sales price of $14.70 per share of the registrant's Common Stock on that
date.
As of the
close of business on March 10, 2010, 16,608,050 shares of the registrant's
Common Stock were outstanding.
Documents
Incorporated By Reference
Part III:
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders to be held on May 5, 2010 (the "Proxy Statement").
*
The registrant is required to file reports pursuant to Section 13 of the
Act.
SANDY
SPRING BANCORP, INC.
TABLE
OF CONTENTS
Forward-Looking
Statements
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3
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PART
I.
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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14
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Item
1B.
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Unresolved
Staff Comments
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19
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Item
2.
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Properties
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19
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Item
3.
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Legal
Proceedings
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19
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Item
4.
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[Reserved]
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19
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PART
II.
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Item
5.
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Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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19
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Item
6.
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Selected
Financial Data
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22
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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23
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Item
8.
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Financial
Statements and Supplementary Data
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47
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Reports
of Independent Registered Public Accounting Firms
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48
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Consolidated
Financial Statements
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51
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Notes
to the Consolidated Financial Statements
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55
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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94
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Item
9A.
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Controls
and Procedures
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94
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Item
9B.
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Other
Information
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94
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Executive
Officers |
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94
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PART
III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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94
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Item
11.
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Executive
Compensation
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94
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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94
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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94
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Item
14.
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Principal
Accounting Fees and Services
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94
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PART
IV.
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Item
15.
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Exhibits,
Financial Statements, and Reports on Form 8-K
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94
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Signatures |
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97
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Forward-Looking
Statements
This
Annual Report Form 10-K, as well as other periodic reports filed with the
Securities and Exchange Commission, and written or oral communications made from
time to time by or on behalf of Sandy Spring Bancorp and its subsidiaries (the
“Company”), may contain statements relating to future events or future results
of the Company that are considered “forward-looking statements” under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements may be identified by the use of words such as “believe,” “expect,”
“anticipate,” “plan,” “estimate,” “intend” and “potential,” or words
of similar meaning, or future or conditional verbs such as “should,” “could,” or
“may.” Forward-looking statements include statements of our
goals, intentions and expectations; statements regarding our business plans,
prospects, growth and operating strategies; statements regarding the quality of
our loan and investment portfolios; and estimates of our risks and future costs
and benefits.
Forward-looking
statements reflect our expectation or prediction of future conditions, events or
results based on information currently available. These forward-looking
statements are subject to significant risks and uncertainties that may cause
actual results to differ materially from those in such
statements. These risk and uncertainties include, but are not limited
to, the risks identified in Item 1A of this report and the
following:
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general
business and economic conditions nationally or in the markets we serve
could adversely affect, among other things, real estate prices,
unemployment levels, and consumer and business confidence, which could
lead to decreases in the demand for loans, deposits and other financial
services that we provide and increases in loan delinquencies and
defaults;
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changes
or volatility in the capital markets and interest rates may adversely
impact the value of securities, loans, deposits and other financial
instruments and the interest rate sensitivity of our balance sheet as well
as our liquidity;
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our
liquidity requirements could be adversely affected by changes in our
assets and liabilities;
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our
investment securities portfolio is subject to credit risk, market risk,
and liquidity risk as well as changes in the estimates we use to value
certain of the securities in our
portfolio;
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the
effect of legislative or regulatory developments including changes in laws
concerning taxes, banking, securities, insurance and other aspects of the
financial services industry;
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competitive
factors among financial services companies, including product and pricing
pressures and our ability to attract, develop and retain qualified banking
professionals;
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the
effect of changes in accounting policies and practices, as may be adopted
by the Financial Accounting Standards Board, the Securities and Exchange
Commission, the Public Company Accounting Oversight Board and other
regulatory agencies; and
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the
effect of fiscal and governmental policies of the United States federal
government.
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Forward-looking
statements speak only as of the date of this report. We do not
undertake to update forward-looking statements to reflect circumstances or
events that occur after the date of this report or to reflect the occurrence of
unanticipated events except as required by federal securities
laws.
PART
I
Item
1. BUSINESS
General
Sandy
Spring Bancorp, Inc. (the “Company") is the one-bank holding company for Sandy
Spring Bank (the "Bank"). The Company is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding
Company Act"). As such, the Company is subject to supervision and regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
The Company began operating in 1988. The Bank was founded in 1868, and is the
oldest banking business based in Maryland. The Bank is independent, community
oriented, and conducts a full-service commercial banking business through 43
community offices located in Anne Arundel, Carroll, Frederick, Howard,
Montgomery and Prince George's counties in Maryland, and Fairfax and Loudoun
counties in Virginia. The Bank is a state chartered bank subject to supervision
and regulation by the Federal Reserve and the State of Maryland. The Bank's
deposit accounts are insured by the Deposit Insurance Fund administered by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by
law. The Bank is a member of the Federal Reserve System and is an Equal Housing
Lender. The Company, the Bank, and its other subsidiaries are Affirmative
Action/Equal Opportunity Employers.
With $3.6
billion in assets, the Company is the holding company for the Bank and its
principal subsidiaries, Sandy Spring Insurance Corporation, The Equipment
Leasing Company, and West Financial Services, Inc. Sandy Spring
Bancorp, Inc. is the largest publicly traded banking company headquartered and
operating in Maryland. Sandy Spring Bank is a community banking
organization that focuses its lending and other services on businesses and
consumers in the local market area. Through its subsidiaries, Sandy
Spring Bank also offers a comprehensive menu of leasing, insurance, and
investment management services.
The
Company's and the Bank's principal executive office is located at 17801 Georgia
Avenue, Olney, Maryland 20832, and its telephone number is
301-774-6400.
Availability
of Information
This report is provided
along with the annual proxy statement for convenience of use and to decrease
costs, but is not part of the proxy materials. The Company makes
available through the Investor Relations area of the Company website, at www.sandyspringbank.com, annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934. Access to these reports is provided by means of
a link to a third-party vendor that maintains a database of such
filings. In general, the Company intends that these reports be
available as soon as practicable after they are filed with or furnished to the
Securities and Exchange Commission (“SEC”). Technical and other
operational obstacles or delays caused by the vendor may delay their
availability. The SEC maintains a Web site (www.sec.gov) where these
filings also are available through the SEC’s EDGAR system. There is
no charge for access to these filings through either the Company’s site or the
SEC’s site.
Market
and Economic Overview
Sandy
Spring Bank is located in Montgomery County, Maryland and conducts business in
the Central Maryland and Northern Virginia area. The Bank’s business footprint
serves one of the better performing business regions in the country. Sandy
Spring Bank is ranked twelfth among commercial banks operating in the Washington
D.C. metropolitan area with a 1.6% share of the area’s deposits and
fourteenth in the Baltimore metropolitan area with 1.0% of the area’s deposits
according to data supplied by SNL Financial as of June 30, 2009. The
Baltimore-Washington area is a regional center for federal and state government
services, service oriented businesses and various industries. Both areas are
accessible to a deepwater harbor, the fifth largest in the nation, and have
proximity to a large network of interstate and well maintained highways, notably
Interstates 95, 70, 83, 81 and 68. As a consequence, the area is also a major
provider of warehouse operations for retail distribution and logistics
providers. Additionally, the region also has a high concentration of third party
government service providers, in addition to hosting a robust technology sector.
The employment in the health and education industries is also significant. On a
consolidated basis, the area possesses a diverse blue-collar to white-collar
business environment.
Maryland
has the highest state median household income in the country at $70,000 for
2008, according to the U.S. Census Bureau. To complement its presence in the
Maryland market, the Bank has expanded into Northern Virginia which is home to
nearly 2.4 million people. The Baltimore-Washington area has five out of the top
ten most affluent counties in the United States, as measured by median household
income for counties with 250,000 or more people, according to the U.S. Census
Bureau. Important to both Maryland and Northern Virginia is the accessibility to
other key neighboring markets such as Philadelphia, New York City, Pittsburgh
and the Richmond/Norfolk corridor. The market area benefits from the presence
and employment stability of the federal government and related service
industries. In addition, management believes that the market is benefiting from
stimulus spending, recent military base relocation and expansion initiatives by
the general defense and homeland security industries.
While
general economic decline has had an adverse impact on the local economy, the
regional unemployment rate is currently below the national average according to
the Bureau of Labor Statistics as of July 2009. The workforce is
relatively stable due to government and related employment opportunities and the
presence of a diverse manufacturing base and service industries, and a better
than average regional economic outlook. Recent activity reflects
improving conditions in the market as residential permit activity and sales of
existing homes have experienced increases in 2009 compared to the prior
year. Additionally, the decline in real estate prices has remained
below the national average of 15.6% during the economic downturn according to
the latest Case-Shiller report as of July, 2009. While the data at
year end 2009 on economic metrics such as retail sales, mortgage delinquencies,
office vacancies, personal income and median family income provide mixed
economic signals, management believes that there are indications that the
economy has stabilized and is now in a position for recovery and
expansion. The Bank believes that as the economy recovers, it will be
able to take advantage of the growth opportunities while adequately managing
credit risk.
Loan
and Lease Products
The
Company currently offers a complete menu of loan and lease products primarily in
our identified market footprint that are discussed in detail below and on the
following pages. These following sections should be read in
conjunction with the section “Credit Risk” on page 39 of this
report.
Residential
Real Estate Loans
The
residential real estate category contains loans principally to consumers secured
by residential real estate. The Company's residential real estate lending policy
requires each loan to have viable repayment sources. Residential real estate
loans are evaluated for the adequacy of these repayment sources at the time of
approval, based upon measures including credit scores, debt-to-income ratios,
and collateral values. Credit risk for residential real estate loans arises from
borrowers lacking the ability or willingness to repay the loan or by a shortfall
in the value of the residential real estate in relation to the outstanding loan
balance in the event of a default and subsequent liquidation of the real estate
collateral. The residential real estate portfolio includes both
conforming and nonconforming mortgage loans.
Conforming
mortgage loans represent loans originated in accordance with underwriting
standards set forth by the government-sponsored entities (“GSEs”), including the
Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan
Mortgage Company (“Freddie Mac”), and the Government National Mortgage
Association (“Ginnie Mae”), which serve as the primary purchasers of loans sold
in the secondary mortgage market by mortgage lenders. These loans are generally
collateralized by one-to-four-family residential real estate, have
loan-to-collateral value ratios of 80% or less or have mortgage insurance to
insure down to 80%, and are made to borrowers in good credit standing.
Substantially all fixed-rate conforming loans originated are sold in the
secondary mortgage market. For any loans retained by the Company, title
insurance insuring the priority of its mortgage lien, as well as fire and
extended coverage casualty insurance protecting the properties securing the
loans are required. Borrowers may be required to advance funds, with each
monthly payment of principal and interest, to a loan escrow account from which
the Company makes disbursements for items such as real estate taxes and mortgage
insurance premiums. Appraisers approved by the Company appraise the properties
securing substantially all of the Company's residential mortgage
loans.
Nonconforming
mortgage loans represent loans that generally are not saleable in the secondary
market to the GSEs for inclusion in conventional mortgage-backed securities due
to the credit characteristics of the borrower, the underlying documentation, the
loan-to-value ratio, or the size of the loan, among other factors. The Company
originates nonconforming loans for its own portfolio and for sale to third-party
investors, usually large mortgage companies, under commitments by the mortgage
company to purchase the loans subject to compliance with pre-established
investor criteria. These nonconforming loans generated for sale include some
residential mortgage credits where the loans may not be underwritten using
customary underwriting standards. These credits typically remain on the
Company’s consolidated books after funding for thirty days or less, and are
included in residential mortgages held for sale on the face of the balance
sheet. The Company also holds occasional, isolated credits that inadvertently
failed to meet GSE or other third-party investor criteria, or that were
originated and managed in the ordinary course of business and may have
characteristics that could cause them to be categorized as other than conforming
loans. The Company’s current practice is to sell all such other than
conforming loans to third-party investors. The Company believes that the other
than conforming credits it originates or holds and the risks they entail are not
significant to its financial condition, results of operations, liquidity, or
capital resources. The Company's current practice is to sell loans on
a servicing released basis.
The
Company makes residential real estate development and construction loans
generally to provide interim financing on property during the development and
construction period. Borrowers include builders, developers and persons who will
ultimately occupy the single-family dwelling. Residential real estate
development and construction loan funds are disbursed periodically as
pre-specified stages of completion are attained based upon site inspections.
Interest rates on these loans are usually adjustable. Loans to
individuals for the construction of primary personal residences are typically
secured by the property under construction, frequently include additional
collateral (such as a second mortgage on the borrower's present home), and
commonly have maturities of six to twelve months. The Company attempts to obtain
the permanent mortgage loan under terms, conditions and documentation standards
that permit the sale of the mortgage loan in the secondary mortgage loan
market.
Commercial
Loans and Leases
Included
in this category are commercial real estate loans, commercial construction
loans, leases and other commercial loans. Over the years, the Company’s
commercial loan clients have come to represent a diverse cross-section of small
to mid-size local businesses within our market footprint, whose owners and
employees are often established Bank customers. Such banking relationships are a
natural business for the Company, with its long-standing community roots and
extensive experience in serving and lending to this market segment.
The
Company primarily lends for commercial construction in local markets that are
familiar and understandable, works selectively with top-quality builders and
developers, and requires substantial equity from its borrowers. The
underwriting process is designed to confirm that the project will be
economically feasible and financially viable; it is generally evaluated as
though the Company will provide permanent financing. The Company's portfolio
growth objectives do not include speculative commercial construction projects or
projects lacking reasonable proportionate sharing of risk. Development and
construction loans are secured by the properties under development or
construction and personal guarantees are typically obtained. Further, to assure
that reliance is not placed solely upon the value of the underlying collateral,
the Company considers the financial condition and reputation of the borrower and
any guarantors, the amount of the borrower's equity in the project, independent
appraisals, cost estimates and pre-construction sales information.
Commercial
loans are evaluated for the adequacy of repayment sources at the time of
approval and are regularly reviewed for any possible deterioration in the
ability of the borrower to repay the loan. Collateral generally is required to
provide the Company with an additional source of repayment in the event of
default by a commercial borrower. The structure of the collateral package,
including the type and amount of the collateral, varies from loan to loan
depending on the financial strength of the borrower, the amount and terms of the
loan, and the collateral available to be pledged by the borrower, but generally
may include real estate, accounts receivable, inventory, equipment or other
assets. Loans also may be supported by personal guarantees from the principals
of the commercial loan borrowers. The financial condition and cash
flow of commercial borrowers are closely monitored by the submission of
corporate financial statements, personal financial statements and income tax
returns. The frequency of submissions of required information depends upon the
size and complexity of the credit and the collateral that secures the
loan. Credit risk for commercial loans arises from borrowers lacking
the ability or willingness to repay the loan, and in the case of secured loans,
by a shortfall in the collateral value in relation to the outstanding loan
balance in the event of a default and subsequent liquidation of collateral. The
Company has no commercial loans to borrowers in similar industries that exceed
10% of total loans. A risk rating system is used to determine loss
exposure.
Included
in commercial loans are credits directly originated by the Company and
syndicated transactions or loan participations that are originated by other
lenders. The Company's commercial lending policy requires each loan, regardless
of whether it is directly originated or is purchased, to have viable repayment
sources. The risks associated with syndicated loans or purchased participations
are similar to those of directly originated commercial loans, although
additional risk may arise from the limited ability to control actions of the
primary lender. Shared National Credits (SNC), as defined by the
banking regulatory agencies, represent syndicated lending arrangements with
three or more participating financial institutions and credit exceeding $20.0
million in the aggregate. As of December 31, 2009, the Company had $64.2 million
in SNC purchased outstanding and no SNC sold outstanding. During 2009, the
Company’s primary regulator completed its annual SNC examination. As a result of
this review and the Company’s own internal credit review, three loan
participations outstanding with one borrower were placed on nonaccrual status
and a charge-off totaling $6.7 million was recognized. No other action was
required on the Company’s remaining SNC participations.
The
Company also sells participations in loans it originates to other financial
institutions in order to build long-term customer relationships or limit loan
concentration. Strict policies are in place governing the degree of risk assumed
and volume of loans held. At December 31, 2009, other financial institutions had
$4.6 million in outstanding commercial and commercial real estate loan
participations sold by the Company, and the Company had $30.8 million in
outstanding commercial and commercial real estate loan participations purchased
from other lenders, excluding SNC.
The
Company's commercial real estate loans consist of both loans secured by owner
occupied properties and non-owner occupied where an established banking
relationship exists and involves investment properties for warehouse, retail,
and office space with a history of occupancy and cash flow. The
commercial real estate category contains mortgage loans to developers and owners
of commercial real estate. Commercial real estate loans are governed by the same
lending policies and subject to credit risk as previously described for
commercial loans. Although terms and amortization periods vary, the Company's
commercial mortgages generally have maturities or re-pricing opportunities of
five years or less. The Company seeks to reduce the risks associated
with commercial mortgage lending by generally lending in its market area, using
conservative loan-to-value ratios and obtaining periodic financial statements
and tax returns from borrowers to perform annual loan reviews. It is also the
Company's general policy to obtain personal guarantees from the principals of
the borrowers and to underwrite the business entity from a cash flow
perspective.
Commercial
real estate loans secured by owner occupied properties are based upon the
borrower’s financial health and the ability of the borrower and the business to
repay. Whenever appropriate and available, the Bank seeks governmental loan
guarantees, such as the Small Business Administration loan programs, to reduce
risks. All borrowers are required to forward annual corporate, partnership and
personal financial statements. Interest rate risks are mitigated by using either
floating interest rates or by fixing rates for a short period of time, generally
less than three years. While loan amortizations may be approved for
up to 300 months, each loan generally has a call provision (maturity date) of
five years or less.
Residential
construction loans to residential builders are generally made for the
construction of residential homes for which a binding sales contract exists and
the prospective buyers had been pre-qualified for permanent mortgage financing
by either third-party lenders (mortgage companies or other financial
institutions) or the Company. Loans for the development of
residential land are extended when evidence is provided that the lots under
development will be or have been sold to builders satisfactory to the Company.
These loans are generally extended for a period of time sufficient to allow for
the clearing and grading of the land and the installation of water, sewer and
roads, which is typically a minimum of eighteen months to three
years.
The
Company's equipment leasing business is, for the most part, technology based,
consisting of a portfolio of leases for essential commercial equipment used by
small to medium sized businesses. Equipment leasing is conducted through vendor
relations and direct solicitation to end-users located primarily in the
Company’s market. The typical lease is “small ticket” by industry
standards, averaging less than $100 thousand, with individual leases generally
not exceeding $500 thousand. Terms generally are fixed payment for up to five
years. Leases are extended based primarily upon the ability of the
borrower to pay rather than the value of the leased property.
The
Company makes other commercial loans. Commercial term loans are made to provide
funds for equipment and general corporate needs. This loan category
is designed to support borrowers who have a proven ability to service debt over
a term generally not to exceed 84 months. The Company generally
requires a first lien position on all collateral and requires guarantees from
owners having at least a 20% interest in the involved
business. Interest rates on commercial term loans are generally
floating or fixed for a term not to exceed five years. Management
monitors industry and collateral concentrations to avoid loan exposures to a
large group of similar industries or similar collateral. Commercial loans are
evaluated for historical and projected cash flow attributes, balance sheet
strength, and primary and alternate resources of personal
guarantors. Commercial term loan documents require borrowers to
forward regular financial information on both the business and personal
guarantors. Loan covenants require at least annual submission of complete
financial information and in certain cases this information is required monthly,
quarterly or semi-annually depending on the degree to which the Company desires
information resources for monitoring a borrower’s financial condition and
compliance with loan covenants. Examples of properly margined
collateral for loans, as required by bank policy, would be a 75% advance on the
lesser of appraisal or recent sales price on commercial property, an 80% or less
advance on eligible receivables, a 50% or less advance on eligible inventory and
an 80% advance on appraised residential property. Collateral borrowing
certificates may be required to monitor certain collateral categories on a
monthly or quarterly basis. Loans may require personal
guarantees. Key person life insurance may be required as appropriate
and as necessary to mitigate the risk of loss of a primary owner or
manager.
Commercial
lines of credit are granted to finance a business borrower’s short-term credit
needs and/or to finance a percentage of eligible receivables and
inventory. In addition to the risks inherent in term loan facilities,
line of credit borrowers typically require additional monitoring to protect the
lender against increasing loan volumes and diminishing collateral
values. Commercial lines of credit are generally revolving in nature
and require close scrutiny. The Company generally requires at least
an annual out of debt period (for seasonal borrowers) or regular financial
information (monthly or quarterly financial statements, borrowing base
certificates, etc.) for borrowers with more growth and greater permanent working
capital financing needs. Advances against collateral value are
limited. Lines of credit and term loans to the same borrowers
generally are cross-defaulted and cross-collateralized. Interest rate
charges on this group of loans generally float at a factor at or above the prime
lending rate.
Consumer
Lending
Consumer
lending continues to be important to the Company’s full-service, community
banking business. This category of loans includes primarily home
equity loans and lines, installment loans, personal lines of credit and marine
loans.
The home
equity category consists mainly of revolving lines of credit to consumers which
are secured by residential real estate. Home equity lines of
credit and other home equity loans are originated by the Company for typically
up to 90% of the appraised value, less the amount of any existing prior liens on
the property. While home equity loans have maximum terms of up to twenty years
and interest rates are generally fixed, home equity lines of credit have maximum
terms of up to ten years for draws and thirty years for repayment, and interest
rates are generally adjustable. The Company secures these loans with mortgages
on the homes (typically a second mortgage). Purchase money second mortgage loans
originated by the Company have maximum terms ranging from ten to thirty years.
These loans generally carry a fixed rate of interest for the entire term or a
fixed rate of interest for the first five years, re-pricing every five years
thereafter at a predetermined spread to the prime rate of interest. Home equity
lines are generally governed by the same lending policies and subject to credit
risk as described above for residential real estate loans.
Other
consumer loans include installment loans used by customers to purchase
automobiles, boats, recreational vehicles, and student loans. These consumer
loans are generally governed by the same overall lending policies as described
for residential real estate. Credit risk for consumer loans arises from
borrowers lacking the ability or willingness to repay the loan, and in the case
of secured loans, by a shortfall in the value of the collateral in relation to
the outstanding loan balance in the event of a default and subsequent
liquidation of collateral.
Consumer
installment loans are generally offered for terms of up to five years at fixed
interest rates. The Company makes loans for automobiles, recreational
vehicles, and marine craft, both new and used, directly at the branch level as
an accommodation to our customers. Automobile loans can be for up to 100% of the
purchase price or the retail value listed by the National Automobile Dealers
Association. The terms of the loans are determined by the age and condition of
the collateral. Collision insurance policies are required on all these loans,
unless the borrower has substantial other assets and income. The Company also
makes other consumer loans, which may or may not be secured. The term of the
loans usually depends on the collateral. Unsecured loans usually do not exceed
$50 thousand and have a term of no longer than 36 months.
Deposit
Activities
Subject
to the Company’s Asset/Liability Committee (the “ALCO”) policies and current
business plan, the Treasury function works closely with the Company’s retail
deposit operations to accomplish the objectives of maintaining deposit market
share within the Company’s primary markets and managing funding costs to
preserve the net interest margin.
One of
the Company’s primary objectives as a community bank is to develop long-term
multi-product customer relationships from its comprehensive menu of financial
products. To that end, the lead product to develop such relationships is
typically a deposit product. During the past year, the Company offered its new
Premier money market account that was created to capitalize on market disruption
opportunities as an outgrowth from several recent local bank mergers. The
Company has succeeded in retaining a large majority of this deposit growth that
will be relied upon to fund long-term future loan growth as the economy
recovers.
Treasury
Activities
The
Treasury function manages the wholesale segments of the balance sheet, including
investments, purchased funds and long-term debt and is responsible for all
facets of interest rate risk management for the Company which includes the
pricing of deposits consistent with conservative interest rate risk and
liquidity practices. Management’s objective is to achieve the maximum level of
consistent earnings over the long term, while minimizing interest rate risk,
credit risk and liquidity risk and optimizing capital utilization. In managing
the investment portfolio under its stated objectives, the Company invests
primarily in U. S. Treasury and Agency securities, U.S Agency mortgage-backed
securities (“MBS”), U.S. Agency Collateralized Mortgage Obligations (“CMO”),
municipal bonds and to a minimal extent, trust preferred securities and
corporate bonds. Treasury strategies and activities are overseen by ALCO and the
Company’s Investment Committee, which reviews all investment and funding
transactions. The ALCO activities are summarized and reviewed monthly with the
Company’s Board of Directors.
The
investment portfolio is managed with the primary objective of providing
necessary liquidity consistent with anticipated levels of deposit funding and
loan demand with a minimal level of risk. The short overall average duration of
2.7 years of the investment portfolio together with the types of investments
(94% of the portfolio is rated AA or above) is intended to provide sufficient
cash flows to support the Company’s lending goals. Liquidity is also provided by
lines of credit maintained with the Federal Home Loan Bank of Atlanta (“FHLB”),
the Federal Reserve, and to a lesser extent, bank lines of credit.
Borrowing
Activities
Management
utilizes a variety of sources to raise borrowed funds at competitive rates,
including federal funds purchased, FHLB borrowings and retail repurchase
agreements. FHLB borrowings typically carry rates approximating the LIBOR rate
for the equivalent term because they are secured with investments or high
quality loans. Federal funds purchased, which are generally overnight
borrowings, are typically purchased at the Federal Reserve target
rate.
The
Company’s borrowing activities are achieved through the use of the previously
mentioned lines of credit to address overnight and short-term funding needs,
match funding of loan activity and when opportunities are presented, to lock in
attractive rates due to market conditions.
Employees
The
Company and the Bank employed 703 persons, including executive officers, loan
and other banking and trust officers, branch personnel, and others at December
31, 2009. None of the Company's or the Bank's employees is represented by a
union or covered under a collective bargaining agreement. Management of the
Company and the Bank consider their employee relations to be
excellent.
Competition
The
Bank's principal competitors for deposits are other financial institutions,
including other banks, credit unions, and savings institutions located in the
Bank’s primary market area of Anne Arundel, Carroll, Frederick, Howard,
Montgomery and Prince George’s counties in Maryland, and Fairfax and Loudoun
counties in Virginia. Competition among these institutions is based primarily on
interest rates and other terms offered, service charges imposed on deposit
accounts, the quality of services rendered, and the convenience of banking
facilities. Additional competition for depositors' funds comes from mutual
funds, U.S. Government securities, and private issuers of debt obligations and
suppliers of other investment alternatives for depositors such as securities
firms. Competition from credit unions has intensified in recent years as
historical federal limits on membership have been relaxed. Because federal law
subsidizes credit unions by giving them a general exemption from federal income
taxes, credit unions have a significant cost advantage over banks and savings
associations, which are fully subject to federal income taxes. Credit unions may
use this advantage to offer rates that are highly competitive with those offered
by banks and thrifts.
The
banking business in Central Maryland and Northern Virginia generally, and the
Bank's primary service areas specifically, are highly competitive with respect
to both loans and deposits. As noted above, the Bank competes with many larger
banking organizations that have offices over a wide geographic area. These
larger institutions have certain inherent advantages, such as the ability to
finance wide-ranging advertising campaigns and promotions and to allocate their
investment assets to regions offering the highest yield and demand. They also
offer services, such as international banking, that are not offered directly by
the Bank (but are available indirectly through correspondent institutions), and,
by virtue of their larger total capitalization, such banks have substantially
higher legal lending limits, which are based on bank capital, than does the
Bank. The Bank can arrange loans in excess of its lending limit, or in excess of
the level of risk it desires to take, by arranging participations with other
banks. The primary factors in competing for loans are interest
rates, loan origination fees, and the range of services offered by lenders.
Competitors for loan originations include other commercial banks, mortgage
bankers, mortgage brokers, savings associations, and insurance companies.
Equipment leasing through the equipment leasing subsidiary basically involves
the same competitive factors as lending, with competition from other equipment
leasing companies.
Sandy
Spring Insurance Corporation (“SSIC”), a wholly owned subsidiary of the Bank,
offers annuities as an alternative to traditional deposit accounts. SSIC
operates the Chesapeake Insurance Group, a general insurance agency located in
Annapolis, Maryland, and Neff & Associates, an insurance agency located in
Ocean City, Maryland. Both agencies face competition primarily from
other insurance agencies and insurance companies. West Financial
Services, Inc. (“WFS”), a wholly owned subsidiary of the Bank, is an asset
management and financial planning company located in McLean,
Virginia. WFS faces competition primarily from other financial
planners, banks, and financial management companies.
In
addition to competing with other commercial banks, credit unions and savings
associations, commercial banks such as the Bank compete with non-bank
institutions for funds. For instance, yields on corporate and government debt
and equity securities affect the ability of commercial banks to attract and hold
deposits. Mutual funds also provide substantial competition to banks for
deposits. Other entities, both governmental and in private industry,
raise capital through the issuance and sale of debt and equity securities and
indirectly compete with the Bank in the acquisition of deposits.
The
Holding Company Act permits the Federal Reserve to approve an application of an
adequately capitalized and adequately managed bank holding company to acquire
control of, or acquire all or substantially all of the assets of, a bank located
in a state other than that holding company's home state. The Federal Reserve may
not approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law of
the host state. The Holding Company Act also prohibits the Federal Reserve from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Holding Company
Act does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or bank
holding company to the extent such limitation does not discriminate against
out-of-state banks or bank holding companies. The State of Maryland
allows out-of-state financial institutions to merge with Maryland banks and to
establish branches in Maryland, subject to certain limitations.
Financial
holding companies may engage in banking as well as types of securities,
insurance, and other financial activities that historically had been prohibited
for bank holding companies under prior law. Banks with or without
holding companies also may establish and operate financial subsidiaries that may
engage in most financial activities in which financial holding companies may
engage. Competition may increase as bank holding companies and other large
financial services companies take advantage of the ability to engage in new
activities and provide a wider array of products.
Monetary
Policy
The
Company and the Bank are affected by fiscal and monetary policies of the federal
government, including those of the Federal Reserve Board, which regulates the
national money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques available to the Federal Reserve Board are
engaging in open market transactions of U.S. Government securities, changing the
discount rate and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth of
bank loans, investments and deposits. Their use may also affect interest rates
charged on loans and paid on deposits. The effect of governmental policies on
the earnings of the Company and the Bank cannot be predicted.
Regulation,
Supervision, and Governmental Policy
The
following is a brief summary of certain statutes and regulations that
significantly affect the Company and the Bank. A number of other statutes and
regulations affect the Company and the Bank but are not summarized
below.
Bank
Holding Company Regulation
The
Company is registered as a bank holding company under the Holding Company Act
and, as such, is subject to supervision and regulation by the Federal Reserve.
As a bank holding company, the Company is required to furnish to the Federal
Reserve annual and quarterly reports of its operations and additional
information and reports. The Company is also subject to regular examination by
the Federal Reserve.
Under the
Holding Company Act, a bank holding company must obtain the prior approval of
the Federal Reserve before (1) acquiring direct or indirect ownership or control
of any class of voting securities of any bank or bank holding company if, after
the acquisition, the bank holding company would directly or indirectly own or
control more than 5% of the class; (2) acquiring all or substantially all of the
assets of another bank or bank holding company; or (3) merging or consolidating
with another bank holding company.
Prior to
acquiring control of the Company or the Bank any company must obtain approval of
the Federal Reserve. For purposes of the Holding Company Act, "control" is
defined as ownership of 25% or more of any class of voting securities of the
Company or the Bank, the ability to control the election of a majority of the
directors, or the exercise of a controlling influence over management or
policies of the Company or the Bank.
The
Change in Bank Control Act and the related regulations of the Federal Reserve
require any person or persons acting in concert (except for companies required
to make application under the Holding Company Act), to file a written notice
with the Federal Reserve before the person or persons acquire control of the
Company or the Bank. The Change in Bank Control Act defines "control" as the
direct or indirect power to vote 25% or more of any class of voting securities
or to direct the management or policies of a bank holding company or an insured
bank.
The
Holding Company Act also limits the investments and activities of bank holding
companies. In general, a bank holding company is prohibited from acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
a company that is not a bank or a bank holding company or from engaging directly
or indirectly in activities other than those of banking, managing or controlling
banks, providing services for its subsidiaries, non-bank activities that are
closely related to banking, and other financially related activities. The
activities of the Company are subject to these legal and regulatory limitations
under the Holding Company Act and Federal Reserve regulations.
In
general, bank holding companies that qualify as financial holding companies
under federal banking law may engage in an expanded list of non-bank activities.
Non-bank and financially related activities of bank holding companies, including
companies that become financial holding companies, also may be subject to
regulation and oversight by regulators other than the Federal Reserve. The
Company is not a financial holding company, but may choose to become one in the
future.
The
Federal Reserve has the power to order a holding company or its subsidiaries to
terminate any activity, or to terminate its ownership or control of any
subsidiary, when it has reasonable cause to believe that the continuation of
such activity or such ownership or control constitutes a serious risk to the
financial safety, soundness, or stability of any bank subsidiary of that holding
company.
The
Federal Reserve has adopted guidelines regarding the capital adequacy of bank
holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets.
See "Regulatory Capital Requirements."
The
Federal Reserve has the power to prohibit dividends by bank holding companies if
their actions constitute unsafe or unsound practices. The Federal Reserve has
issued a policy statement on the payment of cash dividends by bank holding
companies, which expresses the Federal Reserve's view that a bank holding
company should pay cash dividends only to the extent that the company's net
income for the past year is sufficient to cover both the cash dividends and a
rate of earnings retention that is consistent with the company's capital needs,
asset quality, and overall financial condition.
Bank
Regulation
The Bank
is a state chartered bank and trust company subject to supervision by the State
of Maryland. As a member of the Federal Reserve System, the Bank is
also subject to supervision by the Federal Reserve. Deposits of the
Bank are insured by the FDIC to the legal maximum. Deposits, reserves,
investments, loans, consumer law compliance, issuance of securities, payment of
dividends, establishment of branches, mergers and acquisitions, corporate
activities, changes in control, electronic funds transfers, responsiveness to
community needs, management practices, compensation policies, and other aspects
of operations are subject to regulation by the appropriate federal and state
supervisory authorities. In addition, the Bank is subject to numerous federal,
state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit (including to
insiders), credit practices, disclosure of credit terms and discrimination in
credit transactions.
The
Federal Reserve regularly examines the operations and condition of the Bank,
including, but not limited to, its capital adequacy, reserves, loans,
investments, and management practices. These examinations are for the protection
of the Bank's depositors and the Deposit Insurance Fund. In addition, the Bank
is required to furnish quarterly and annual reports to the Federal Reserve. The
Federal Reserve's enforcement authority includes the power to remove officers
and directors and the authority to issue cease-and-desist orders to prevent a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
The
Federal Reserve has adopted regulations regarding capital adequacy, which
require member banks to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "Regulatory Capital
Requirements." Federal Reserve and State regulations limit the amount of
dividends that the Bank may pay to the Company. See “Note 12 – Stockholders’
Equity” of the Notes to the Consolidated Financial Statements.
The Bank
is subject to restrictions imposed by federal law on extensions of credit to,
and certain other transactions with, the Company and other affiliates, and on
investments in their stock or other securities. These restrictions prevent the
Company and the Bank's other affiliates from borrowing from the Bank unless the
loans are secured by specified collateral, and require those transactions to
have terms comparable to terms of arms-length transactions with third persons.
In addition, secured loans and other transactions and investments by the Bank
are generally limited in amount as to the Company and as to any other affiliate
to 10% of the Bank's capital and surplus and as to the Company and all other
affiliates together to an aggregate of 20% of the Bank's capital and surplus.
Certain exemptions to these limitations apply to extensions of credit and other
transactions between the Bank and its subsidiaries. These regulations and
restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends,
interest, and operating expenses.
Under
Federal Reserve regulations, banks must adopt and maintain written policies that
establish appropriate limits and standards for extensions of credit secured by
liens or interests in real estate or are made for the purpose of financing
permanent improvements to real estate. These policies must establish loan
portfolio diversification standards; prudent underwriting standards, including
loan-to-value limits, that are clear and measurable; loan administration
procedures; and documentation, approval, and reporting requirements. A bank's
real estate lending policy must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
adopted by the federal bank regulators. The Interagency Guidelines, among other
things, call for internal loan-to-value limits for real estate loans that are
not in excess of the limits specified in the Guidelines. The Interagency
Guidelines state, however, that it may be appropriate in individual cases to
originate or purchase loans with loan-to-value ratios in excess of the
supervisory loan-to-value limits.
Sandy
Spring Bank’s deposits are insured up to applicable limits by the Deposit
Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal
Deposit Insurance Corporation’s risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors, with less
risky institutions paying lower assessments. An institution’s assessment rate
depends upon the category to which it is assigned. Effective April 1, 2009,
assessment rates range from seven to 77-1/2 basis points. No institution may pay
a dividend if in default of the federal deposit insurance
assessment. The Federal Deposit Insurance Corporation imposed on all
insured institutions a special emergency assessment of five basis points of
total assets minus tier 1 capital, as of June 30, 2009 (capped at ten basis
points of an institution’s deposit assessment base), in order to cover losses to
the Deposit Insurance Fund. That special assessment was collected on
September 30, 2009. The Federal Deposit Insurance Corporation
provided for similar assessments during the final two quarters of 2009, if
deemed necessary. However, in lieu of further special assessments,
the Federal Deposit Insurance Corporation required insured institutions to
prepay estimated quarterly risk-based assessments for the fourth quarter of 2009
through the fourth quarter of 2012. The estimated assessments, which
include an assumed annual assessment base increase of 5%, were recorded as a
prepaid expense asset as of December 30, 2009. As of December 31,
2009, and each quarter thereafter, a charge to earnings will be recorded for
each regular assessment with an offsetting credit to the prepaid
asset. The Federal Deposit Insurance Corporation has authority to
increase insurance assessments. A significant increase in insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of Sandy Spring Bank. Management cannot predict what insurance
assessment rates will be in the future.
Regulatory
Capital Requirements
The
Federal Reserve has established guidelines for maintenance of appropriate levels
of capital by bank holding companies and member banks. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to risk-weighted assets.
These capital regulations are subject to change.
The
regulations of the Federal Reserve require bank holding companies and member
banks to maintain a minimum leverage ratio of "Tier 1 capital" (as defined in
the risk-based capital guidelines discussed in the following paragraphs) to
total assets of 3.0%. The capital regulations state, however, that only the
strongest bank holding companies and banks, with composite examination ratings
of 1 under the rating system used by the federal bank regulators, would be
permitted to operate at or near this minimum level of capital. All other bank
holding companies and banks are expected to maintain a leverage ratio of at
least 1% to 2% above the minimum ratio, depending on the assessment of an
individual organization's capital adequacy by its primary regulator. A bank or
bank holding company experiencing or anticipating significant growth is expected
to maintain capital well above the minimum levels. In addition, the Federal
Reserve has indicated that it also may consider the level of an organization's
ratio of tangible Tier 1 capital (after deducting all intangibles) to total
assets in making an overall assessment of capital.
The
risk-based capital rules of the Federal Reserve require bank holding companies
and member banks to maintain minimum regulatory capital levels based upon a
weighting of their assets and off-balance sheet obligations according to risk.
The risk-based capital rules have two basic components: a core capital (Tier 1)
requirement and a supplementary capital (Tier 2) requirement. Core capital
consists primarily of common stockholders' equity, certain perpetual preferred
stock (noncumulative perpetual preferred stock with respect to banks), and
minority interests in the equity accounts of consolidated subsidiaries; less all
intangible assets, except for certain mortgage servicing rights and purchased
credit card relationships. Supplementary capital elements include, subject to
certain limitations, the allowance for losses on loans and leases; perpetual
preferred stock that does not qualify as Tier 1 capital; long-term preferred
stock with an original maturity of at least 20 years from issuance; hybrid
capital instruments, including perpetual debt and mandatory convertible
securities; subordinated debt, intermediate-term preferred stock, and up to 45%
of pre-tax net unrealized gains on available-for-sale equity
securities.
The
risk-based capital regulations assign balance sheet assets and credit equivalent
amounts of off-balance sheet obligations to one of four broad risk categories
based principally on the degree of credit risk associated with the obligor. The
assets and off-balance sheet items in the four risk categories are weighted at
0%, 20%, 50% and 100%. These computations result in the total risk-weighted
assets.
The
risk-based capital regulations require all commercial banks and bank holding
companies to maintain a minimum ratio of total capital to total risk-weighted
assets of 8%, with at least 4% as core capital. For the purpose of calculating
these ratios: (i) supplementary capital is limited to no more than 100% of core
capital; and (ii) the aggregate amount of certain types of supplementary capital
is limited. In addition, the risk-based capital regulations limit the allowance
for credit losses that may be included in capital to 1.25% of total
risk-weighted assets.
The
federal bank regulatory agencies have established a joint policy regarding the
evaluation of commercial banks' capital adequacy for interest rate risk. Under
the policy, the Federal Reserve's assessment of a bank's capital adequacy
includes an assessment of the bank's exposure to adverse changes in interest
rates. The Federal Reserve has determined to rely on its examination process for
such evaluations rather than on standardized measurement systems or formulas.
The Federal Reserve may require banks that are found to have a high level of
interest rate risk exposure or weak interest rate risk management systems to
take corrective actions. Management believes its interest rate risk management
systems and its capital relative to its interest rate risk are
adequate.
Federal
banking regulations also require banks with significant trading assets or
liabilities to maintain supplemental risk-based capital based upon their levels
of market risk. The Bank did not have significant levels of trading assets or
liabilities during 2009, and was not required to maintain such supplemental
capital.
Well-capitalized
institutions are not subject to limitations on brokered deposits, while an
adequately capitalized institution is able to accept, renew, or rollover
brokered deposits only with a waiver from the FDIC and subject to certain
restrictions on the yield paid on such deposits. Undercapitalized
institutions are not permitted to accept brokered deposits.
The
Federal Reserve has established regulations that classify banks by capital
levels and provide for the Federal Reserve to take various "prompt corrective
actions" to resolve the problems of any bank that fails to satisfy the capital
standards. Under these regulations, a well-capitalized bank is one
that is not subject to any regulatory order or directive to meet any specific
capital level and that has a total risk-based capital ratio of 10% or more, a
Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or
more. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a
total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%,
and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank that does not meet these standards is
categorized as undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on its capital levels. A bank that falls within any
of the three undercapitalized categories established by the prompt corrective
action regulation is subject to severe regulatory sanctions. As of December 31,
2009, the Bank was well-capitalized as defined in the Federal Reserve's
regulations.
For
information regarding the Company's and the Bank's compliance with their
respective regulatory capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations — Capital Management”
of this report, and “Note 11-Subordinated Debentures,” and "Note 23 – Regulatory
Matters" of the Notes to the Consolidated Financial Statements of this
report.
Supervision
and Regulation of Mortgage Banking Operations
The
Company's mortgage banking business is subject to the rules and regulations of
the U.S. Department of Housing and Urban Development ("HUD"), the Federal
Housing Administration ("FHA"), the Veterans' Administration ("VA"), and the
Fannie Mae with respect to originating, processing, selling and servicing
mortgage loans. Those rules and regulations, among other things, prohibit
discrimination and establish underwriting guidelines, which include provisions
for inspections and appraisals, require credit reports on prospective borrowers,
and fix maximum loan amounts. Lenders such as the Company are required annually
to submit audited financial statements to Fannie Mae, FHA and VA. Each of these
regulatory entities has its own financial requirements. The Company's affairs
are also subject to examination by the Federal Reserve, Fannie Mae, FHA and VA
at all times to assure compliance with the applicable regulations, policies and
procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act,
Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate
Settlement Procedures Act and related regulations that prohibit discrimination
and require the disclosure of certain basic information to mortgagors concerning
credit terms and settlement costs. The Company's mortgage banking operations
also are affected by various state and local laws and regulations and the
requirements of various private mortgage investors.
Community
Reinvestment
Under the
Community Reinvestment Act (“CRA”), a financial institution has a continuing and
affirmative obligation to help meet the credit needs of the entire community,
including low and moderate income neighborhoods. The CRA does not
establish specific lending requirements or programs for financial institutions,
or limit an institution’s discretion to develop the types of products and
services that it believes are best suited to its particular
community. However, institutions are rated on their performance in
meeting the needs of their communities. Performance is tested in
three areas: (a) lending, to evaluate the institution’s record of making loans
in its assessment areas; (b) investment, to evaluate the institution’s record of
investing in community development projects, affordable housing, and programs
benefiting low or moderate income individuals and businesses; and (c) service,
to evaluate the institution’s delivery of services through its branches, ATMs
and other offices. The CRA requires each federal banking agency, in
connection with its examination of a financial institution, to assess and assign
one of four ratings to the institution’s record of meeting the credit needs of
the community and to take such record into account in its evaluation of certain
applications by the institution, including applications for charters, branches
and other deposit facilities, relocations, mergers, consolidations, acquisitions
of assets or assumptions of liabilities, and savings and loan holding company
acquisitions. The CRA also requires that all institutions make
public, disclosure of their CRA ratings. The Bank was assigned a
“satisfactory” rating as a result of its last CRA examination.
Bank
Secrecy Act
Under the
Bank Secrecy Act (“BSA”), a financial institution is required to have systems in
place to detect certain transactions, based on the size and nature of the
transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In
addition, financial institutions are required to file suspicious activity
reports for transactions that involve more than $5,000 and which the financial
institution knows, suspects, or has reason to suspect involves illegal funds, is
designed to evade the requirements of the BSA, or has no lawful purpose. The
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot
Act" or the "Patriot Act, enacted prohibitions against specified financial
transactions and account relationships, as well as enhanced due diligence
standards intended to prevent the use of the United States financial system for
money laundering and terrorist financing activities. The Patriot Act requires
banks and other depository institutions, brokers, dealers and certain other
businesses involved in the transfer of money to establish anti-money laundering
programs, including employee training and independent audit requirements meeting
minimum standards specified by the act, to follow standards for customer
identification and maintenance of customer identification records, and to
compare customer lists against lists of suspected terrorists, terrorist
organizations and money launderers. The Patriot Act also requires federal bank
regulators to evaluate the effectiveness of an applicant in combating money
laundering in determining whether to approve a proposed bank
acquisition.
Sarbanes-Oxley
Act of 2002
The
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established a broad range of
corporate governance and accounting measures intended to increase corporate
responsibility and protect investors by improving the accuracy and reliability
of disclosures under federal securities laws. The Company is subject to
Sarbanes-Oxley because it is required to file periodic reports with the SEC
under the Securities and Exchange Act of 1934. Among other things,
Sarbanes-Oxley, its implementing regulations and related Nasdaq Stock Market
rules have established membership requirements and additional responsibilities
for the Company’s audit committee, imposed restrictions on the relationship
between the Company and its outside auditors (including restrictions on the
types of non-audit services our auditors may provide to us), imposed additional
financial statement certification responsibilities for the Company’s chief
executive officer and chief financial officer, expanded the disclosure
requirements for corporate insiders, required management to evaluate the
Company’s disclosure controls and procedures and its internal control over
financial reporting, and required the Company’s auditors to issue a report on
our internal control over financial reporting.
Other
Laws and Regulations
Some of
the aspects of the lending and deposit business of the Bank that are subject to
regulation by the Federal Reserve and the FDIC include reserve requirements and
disclosure requirements in connection with personal and mortgage loans and
deposit accounts. The Bank’s federal student lending activities are
subject to regulation and examination by the United States Department of
Education. In addition, the Bank is subject to numerous federal and
state laws and regulations that include specific restrictions and procedural
requirements with respect to the establishment of branches, investments,
interest rates on loans, credit practices, the disclosure of credit terms, and
discrimination in credit transactions.
Enforcement
Actions
Federal
statutes and regulations provide financial institution regulatory agencies with
great flexibility to undertake an enforcement action against an institution that
fails to comply with regulatory requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
civil money penalties, cease-and-desist orders, receivership, conservatorship,
or the termination of the deposit insurance.
Executive
Officers
The
following listing sets forth the name, age (as of February 27, 2010), principal
position and recent business experience of each executive officer:
R. Louis
Caceres, 47, Executive Vice President of the Bank. Mr. Caceres was made
Executive Vice President of the Bank in 2002. Prior to that, Mr.
Caceres was a Senior Vice President of the Bank.
Ronald E.
Kuykendall, 57, became Executive Vice President, General Counsel and Secretary
of the Company and the Bank in 2002. Prior to that, Mr. Kuykendall
was General Counsel and Secretary of the Company and Senior Vice President of
the Bank.
Philip J.
Mantua, CPA, 51, became Executive Vice President and Chief Financial Officer of
the Company and the Bank in 2004. Prior to that, Mr. Mantua was
Senior Vice President of Managerial Accounting.
Joseph J.
O'Brien, Jr., 46, joined the Bank in July 2007 as Executive Vice
President. On January 1, 2008 he became president of the Northern
Virginia Market. Prior to joining the Bank Mr. O'Brien was Executive
Vice President and senior lender for a local banking institution.
Daniel J.
Schrider, 45, became President of the Company and the Bank effective March 26,
2008 and Chief Executive Officer effective January 1, 2009. Prior to
that, Mr. Schrider served as an Executive Vice President and Chief Revenue
Officer of the Bank.
Frank H.
Small, 63, became an Executive Vice President of the Company and the Bank in
2001 and Chief Operating Officer of the Bank in 2002. Prior to that,
Mr. Small was an Executive Vice President of the Bank.
Jeffrey
A. Welch, 50, became an Executive Vice President and Chief Credit Officer of the
Bank in 2008. Prior to joining the Bank, Mr. Welch served as a Senior Vice
President of Commerce Bank.
Item
1A. RISK FACTORS
Investing
in our common stock involves risks. You should carefully consider the following
risk factors before you decide to make an investment decision regarding our
stock. The risk factors may cause our future earnings to be lower or our
financial condition to be less favorable than we expect. In addition, other
risks of which we are not aware, or which we do not believe are material, may
cause earnings to be lower, or may hurt our financial condition. You should also
consider the other information in this Annual Report on Form 10-K, as well as in
the documents incorporated by reference into it.
A
continuation of recessionary conditions could have an adverse effect on our
financial position or results of operations.
United
States and global markets have experienced severe disruption and volatility, and
general economic conditions have declined significantly. Adverse developments in
credit quality and asset values throughout the financial services industry, as
well as general uncertainty regarding the economic and regulatory environment,
have had a significant negative impact on the industry. The United
States government has taken steps to try to stabilize the financial system,
including investing in financial institutions, and also has been working to
design and implement programs to stimulate economic recovery. There can be no
assurances that these efforts will be successful. Factors that could
continue to pressure financial services companies, including the Company, are
numerous and include (1) worsening credit quality, leading to increases in loan
losses and reserves, (2) continued or worsening disruption and volatility in
financial markets, leading to continuing reductions in assets values, (3)
capital and liquidity concerns regarding financial institutions generally, (4)
limitations resulting from or imposed in connection with governmental actions
intended to stabilize or provide additional regulation of the financial system,
and (5) recessionary conditions that are deeper or last longer than currently
anticipated.
Changes
in local economic conditions could adversely affect our business.
Our
commercial and commercial real estate lending operations are concentrated in
Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George’s
counties in Maryland, and Fairfax and Loudoun counties in Virginia. Our success
depends in part upon economic conditions in these markets. Adverse changes in
economic conditions in these markets could reduce our growth in loans and
deposits, impair our ability to collect our loans, increase our problem loans
and charge-offs,and otherwise negatively affect our performance and financial
condition. Recent declines in real estate values could cause some of our
residential and commercial real estate loans to be inadequately collateralized,
which would expose us to a greater risk of loss in the event that we seek to
recover on defaulted loans by selling the real estate
collateral.
We
may not successfully execute our plan to return to profitability
For the
year ended December 31, 2009, we had a net loss available to common stockholders
of approximately $19.7 million. While we are executing a plan to
return to profitability on a long-term basis by stabilizing and then reducing
our level of non-performing assets, enhancing our capital and liquidity, and
increasing the operating income of our core community banking franchise, there
can be no assurance that we will be successful in executing our plan such that
we will return to profitability.
Our
allowance for loan and lease losses may not be adequate to cover our actual loan
and lease losses, which could adversely affect our earnings.
We
maintain an allowance for loan and lease losses in an amount that we believe is
adequate to provide for probable losses in the portfolio. While we strive to
monitor credit quality and to identify loans and leases that may become
non-performing, at any time there are loans and leases included in the portfolio
that will result in losses, but that have not been identified as non-performing
or potential problem credits. We cannot be sure that we will be able to identify
deteriorating credits prior to them becoming non-performing assets, or that we
will have the ability to limit losses on those loans and leases that are
identified. As a result, future additions to the allowance may be necessary.
Additionally, future additions may be required based on changes in the loans and
leases comprising the portfolio and changes in the financial condition of
borrowers, that may result from changes in economic conditions, or as a result
of assumptions by management in determining the allowance. Additionally, federal
banking regulators, as an integral part of their supervisory function,
periodically review our allowance for loan and lease losses. These regulatory
agencies may require us to increase our provision for loan and lease losses or
to recognize further loan or lease charge-offs based upon their judgments, which
may differ from ours. Any increase in the allowance for loan and lease losses
could have a negative effect on the financial condition and results of
operations of the Company.
If
our non-performing assets increase, our earnings will suffer.
At
December 31, 2009, our non-performing assets totaled $141.2 million, or
3.89%, of total assets compared to non-performing assets of $72.2 million, or
2.18% of total assets at December 31, 2008. Our non-performing assets
adversely affect our net income in various ways. We do not record interest
income on non-accrual loans or other real estate owned. We must reserve for
probable losses, which is established through a current period charge to the
provision for loan and lease losses as well as from time to time, as
appropriate, write-downs of the value of properties in our other real estate
owned portfolio to reflect changing market values. Additionally, there are legal
fees associated with the resolution of problem assets as well as carrying costs
such as taxes, insurance and maintenance related to our other real estate owned.
Further, the resolution of non-performing assets requires the active involvement
of management, which can distract them from more profitable activity. Finally,
if our estimate for the recorded allowance for loan and lease losses proves to
be incorrect and our allowance is inadequate, we will have to increase the
allowance accordingly and as a result our earnings would be adversely
affected. A further downturn in the market areas we serve could
increase our credit risk associated with our loan portfolio, as it could have a
material adverse effect on both the ability of borrowers to repay loans as
well as the value of the real property or other property held as collateral for
such loans. There can be no assurance that we will not experience
further increases in non-performing loans in the future, or that our
non-performing assets will not result in further losses in the
future.
Changes
in interest rates and other factors beyond our control may adversely affect our
earnings and financial condition.
Our net
income depends to a great extent upon the level of our net interest income.
Changes in interest rates can increase or decrease net interest income and net
income. Net interest income is the difference between the interest income we
earn on loans, investments, and other interest-earning assets, and the interest
we pay on interest-bearing liabilities, such as deposits and borrowings. Net
interest income is affected by changes in market interest rates, because
different types of assets and liabilities may react differently, and at
different times, to market interest rate changes. When interest-bearing
liabilities mature or re-price more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest
income. Similarly, when interest-earning assets mature or re-price more quickly
than interest-bearing liabilities, falling interest rates could reduce net
interest income.
Changes
in market interest rates are affected by many factors beyond our control,
including inflation, unemployment, money supply, international events, and
events in world financial markets. We attempt to manage our risk from changes in
market interest rates by adjusting the rates, maturity, re-pricing, and balances
of the different types of interest-earning assets and interest-bearing
liabilities, but interest rate risk management techniques are not exact. As a
result, a rapid increase or decrease in interest rates could have an adverse
effect on our net interest margin and results of operations. Changes in the
market interest rates for types of products and services in our various markets
also may vary significantly from location to location and over time based upon
competition and local or regional economic factors. At December 31, 2009, our
interest rate sensitivity simulation model projected that net interest income
would not change significantly if interest rates immediately fell by 200 basis
points due to the current low level of market interest rates but would decrease
by 5.03% if interest rates immediately rose by 200 basis points. The results of
our interest rate sensitivity simulation model depend upon a number of
assumptions which may not prove to be accurate. There can be no assurance that
we will be able to successfully manage our interest rate risk.
Our
investment securities portfolio is subject to credit risk, market risk, and
liquidity risk.
Our
investment securities portfolio has risks beyond our control that can
significantly influence its fair value. These factors include, but are not
limited to, rating agency downgrades of the securities, defaults of the issuers
of the securities, lack of market pricing of the securities, and continued
instability in the credit markets. Recent lack of market activity with respect
to certain of the securities has, in certain circumstances, required us to base
our fair market valuation on unobservable inputs. Any change in current
accounting principles or interpretations of these principles could impact our
assessment of fair value and thus our determination of other-than-temporary
impairment of the securities in our investment securities portfolio. If any of
our investment securities are determined to be other-than-temporarily impaired,
we would be required to write down the securities, which could adversely affect
our earnings and regulatory capital ratios.
We
are subject to liquidity risks.
Market
conditions could negatively affect the level or cost of liquidity available to
us, which would affect our ongoing ability to accommodate liability maturities
and deposit withdrawals, meet contractual obligations, and fund asset growth and
new business transactions at a reasonable cost, in a timely manner, and without
adverse consequences. Core deposits and Federal Home Loan Bank advances are our
primary source of funding. A significant decrease in our core deposits, an
inability to renew Federal Home Loan Bank advances, an inability to obtain
alternative funding to core deposits or Federal Home Loan Bank advances, or a
substantial, unexpected, or prolonged change in the level or cost of liquidity
could have a negative effect on our business and financial
condition.
An
impairment in the carrying value of our goodwill could negatively impact our
earnings and capital.
At
December 31, 2009, we had goodwill totaling $76.8 million. Goodwill
is initially recorded at fair value and is not amortized, but is reviewed for
impairment at least annually or more frequently if events or changes in
circumstances indicate that the carrying value may not be recoverable. Given the
current economic environment and conditions in the financial markets, we could
be required to evaluate the recoverability of goodwill prior to our normal
annual assessment if we experience disruption in our business, unexpected
significant declines in our operating results, or sustained market
capitalization declines. These types of events and the resulting analyses could
result in goodwill impairment charges in the future. These non-cash impairment
charges could adversely affect our results of operations in future periods. A
goodwill impairment charge does not adversely affect any of our regulatory
capital ratios or our tangible capital ratio. During the last quarter of 2009,
the market value of the Company’s stock declined significantly below its book
value at December 31, 2009. Management considered this decrease to be a
triggering event indicating the possibility of impairment in the Community
Banking segment at December 31, 2009. Based on our analyses, we concluded that
the fair value of our reporting units exceeded the carrying value of our assets
and liabilities and, therefore, goodwill was not considered impaired at December
31, 2009.
We
rely on our management and other key personnel, and the loss of any of them may
adversely affect our operations.
We are
and will continue to be dependent upon the services of our executive management
team. In addition, we will continue to depend on our ability to retain and
recruit key client relationship managers. The unexpected loss of services of any
key management personnel, or the inability to recruit and retain qualified
personnel in the future, could have an adverse effect on our business and
financial condition.
The
market price for our common stock may be volatile.
The
market price for our common stock has fluctuated, ranging between $6.50 and
$22.48 per share during the 12 months ended December 31, 2009. The overall
market and the price of our common stock may continue to be volatile. There may
be a significant impact on the market price for our common stock due to, among
other things:
|
·
|
past
and future dividend practice;
|
|
·
|
financial
condition, performance, creditworthiness and
prospects;
|
|
·
|
quarterly
variations in our operating results or the quality of our
assets;
|
|
·
|
operating
results that vary from the expectations of management, securities analysts
and investors;
|
|
·
|
changes
in expectations as to our future financial
performance;
|
|
·
|
announcements
of innovations, new products, strategic developments, significant
contracts, acquisitions and other material events by us or our
competitors;
|
|
·
|
the
operating and securities price performance of other companies that
investors believe are comparable to
us;
|
|
·
|
future
sales of our equity or equity-related
securities;
|
|
·
|
the
credit, mortgage and housing markets, the markets for securities relating
to mortgages or housing, and developments with respect to financial
institutions generally; and
|
|
·
|
changes
in global financial markets and global economies and general market
conditions, such as interest or foreign exchange rates, stock, commodity
or real estate valuations or volatility or other geopolitical, regulatory
or judicial events.
|
There can
be no assurance that a more active or consistent trading market in our common
stock will develop. As a result, relatively small trades could have a
significant impact on the price of our common stock.
We
may fail to realize the cost savings we estimate for mergers and
acquisitions.
The
success of our mergers and acquisitions may depend, in part, on our ability to
realize the estimated cost savings from combining the businesses. It is possible
that the potential cost savings could turn out to be more difficult to achieve
than we anticipated. Our cost savings estimates also depend on our ability to
combine the businesses in a manner that permits those cost savings to be
realized. If our estimates turn out to be incorrect or we are not able to
combine successfully, the anticipated cost savings may not be realized fully or
at all, or may take longer to realize than expected.
Combining
acquired businesses with Sandy Spring may be more difficult, costly, or
time-consuming than we expect, or could result in the loss of
customers.
It is
possible that the process of merger integration of acquired companies could
result in the loss of key employees, the disruption of ongoing business or
inconsistencies in standards, controls, procedures and policies that adversely
affect the ability to maintain relationships with clients and employees or to
achieve the anticipated benefits of the merger or acquisition. There also may be
disruptions that cause us to lose customers or cause customers to withdraw their
deposits. Customers may not readily accept changes to their banking arrangements
or other customer relationships after the merger or acquisition.
Competition
may decrease our growth or profits.
We
compete for loans, deposits, and investment dollars with other banks and other
financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private
lenders, many of which have substantially greater resources than ours. Credit
unions have federal tax exemptions, which may allow them to offer lower rates on
loans and higher rates on deposits than taxpaying financial institutions such as
commercial banks. In addition, non-depository institution competitors are
generally not subject to the extensive regulation applicable to institutions
that offer federally insured deposits. Other institutions may have other
competitive advantages in particular markets or may be willing to accept lower
profit margins on certain products. These differences in resources, regulation,
competitive advantages, and business strategy may decrease our net interest
margin, increase our operating costs, and may make it harder for us to compete
profitably.
Government
regulation significantly affects our business.
The
banking industry is heavily regulated. Banking regulations are primarily
intended to protect the federal deposit insurance funds and depositors, not
shareholders. Sandy Spring Bank is subject to regulation and supervision by the
Board of Governors of the Federal Reserve System and by Maryland banking
authorities. Sandy Spring Bancorp is subject to regulation and supervision by
the Board of Governors of the Federal Reserve System. The burdens imposed by
federal and state regulations put banks at a competitive disadvantage compared
to less regulated competitors such as finance companies, mortgage banking
companies, and leasing companies. Changes in the laws, regulations, and
regulatory practices affecting the banking industry may increase our costs of
doing business or otherwise adversely affect us and create competitive
advantages for others. Regulations affecting banks and financial services
companies undergo continuous change, and we cannot predict the ultimate effect
of these changes, which could have a material adverse effect on our
profitability or financial condition. Federal economic and monetary policy may
also affect our ability to attract deposits and other funding sources, make
loans and investments, and achieve satisfactory interest spreads.
Our
ability to pay dividends is limited by law and contract.
Our
ability to pay dividends to our shareholders largely depends on Sandy Spring
Bancorp’s receipt of dividends from Sandy Spring Bank. The amount of dividends
that Sandy Spring Bank may pay to Sandy Spring Bancorp is limited by federal
laws and regulations. The ability of Sandy Spring Bank to pay dividends is also
subject to its profitability, financial condition and cash flow
requirements. There is no assurance that Sandy Spring Bank will be
able to pay dividends to Sandy Spring Bancorp in the future. We may
decide to limit the payment of dividends even when we have the legal ability to
pay them in order to retain earnings for use in our business. We also are
prohibited from paying dividends on our common stock if the required payments on
our subordinated debentures or preferred stock have not been made.
Restrictions
on unfriendly acquisitions could prevent a takeover.
Our
articles of incorporation and bylaws contain provisions that could discourage
takeover attempts that are not approved by the board of directors. The Maryland
General Corporation Law includes provisions that make an acquisition of Sandy
Spring Bancorp more difficult. These provisions may prevent a future takeover
attempt in which our shareholders otherwise might receive a substantial premium
for their shares over then-current market prices.
These
provisions include supermajority provisions for the approval of certain business
combinations and certain provisions relating to meetings of shareholders. Our
certificate of incorporation also authorizes the issuance of additional shares
without shareholder approval on terms or in circumstances that could deter a
future takeover attempt.
Future
sales of our common stock or other securities may dilute the value and adversely
affect the market price of our common stock.
In many
situations, our board of directors has the authority, without any vote of our
shareholders, to issue shares of our authorized but unissued stock, including
shares authorized and unissued under our omnibus stock plan. In the future, we
may issue additional securities, through public or private offerings, in order
to raise additional capital. Any such issuance would dilute the percentage of
ownership interest of existing shareholders and may dilute the per share book
value of the common stock. In addition, option holders may exercise their
options at a time when we would otherwise be able to obtain additional equity
capital on more favorable terms.
Changes
in the Federal or State tax laws may negatively impact our financial
performance.
The
Company is subject to changes in tax law that could increase the effective tax
rate payable to the state or federal government. These law changes may be
retroactive to previous periods and as a result, could negatively affect the
current and future financial performance of the Company.
Volatile
and illiquid financial markets resulting from a significant event in the market
may hinder our ability to increase or maintain our current liquidity
position.
Financial
concerns in broad based financial sectors such as mortgage banking or
homebuilding may result in a volatile and illiquid bond market and may reduce or
eliminate the Company’s ability to pledge certain types of assets to increase or
maintain its liquidity position. A decline in the Company’s liquidity position
may hinder its ability to grow the balance sheet through internally generated
loan growth or through acquisitions.
We
may be subject to litigation risk.
In the
normal course of business, the Company may become involved in litigation, the
outcome of which may have a direct material impact on our financial position and
daily operations.
Our
financial results may be subject to the impact of changes in accounting
standards or interpretation of new or existing
standards.
From time
to time the Financial Accounting Standards Board (“FASB”) and the SEC change
accounting regulations and reporting standards that govern the preparation of
the Company’s financial statements. In addition, the FASB, SEC, bank regulators
and the outside independent auditors may revise their previous interpretations
regarding existing accounting regulations and the application of these
accounting standards. These revisions in their interpretations are out of the
Company’s control and may have a material impact on the Company’s financial
statements.
The
limitations on dividends and repurchases imposed through our participation in
the TARP Capital Purchase Program may make our common stock less attractive of
an investment.
In
December 2008, the U.S. Treasury purchased newly issued shares of our preferred
stock as part of the Capital Purchase Program. As part of this
transaction, we agreed to not increase the dividend paid on our common stock and
to not repurchase shares of our capital stock for a period of three
years. These capital management devices contribute to the
attractiveness of our common stock, and limitations and prohibitions on such
activities may make our common stock less attractive to investors.
The
limitations on executive compensation imposed through our participation in the
Capital Purchase Program may restrict our ability to attract, retain and
motivate key employees, which could adversely affect our
operations.
As part
of our participation in the Capital Purchase Program, we agreed to be bound by
certain executive compensation restrictions, including limitations on severance
payments and the clawback of any bonus and incentive compensation that were
based on materially inaccurate financial statements or any other materially
inaccurate performance metric criteria. The recently enacted American
Recovery and Reinvestment Act of 2009 provides more stringent limitations on
severance pay and the payment of bonuses to certain officers and highly
compensated employees of participants in the Capital Purchase
Program. To the extent that any of these compensation restrictions do
not permit us to provide a comprehensive compensation package to our key
employees that is competitive in our market area, we may have difficulty in
attracting, retaining and motivating our key employees, which could have an
adverse effect on our results of operations.
The
terms governing the issuance of the preferred stock to Treasury may be changed,
the effect of which may have an adverse effect on our operations.
The
Securities Purchase Agreement that we entered into with the Treasury provides
that the Treasury may unilaterally amend any provision of the agreement to the
extent required to comply with any changes in applicable federal statutes that
may occur in the future. The American Recovery and Reinvestment Act
of 2009 placed more stringent limits on executive compensation for participants
in the Capital Purchase Program and established a requirement that compensation
paid to executives be presented to shareholders for a “non-binding”
vote. Further changes in the terms of the transaction may occur in
the future. Such changes may place further restrictions on our
business, which may adversely affect our operations.
Our
inability to raise capital at attractive rates may restrict our ability to
redeem the preferred stock we issued, which may lead to a greater cost of that
investment.
The terms
of the preferred stock issued to the Treasury provide that the shares pay a
dividend at a rate of 5% per year for the first five years after which time the
rate will increase to 9% per year. It is our current goal to repay
the Treasury before the date of the increase in the dividend
rate. However, our ability to repay the Treasury will depend on our
ability to raise capital, which will depend on conditions in the capital markets
at that time, which are outside of our control. We can give no
assurance that we will be able to raise additional capital or that such capital
will be available on terms more attractive to us than the Treasury’s
investment.
Item 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
The
Company’s headquarters is located in Olney, Maryland. As of December 31, 2009,
Sandy Spring Bank owned 13 of its 43 full-service community banking centers and
leased the remaining banking centers. Visit www.sandyspringbank.com for a
complete list of community banking and ATM locations.
Item
3.
|
LEGAL
PROCEEDINGS
|
In the
normal course of business, the Company becomes involved in litigation arising
from the banking, financial, and other activities it conducts. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
PART
II
Item
5.
|
MARKET
FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Stock
Listing
Common
shares of Sandy Spring Bancorp, Inc. are listed on the NASDAQ Global Select
Market under the symbol “SASR”. At March 10, 2010 there
were 2,642 holders of record of the Company’s common stock.
Transfer
Agent and Registrar
Registrar
and Transfer Company, 10 Commerce Drive, Cranford, New Jersey
07016-3572.
Dividends
Shareholders
received quarterly cash common dividends totaling $6.1 million in 2009 and $15.8
million in 2008. Dividends paid on common stock exceeded net income
available to common shareholders in 2009. The dividend amount is established by
the board of directors each quarter. In making its decision on dividends, the
board considers operating results, financial condition, capital adequacy,
regulatory requirements, shareholder returns, and other factors. The
dividend rate was reduced to $.01 per share in November 2009 in an effort to
preserve the Company’s capital.
Share
Transactions with Employees
Shares
issued under the employee stock purchase plan, which commenced on July 1, 2001,
totaled 40,598 in 2009 and 32,891 in 2008, while issuances pursuant to exercises
of stock options and grants of restricted stock were 11,574 and 22,546 in the
respective years. Shares issued under the director stock purchase plan totaled
2,988 shares in 2009 and 1,479 shares in 2008
Quarterly
Stock Information
|
|
2009
|
|
|
2008
|
|
|
|
Stock Price Range
|
|
|
Per Share
|
|
|
Stock Price Range
|
|
|
Per Share
|
|
Quarter
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
|
Low
|
|
|
High
|
|
|
Dividend
|
|
1st
|
|
$ |
6.50 |
|
|
$ |
22.48 |
|
|
$ |
0.12 |
|
|
$ |
25.07 |
|
|
$ |
31.73 |
|
|
$ |
0.24 |
|
2nd
|
|
|
10.59 |
|
|
|
17.13 |
|
|
|
0.12 |
|
|
|
16.56 |
|
|
|
28.41 |
|
|
|
0.24 |
|
3rd
|
|
|
14.33 |
|
|
|
17.92 |
|
|
|
0.12 |
|
|
|
13.55 |
|
|
|
27.50 |
|
|
|
0.24 |
|
4th
|
|
|
8.19 |
|
|
|
16.61 |
|
|
|
0.01 |
|
|
|
13.56 |
|
|
|
22.95 |
|
|
|
0.24 |
|
Total
|
|
|
|
|
|
|
|
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
$ |
0.96 |
|
Issuer
Purchases of Equity Securities
The
Company did not repurchase any shares in the quarter ended December 31, 2009 and
does not currently have a stock repurchase program. As a result of
participating in the Department of the Treasury’s Troubled Asset Relief Program
(“TARP”) Capital Purchase Program, until December 5, 2011, the Company may not
repurchase any shares of its common stock, other than in connection with the
administration of an employee benefit plan, without the consent of the Treasury
Department.
Total
Return Comparison
The
following graph and table show the cumulative total return on the common stock
of the Company over the last five years, compared with the cumulative total
return of a broad stock market index (the Standard and Poor’s 500 Index or
“S&P 500”), and a narrower index of Mid-Atlantic bank holding company peers
with assets of $2 billion to $7 billion. The cumulative total return
on the stock or the index equals the total increase in value since December 31,
2003, assuming reinvestment of all dividends paid into the stock or the index.
The graph and table were prepared assuming that $100 was invested on December
31, 2004, in the common stock and the securities included in the
indexes.
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sandy
Spring Bancorp, Inc.
|
|
$ |
100.0 |
|
|
$ |
93.2 |
|
|
$ |
104.6 |
|
|
$ |
78.5 |
|
|
$ |
64.4 |
|
|
$ |
27.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P
500 Index
|
|
$ |
100.0 |
|
|
$ |
104.9 |
|
|
$ |
121.5 |
|
|
$ |
128.2 |
|
|
$ |
80.7 |
|
|
$ |
102.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Peer
Group Index
|
|
$ |
100.0 |
|
|
$ |
97.0 |
|
|
$ |
107.6 |
|
|
$ |
82.5 |
|
|
$ |
88.8 |
|
|
$ |
53.3 |
|
The Peer
Group Index includes twenty publicly traded bank holding companies, other than
the Company, headquartered in the Mid-Atlantic Region as noted and with assets
of $2 billion to $7 billion. The companies included in this index
are: The Bancorp, Inc. (PA); City Holding Company (WV); First Bancorp
(NC); First Commonwealth Financial Corp. (PA), First Community Bancshares, Inc.
(VA); First Financial Bancorp (OH); FNB Financial Corp. (NC); Hampton Roads
Bankshares, Inc. (VA); Lakeland Bancorp, Inc. (NJ); Metro Bancorp, Inc. (PA);
Peoples Bancorp, Inc. (OH); Stellar One Company (VA); Sun Bancorp,
Inc. (NJ); S&T Bancorp, Inc. (PA); Towne Bank (VA); Union First Market
Bankshares Corporation (VA); Univest Company of Pennsylvania (PA); Virginia
Commerce Bancorp, Inc. (VA); Wesbanco, Inc. (WV); and Yadkin Valley Financial
Corp. (NC). Returns are weighted according to the issuer’s stock market
capitalization at the beginning of each year shown.
Equity
Compensation Plans
The
following table presents disclosure regarding equity compensation plans in
existence at December 31, 2009, consisting only of the 1999 Stock Option Plan
(expired but with outstanding options that may still be exercised) and the 2005
Omnibus Stock Plan, each of which was approved by the shareholders.
|
|
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
|
|
|
Weighted average exercise
price of outstanding options,
warrants and rights
|
|
|
Number of securities remaining
available for future issuance under
equity compensation plans
excluding securities reflected in
column
|
|
Equity
compensation plans approved by security holders
|
|
|
833,727 |
|
|
$ |
32.56 |
|
|
|
1,212,233 |
|
Equity
compensation plans not approved by security holders
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
|
833,727 |
|
|
$ |
32.56 |
|
|
|
1,212,233 |
|
Item
6. SELECTED FINANCIAL DATA
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Results
of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent
interest income
|
|
$ |
160,069 |
|
|
$ |
173,389 |
|
|
$ |
186,481 |
|
|
$ |
159,686 |
|
|
$ |
129,288 |
|
Interest
expense
|
|
|
51,522 |
|
|
|
60,386 |
|
|
|
76,149 |
|
|
|
58,687 |
|
|
|
33,982 |
|
Tax-equivalent
net interest income
|
|
|
108,548 |
|
|
|
113,003 |
|
|
|
110,332 |
|
|
|
100,999 |
|
|
|
95,306 |
|
Tax-equivalent
adjustment
|
|
|
4,839 |
|
|
|
4,545 |
|
|
|
5,506 |
|
|
|
6,243 |
|
|
|
7,128 |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
|
|
2,600 |
|
Net
interest income after provision for loan and lease losses
|
|
|
26,946 |
|
|
|
75,267 |
|
|
|
100,732 |
|
|
|
91,961 |
|
|
|
85,578 |
|
Non-interest
income
|
|
|
45,241 |
|
|
|
46,243 |
|
|
|
44,289 |
|
|
|
38,895 |
|
|
|
36,909 |
|
Non-interest
expenses
|
|
|
103,039 |
|
|
|
102,089 |
|
|
|
99,788 |
|
|
|
85,096 |
|
|
|
77,194 |
|
Income
(loss) before taxes
|
|
|
(30,852 |
) |
|
|
19,421 |
|
|
|
45,233 |
|
|
|
45,760 |
|
|
|
45,293 |
|
Income
tax expense (benefit)
|
|
|
(15,997 |
) |
|
|
3,642 |
|
|
|
12,971 |
|
|
|
12,889 |
|
|
|
12,195 |
|
Net
income (loss)
|
|
|
(14,855 |
) |
|
|
15,779 |
|
|
|
32,262 |
|
|
|
32,871 |
|
|
|
33,098 |
|
Net
income (loss) available to common stockholders
|
|
|
(19,665 |
) |
|
|
15,445 |
|
|
|
32,262 |
|
|
|
32,871 |
|
|
|
33,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) - basic per share
|
|
$ |
(0.90 |
) |
|
$ |
0.96 |
|
|
$ |
2.01 |
|
|
$ |
2.22 |
|
|
$ |
2.26 |
|
Net
income (loss) - basic per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
|
|
2.22 |
|
|
|
2.26 |
|
Net
income (loss) -diluted per share
|
|
|
(0.90 |
) |
|
|
0.96 |
|
|
|
2.01 |
|
|
|
2.20 |
|
|
|
2.24 |
|
Net
income (loss) - diluted per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
|
|
2.20 |
|
|
|
2.24 |
|
Dividends
declared per common share
|
|
|
0.37 |
|
|
|
0.96 |
|
|
|
0.92 |
|
|
|
0.88 |
|
|
|
0.84 |
|
Book
value per common share
|
|
|
17.80 |
|
|
|
19.05 |
|
|
|
19.31 |
|
|
|
16.04 |
|
|
|
14.73 |
|
Dividends
declared to diluted net income per common share
|
|
|
(30.83 |
)% |
|
|
102.12 |
% |
|
|
45.77 |
% |
|
|
40.00 |
% |
|
|
37.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
End Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,630,478 |
|
|
$ |
3,313,638 |
|
|
$ |
3,043,953 |
|
|
$ |
2,610,457 |
|
|
$ |
2,459,616 |
|
Loans
and leases
|
|
|
2,298,010 |
|
|
|
2,490,646 |
|
|
|
2,277,031 |
|
|
|
1,805,579 |
|
|
|
1,684,379 |
|
Securities
|
|
|
1,023,799 |
|
|
|
492,491 |
|
|
|
445,273 |
|
|
|
540,908 |
|
|
|
567,432 |
|
Deposits
|
|
|
2,696,842 |
|
|
|
2,365,257 |
|
|
|
2,273,868 |
|
|
|
1,994,223 |
|
|
|
1,803,210 |
|
Borrowings
|
|
|
535,646 |
|
|
|
522,658 |
|
|
|
426,525 |
|
|
|
351,540 |
|
|
|
417,378 |
|
Stockholders’
equity
|
|
|
373,586 |
|
|
|
391,862 |
|
|
|
315,640 |
|
|
|
237,777 |
|
|
|
217,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,557,234 |
|
|
$ |
3,152,586 |
|
|
$ |
2,935,451 |
|
|
$ |
2,563,673 |
|
|
$ |
2,352,061 |
|
Loans
and leases
|
|
|
2,416,470 |
|
|
|
2,420,040 |
|
|
|
2,113,476 |
|
|
|
1,788,702 |
|
|
|
1,544,990 |
|
Securities
|
|
|
824,802 |
|
|
|
428,479 |
|
|
|
495,928 |
|
|
|
559,350 |
|
|
|
603,882 |
|
Deposits
|
|
|
2,599,284 |
|
|
|
2,284,648 |
|
|
|
2,253,979 |
|
|
|
1,866,346 |
|
|
|
1,771,381 |
|
Borrowings
|
|
|
535,272 |
|
|
|
513,237 |
|
|
|
361,884 |
|
|
|
451,251 |
|
|
|
355,537 |
|
Stockholders’
equity
|
|
|
389,221 |
|
|
|
324,995 |
|
|
|
290,224 |
|
|
|
229,360 |
|
|
|
204,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
(0.55 |
)% |
|
|
0.49 |
% |
|
|
1.10 |
% |
|
|
1.28 |
% |
|
|
1.41 |
% |
Return
on average common equity
|
|
|
(6.42 |
) |
|
|
4.84 |
|
|
|
11.12 |
|
|
|
14.33 |
|
|
|
16.21 |
|
Yield
on average interest-earning assets
|
|
|
4.85 |
|
|
|
6.02 |
|
|
|
6.98 |
|
|
|
6.73 |
|
|
|
5.95 |
|
Rate
on average interest-bearing liabilities
|
|
|
1.97 |
|
|
|
2.56 |
|
|
|
3.50 |
|
|
|
3.08 |
|
|
|
2.02 |
|
Net
interest spread
|
|
|
2.88 |
|
|
|
3.46 |
|
|
|
3.48 |
|
|
|
3.65 |
|
|
|
3.93 |
|
Net
interest margin
|
|
|
3.29 |
|
|
|
3.92 |
|
|
|
4.13 |
|
|
|
4.26 |
|
|
|
4.39 |
|
Efficiency
ratio – GAAP (1)
|
|
|
69.18 |
|
|
|
65.99 |
|
|
|
66.92 |
|
|
|
63.67 |
|
|
|
61.71 |
|
Efficiency
ratio – Non-GAAP (1)
|
|
|
64.81 |
|
|
|
59.88 |
|
|
|
61.92 |
|
|
|
58.71 |
|
|
|
58.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 leverage
|
|
|
9.09 |
% |
|
|
11.00 |
% |
|
|
8.87 |
% |
|
|
9.81 |
% |
|
|
9.55 |
% |
Tier
1 capital to risk-weighted assets
|
|
|
12.01 |
|
|
|
12.56 |
|
|
|
10.28 |
|
|
|
12.64 |
|
|
|
12.22 |
|
Total
regulatory capital to risk-weighted assets
|
|
|
13.27 |
|
|
|
13.82 |
|
|
|
11.28 |
|
|
|
13.62 |
|
|
|
13.22 |
|
Tangible
common equity to tangible assets - Non-GAAP(2)
|
|
|
5.95 |
|
|
|
7.18 |
|
|
|
7.57 |
|
|
|
8.45 |
|
|
|
8.06 |
|
Average
equity to average assets
|
|
|
10.94 |
|
|
|
10.31 |
|
|
|
9.89 |
|
|
|
8.95 |
|
|
|
8.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to loans and leases
|
|
|
2.81 |
% |
|
|
2.03 |
% |
|
|
1.10 |
% |
|
|
1.08 |
% |
|
|
1.00 |
% |
Non-performing
loans to total loans
|
|
|
5.82 |
|
|
|
2.79 |
|
|
|
1.51 |
|
|
|
0.21 |
|
|
|
0.08 |
|
Non-performing
assets to total assets
|
|
|
3.89 |
|
|
|
2.18 |
|
|
|
1.15 |
|
|
|
0.15 |
|
|
|
0.06 |
|
Net
charge-offs to average loans and leases
|
|
|
2.61 |
|
|
|
0.32 |
|
|
|
0.06 |
|
|
|
0.01 |
|
|
|
0.02 |
|
(1)
|
See
the discussion of the efficiency ratio in the section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations
entitled “Operating
Expense Performance.”
|
(2)
|
See
the discussion of tangible common equity in the section of
Management’s Discussion and Analysis of Financial Condition and Results of
Operations entitled “Tangible Common
Equity.”
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
The net
loss available to common stockholders for Sandy Spring Bancorp, Inc. and
subsidiaries (the “Company”) for the year ended December 31, 2009, totaled $19.7
million ($1.20 per diluted common share), as compared to net income available to
common stockholders of $15.4 million ($0.94 per diluted common share) for the
prior year. These results reflect the following events:
|
·
|
A
4% decrease in net interest income due primarily to a lack of loan demand
that caused the Company to invest funds generated by its successful
deposit acquisition program into lower yielding investment securities as
compared to our lending products. Net interest income for the year was
also adversely affected by the growth in average non-performing loans.
These factors resulted in a net interest margin decrease to 3.29% in 2009
from 3.92% in 2008.
|
|
·
|
An
increase in the provision for loan and lease losses to $76.8 million in
2009 from $33.2 million in 2008 due mainly to higher charge-offs,
increases in internal risk rating downgrades and specific reserves on a
higher level of non-performing loans primarily in the residential real
estate development portfolio.
|
|
·
|
A
decrease of 2% in non-interest income compared to the prior year due to
declines in service charges on deposit accounts, fees on sales of
investment products and insurance agency commissions. These decreases were
somewhat offset by increases in gains on sales of mortgage loans and other
non-interest income.
|
|
·
|
An
increase of 1% in non-interest expenses compared to the prior year due
primarily to increases in FDIC insurance premiums, salaries and benefits
expenses and other non-interest expenses. Excluding a one-time special
assessment by the FDIC in 2009 and a goodwill impairment charge and a
pre-tax pension credit in 2008, non-interest expenses increased 2% over
2008.
|
The 2009
national and regional economies continued to reflect recessionary pressures and
a soft real estate market, in addition to some market volatility. These forces
exerted extraordinary pressures on virtually all facets of bank performance.
Credit issues presented the primary challenges during the past year. The bank’s
management team addressed these issues aggressively through the addition of
experienced staff and developing more sophisticated reporting tools in order to
enhance its ability to identify problem credits at an early stage. As the year
drew to a close, the bank’s emphasis shifted from identification of problem
credits to resolution of these credits, which reflects the natural evolution of
such a process.
The net
interest margin declined to 3.29% in 2009 compared to 3.92% in 2008 as market
rates remained at historically low levels throughout the year. Deposits
increased 14%, over the prior year due primarily to the introduction of a new
deposit product in an effort to grow market share and improve liquidity. Much of
this deposit growth was deployed into investment securities, which grew by 108%
over the prior year, as the loan portfolio declined due to soft demand and the
application of strict underwriting standards employed by the Company. As a
result of these trends, the net interest margin declined compared to the prior
year due to the decline in the loan portfolio, the increase in non-performing
loans and the relatively lower rates earned on a much larger investment
portfolio.
Due to
the growth in investment securities mentioned previously together with a
restructuring of its borrowing lines with the Federal Home Loan Bank of Atlanta
and the Federal Reserve in the prior year, the Company maintained a strong level
of liquidity during the past year.
The
Company continued to experience a higher level of credit risk than in prior
years. The Company saw non-performing assets increase to $141.2 million in 2009
from $72.2 million in 2008 primarily due to conditions in its residential real
estate development portfolio. Non-performing loans in the commercial real estate
and residential mortgage portfolios increased as well but to a lesser extent.
The Company has added experienced staff and developed more sophisticated
reporting tools in order to aggressively manage such problem credits as it has
moved from identifying such problem credits to the logical next phase of sale
and resolution of such credits.
Lastly,
but as important, is capital adequacy. Despite the challenges discussed above,
the Company has remained above all “well-capitalized” regulatory requirement
levels. The Company has maintained the preferred stock sold in 2008 under the
U.S. Treasury’s Capital Purchase Program to retain an added margin of
capital.
Comparing
December 31, 2009 balances to December 31, 2008, total assets increased 10% to
$3.6 billion. Loan balances decreased by 8% compared to the prior year primarily
due to decreases of 15% in residential mortgage and construction loans and 6% in
commercial loans. These declines were a result of soft loan demand due to
economic conditions, stringent underwriting standards implemented by the Company
and a higher level of loan charge-offs. Customer funding sources, which include
deposits plus other short-term borrowings from core customers, increased 14%
over 2008. This growth was accomplished largely due to the Company’s
implementation of a strategy to grow its market share of deposits by
capitalizing on opportunities resulting from acquisitions of local banks in its
market by other banks. As the centerpiece of this deposit gathering effort, the
Company introduced its new money market deposit product, which was very
competitively priced to develop new multi-product customer relationships as a
base to fund long-term growth within the Company’s market. As a result of low
loan demand, funds generated through deposit growth were used to purchase
investment securities, which increased 108%. During the same period,
stockholders’ equity decreased to $373.6 million or 10% of total
assets.
Net
interest income decreased by $4.8 million, or 4%, mainly due to a 117 basis
point decline in the yield on interest earning assets which exceeded a decrease
of 59 basis points in the cost of interest bearing liabilities and the impact of
the growth in non-performing assets. The net interest margin decreased from
3.92% for the year 2008 to 3.29% for the year 2009. Non-interest income
decreased by 2% to $45.2 million compared to the prior year. This increase was
due primarily to a decrease of $1.3 million in service charges on deposit
accounts. In addition, fees on sales of investment products and insurance agency
commissions both decreased $0.7 million compared to the prior year. These
decreases were somewhat offset by increases of $1.0 million in gains on sales of
mortgages and $1.0 million in other non-interest income. Non-interest income
totaled 30% of total revenue, which is composed of net interest income and
non-interest income.
Non-interest
expenses increased $1.0 million or 1% over the prior year. This increase in
expenses was due primarily to an increase of $4.3 million in FDIC insurance
premiums, which included a one time special assessment in 2009 of $1.7 million.
In addition, salaries and benefits expenses increased $1.4 million or 3% over
the prior year due primarily to a $1.5 million pre-tax pension credit in
2008. These increases were partially offset by a pre-tax impairment
charge of $4.2 million to write down the remaining value of goodwill in the
Company’s leasing subsidiary, The Equipment Leasing Company in
2008.
Non-performing
assets increased substantially to $141.2 million at December 31, 2009 compared
to $72.2 million at December 31, 2008. This increase was due primarily to the
effect of current market conditions on the Company’s residential real estate
development portfolio. Non-performing assets represented 3.89% of
total assets at year-end 2009, versus 2.18% at year-end 2008. The
ratio of net charge-offs to average loans and leases was 2.61% in 2009, compared
to 0.32% in 2008.
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 rely to a greater extent on
the use of estimates, assumptions, and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates, assumptions, and judgments are necessary for
assets and liabilities that are required to be recorded at fair
value. A decline in the assets required to be recorded at fair
values will warrant an impairment write-down or valuation allowance to be
established. Carrying assets and liabilities at fair value inherently
results in more financial statement volatility. The fair values and
the information used to record valuation adjustments for certain assets and
liabilities are based either on quoted market prices or are provided by other
third-party sources, when readily available. The following accounting
policies, read in conjunction with the applicable portions of Note 1 –
“Significant Accounting Polices” of the Consolidated Financial Statements,
comprise those policies that management believes 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 for separately identified loans. 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, 2009. 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 89% of the total allowance at
December 31, 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 11% of the total allowance at
December 31, 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.
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. Examples of such events include, but are not limited to
adverse action by a regulator or a loss of key personnel. 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 a combination of 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.
Throughout
2009, the Company was trading below its book value consistent with its peer
group. However during the fourth quarter the market value of the
Company’s stock declined significantly below its tangible book value at December
31, 2009. Management considered this decrease to be a triggering event
indicating the possibility of impairment in the Community Banking and “Other”
segments at December 31, 2009. The Company engaged a third party valuation
specialist to assist management in the determination of the fair value of the
Community Banking segment as estimated using an income approach (discounted
future benefits method) along with a market approach (guideline public company
method). Two additional methodologies based on market approaches were also
performed which focused on the stock price of the Company. Significant
assumptions used in the above methods include:
|
·
|
an
estimated control premium based on management’s estimate of the cost
savings that would be available to an
acquirer.
|
|
·
|
a
discount rate equal to 16.6%
|
|
·
|
price
to book ratio of 0.85
|
|
·
|
price
to trailing twelve months income of 1.54;
and
|
|
·
|
price
to assets of 0.074.
|
All
methods were subjected to sensitivity analysis which included application of
differing weightings of the respective methods to obtain a range of fair values
for the Community Banking segment. Based on the lowest fair value within the
range management determined that the Community Banking segment failed Step 1 of
the two-step impairment analysis and needed to perform additional valuation
analysis to determine whether the goodwill attributed to the Community Banking
segment was impaired and, if so, the amount of the impairment.
In
performing the Step 2 analysis, the Company determines the fair value of its
assets and liabilities and deducts this amount from the fair value of the
Community Banking segement as determined in Step 1 to imply a fair value of its
goodwill in an acquisition. The Company utilized prices from recent
comparable transactions in the Mid-Atlantic region to value the Company’s core
deposit intangibles and market quotes to value the investment portfolio. An
outside third party valuation specialist estimated the fair value of the loan
portfolio using a discounted cash flow approach. Significant assumptions used in
the loan portfolio valuation involved (1) the stratification of the loan
portfolio into pools based on their respective credit risk characteristics, (2)
the individual pool yields were compared to market yields in conjunction with
their remaining months to maturity and prepayments speeds, and (3) a credit loss
factor was incorporated into the cash flows. Management performed a detailed
review of all projections and their underlying assumptions. The key assumptions
used in the Company’s analysis involved the level of credit quality and thus the
credit risk existing within each pool of the loan portfolio. Factors that could
negatively affect the Company’s key assumptions involve the adverse performance
of the national and regional economies in excess of the levels projected in the
valuation models. Should the current regional economic recovery stall or reverse
it could have a significant effect on the Company’s recovery from its recent
performance trends.
The
Company determined at the conclusion of its Step 2 analysis that the fair value
of the goodwill in the Community Banking segment exceeded its carrying value of
$62.6 million by $31.9 million or 51%, and that no impairment of goodwill
existed at December 31, 2009. In addition, the market price of the Company’s
stock has increased significantly since December 31, 2009. The stock is
currently trading in the $14 range.
As a
result of its impairment assessment in 2008, the Company determined that The
Equipment Leasing Company was impaired and determined that the goodwill had no
remaining value at December 31, 2008. Accordingly, the Company recorded an
impairment charge of $4.2 million in 2008.
All other
remaining goodwill and intangibles associated with other segments of the Company
not previously discussed above were reviewed at December 31, 2009 and 2008,
respectively, for any indications of impairment. Based on the review,
no impairment was noted for the years ended December 31, 2009 and 2008, related
to the Investment Management and Insurance segments.
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 non-interest expenses in
the Consolidated Statements 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 measured at fair value on a recurring basis are investment
securities available for sale, residential mortgages held for sale and
commercial loan interest rate swap agreements. In addition, the
Company has elected, at its option, to measure mortgage loans held for sale at
fair value. Loans with respect to which 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 21-Fair Value” 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, including (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.
Table
1 – Consolidated Average Balances, Yields and Rates
CONSOLIDATED
AVERAGE BALANCES, YIELDS AND RATES
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
|
|
|
Yield
|
|
|
Average
|
|
|
|
|
|
Yield
|
|
|
Average
|
|
|
|
|
|
Yield
|
|
(Dollars in thousands and tax-equivalent)
|
|
Balances
|
|
|
Interest (1)
|
|
|
/Rate
|
|
|
Balances
|
|
|
Interest (1)
|
|
|
/Rate
|
|
|
Balances
|
|
|
Interest (1)
|
|
|
/Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage loans (3)
|
|
$ |
471,221 |
|
|
$ |
27,560 |
|
|
|
5.85 |
% |
|
$ |
463,853 |
|
|
$ |
28,547 |
|
|
|
6.15 |
% |
|
$ |
431,563 |
|
|
$ |
26,393 |
|
|
|
6.12 |
% |
Residential
construction loans
|
|
|
139,197 |
|
|
|
7,165 |
|
|
|
5.15 |
|
|
|
196,926 |
|
|
|
11,585 |
|
|
|
5.88 |
|
|
|
154,578 |
|
|
|
11,047 |
|
|
|
7.15 |
|
Commercial
mortgage loans
|
|
|
866,655 |
|
|
|
53,280 |
|
|
|
6.15 |
|
|
|
759,658 |
|
|
|
50,699 |
|
|
|
6.67 |
|
|
|
624,080 |
|
|
|
44,992 |
|
|
|
7.21 |
|
Commercial
construction loans
|
|
|
199,299 |
|
|
|
5,669 |
|
|
|
2.84 |
|
|
|
254,309 |
|
|
|
13,859 |
|
|
|
5.45 |
|
|
|
235,250 |
|
|
|
20,828 |
|
|
|
8.85 |
|
Commercial
loans and leases
|
|
|
335,093 |
|
|
|
17,991 |
|
|
|
5.37 |
|
|
|
357,311 |
|
|
|
24,007 |
|
|
|
6.72 |
|
|
|
302,671 |
|
|
|
24,911 |
|
|
|
8.23 |
|
Consumer
loans
|
|
|
405,005 |
|
|
|
16,001 |
|
|
|
3.96 |
|
|
|
387,983 |
|
|
|
20,503 |
|
|
|
5.28 |
|
|
|
365,334 |
|
|
|
25,367 |
|
|
|
6.94 |
|
Total
loans and leases (2)
|
|
|
2,416,470 |
|
|
|
127,666 |
|
|
|
5.28 |
|
|
|
2,420,040 |
|
|
|
149,200 |
|
|
|
6.17 |
|
|
|
2,113,476 |
|
|
|
153,538 |
|
|
|
7.26 |
|
Taxable
securities
|
|
|
662,853 |
|
|
|
20,784 |
|
|
|
3.14 |
|
|
|
242,422 |
|
|
|
10,684 |
|
|
|
4.41 |
|
|
|
279,881 |
|
|
|
14,603 |
|
|
|
5.22 |
|
Tax-advantaged
securities
|
|
|
161,949 |
|
|
|
11,467 |
|
|
|
7.08 |
|
|
|
186,057 |
|
|
|
12,838 |
|
|
|
6.90 |
|
|
|
216,047 |
|
|
|
15,060 |
|
|
|
6.97 |
|
Interest-bearing
deposits with banks
|
|
|
56,980 |
|
|
|
149 |
|
|
|
0.26 |
|
|
|
11,305 |
|
|
|
112 |
|
|
|
0.99 |
|
|
|
21,600 |
|
|
|
1,123 |
|
|
|
5.20 |
|
Federal
funds sold
|
|
|
2,045 |
|
|
|
3 |
|
|
|
0.19 |
|
|
|
22,619 |
|
|
|
555 |
|
|
|
2.45 |
|
|
|
42,305 |
|
|
|
2,157 |
|
|
|
5.10 |
|
Total
earning assets
|
|
|
3,300,297 |
|
|
|
160,069 |
|
|
|
4.85 |
|
|
|
2,882,443 |
|
|
|
173,389 |
|
|
|
6.02 |
|
|
|
2,673,309 |
|
|
|
186,481 |
|
|
|
6.98 |
|
Less: allowance
for loan and lease losses
|
|
|
(59,961 |
) |
|
|
|
|
|
|
|
|
|
|
(32,629 |
) |
|
|
|
|
|
|
|
|
|
|
(22,771 |
) |
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
|
45,038 |
|
|
|
|
|
|
|
|
|
|
|
49,981 |
|
|
|
|
|
|
|
|
|
|
|
54,294 |
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
50,649 |
|
|
|
|
|
|
|
|
|
|
|
53,207 |
|
|
|
|
|
|
|
|
|
|
|
52,604 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
221,211 |
|
|
|
|
|
|
|
|
|
|
|
199,584 |
|
|
|
|
|
|
|
|
|
|
|
178,015 |
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,557,234 |
|
|
|
|
|
|
|
|
|
|
$ |
3,152,586 |
|
|
|
|
|
|
|
|
|
|
$ |
2,935,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
$ |
254,047 |
|
|
|
420 |
|
|
|
0.17 |
% |
|
$ |
242,848 |
|
|
|
671 |
|
|
|
0.28 |
% |
|
$ |
236,940 |
|
|
|
808 |
|
|
|
0.34 |
% |
Regular
savings deposits
|
|
|
152,383 |
|
|
|
210 |
|
|
|
0.14 |
|
|
|
153,123 |
|
|
|
455 |
|
|
|
0.30 |
|
|
|
165,134 |
|
|
|
535 |
|
|
|
0.32 |
|
Money
market savings deposits
|
|
|
841,336 |
|
|
|
10,725 |
|
|
|
1.27 |
|
|
|
669,239 |
|
|
|
12,247 |
|
|
|
1.83 |
|
|
|
643,047 |
|
|
|
23,809 |
|
|
|
3.70 |
|
Time
deposits
|
|
|
829,817 |
|
|
|
23,566 |
|
|
|
2.84 |
|
|
|
777,979 |
|
|
|
29,443 |
|
|
|
3.78 |
|
|
|
768,005 |
|
|
|
34,764 |
|
|
|
4.53 |
|
Total
interest-bearing deposits
|
|
|
2,077,583 |
|
|
|
34,921 |
|
|
|
1.68 |
|
|
|
1,843,189 |
|
|
|
42,816 |
|
|
|
2.32 |
|
|
|
1,813,126 |
|
|
|
59,916 |
|
|
|
3.30 |
|
Other borrowings
|
|
|
88,198 |
|
|
|
308 |
|
|
|
0.35 |
|
|
|
119,176 |
|
|
|
1,795 |
|
|
|
1.51 |
|
|
|
111,390 |
|
|
|
4,392 |
|
|
|
3.94 |
|
Advances
from FHLB
|
|
|
412,074 |
|
|
|
14,708 |
|
|
|
3.57 |
|
|
|
359,061 |
|
|
|
13,553 |
|
|
|
3.77 |
|
|
|
215,494 |
|
|
|
9,618 |
|
|
|
4.46 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
1,585 |
|
|
|
4.53 |
|
|
|
35,000 |
|
|
|
2,222 |
|
|
|
6.35 |
|
|
|
35,000 |
|
|
|
2,223 |
|
|
|
6.35 |
|
Total
interest-bearing liabilities
|
|
|
2,612,855 |
|
|
|
51,522 |
|
|
|
1.97 |
|
|
|
2,356,426 |
|
|
|
60,386 |
|
|
|
2.56 |
|
|
|
2,175,010 |
|
|
|
76,149 |
|
|
|
3.50 |
|
Noninterest-bearing
demand deposits
|
|
|
521,701 |
|
|
|
|
|
|
|
|
|
|
|
441,459 |
|
|
|
|
|
|
|
|
|
|
|
440,853 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
33,457 |
|
|
|
|
|
|
|
|
|
|
|
29,706 |
|
|
|
|
|
|
|
|
|
|
|
29,364 |
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
389,221 |
|
|
|
|
|
|
|
|
|
|
|
324,995 |
|
|
|
|
|
|
|
|
|
|
|
290,224 |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
3,557,234 |
|
|
|
|
|
|
|
|
|
|
$ |
3,152,586 |
|
|
|
|
|
|
|
|
|
|
$ |
2,935,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income and spread
|
|
|
|
|
|
$ |
108,547 |
|
|
|
2.88 |
% |
|
|
|
|
|
$ |
113,003 |
|
|
|
3.46 |
% |
|
|
|
|
|
$ |
110,332 |
|
|
|
3.48 |
% |
Less:
tax equivalent adjustment
|
|
|
|
|
|
|
4,839 |
|
|
|
|
|
|
|
|
|
|
|
4,544 |
|
|
|
|
|
|
|
|
|
|
|
5,506 |
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$ |
103,708 |
|
|
|
|
|
|
|
|
|
|
$ |
108,459 |
|
|
|
|
|
|
|
|
|
|
$ |
104,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income/earning assets
|
|
|
|
|
|
|
|
|
|
|
4.85 |
% |
|
|
|
|
|
|
|
|
|
|
6.02 |
% |
|
|
|
|
|
|
|
|
|
|
6.98 |
% |
Interest
expense/earning assets
|
|
|
|
|
|
|
|
|
|
|
1.56 |
|
|
|
|
|
|
|
|
|
|
|
2.10 |
|
|
|
|
|
|
|
|
|
|
|
2.85 |
|
Net
interest margin
|
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
|
|
|
|
|
|
|
|
|
|
3.92 |
% |
|
|
|
|
|
|
|
|
|
|
4.13 |
% |
(1)
|
Tax-equivalent
income has been adjusted using the combined marginal federal and state
rate of 39.88% for 2009 and 2008 and a combined marginal
federal and state rate of 39.26% for 2007. The annualized
taxable-equivalent adjustments utilized in the above table to compute
yields aggregated to $4.8 million, $4.5 million and $5.5 million in 2009,
2008 and 2007 respectively.
|
(2)
|
Non-accrual
loans are included in the average
balances.
|
(3)
|
Includes
residential mortgage loans held for sale. Home equity loans and lines are
classified as consumer loans.
|
Net
Interest Income
The
largest source of the Company’s operating revenue is net interest income, which
is the difference between the interest earned on interest-earning assets and the
interest paid on interest-bearing liabilities.
Net
interest income for 2009 was $103.7 million, representing a decrease of $4.8
million or 4% from 2008. Comparing 2008 to 2007, net interest income increased
4% to $108.5 million.
For
purposes of this discussion and analysis, the interest earned on tax-exempt
investment securities has been adjusted to an amount comparable to interest
subject to normal income taxes. The result is referred to as tax-equivalent
interest income and tax-equivalent net interest income.
Table 1
provides an analysis of net interest income performance that reflects a decrease
in net interest margin for 2009 of 63 basis points, or 16% when compared to
2008. Average earning assets increased by 15% from 2008 to
2009. Table 2 shows the extent to which interest income, interest
expense and net interest income were affected by rate changes and volume
changes. The decrease in tax-equivalent net interest margin in 2009
resulted from increases in non-accrual loans coupled with a decrease in interest
income due to declining rates on earning assets due mainly to a significant
increase in lower-yielding investment securities. These lower yields were not
offset entirely by declining interest rates on deposits due to prevailing market
conditions. Average non-interest bearing deposits increased 18% in 2009 while
the percentage of non-interest bearing deposits to total deposits also increased
to 20% in 2009 compared to 19% in 2008 and 20% in 2007. The decrease in the
tax-equivalent net interest margin in 2008 resulted mainly from increases in
nonaccrual loans coupled with a decrease in interest income due to rapidly
declining rates on earning assets which were not offset by lower rates on
deposits due to intense competition at that time. Tax-equivalent net interest
income decreased by 4% in 2009 (to $108.5 million in 2009 from $113.0 million in
2008) and increased 2% in 2008 (from $110.3 million in 2007).
Table
2 – Effect of Volume and Rate Changes on Net Interest Income
|
|
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
|
|
$ |
(21,534 |
) |
|
$ |
(219 |
) |
|
$ |
(21,315 |
) |
|
$ |
(4,338 |
) |
|
$ |
20,508 |
|
|
$ |
(24,846 |
) |
Securities
|
|
|
8,729 |
|
|
|
16,982 |
|
|
|
(8,253 |
) |
|
|
(6,141 |
) |
|
|
(3,832 |
) |
|
|
(2,309 |
) |
Other
earning assets
|
|
|
(515 |
) |
|
|
296 |
|
|
|
(811 |
) |
|
|
(2,613 |
) |
|
|
(1,129 |
) |
|
|
(1,484 |
) |
Total
interest income
|
|
|
(13,320 |
) |
|
|
17,059 |
|
|
|
(30,379 |
) |
|
|
(13,092 |
) |
|
|
15,547 |
|
|
|
(28,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on funding of earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
demand deposits
|
|
|
(251 |
) |
|
|
31 |
|
|
|
(282 |
) |
|
|
(137 |
) |
|
|
18 |
|
|
|
(155 |
) |
Regular
savings deposits
|
|
|
(245 |
) |
|
|
(2 |
) |
|
|
(243 |
) |
|
|
(80 |
) |
|
|
(43 |
) |
|
|
(37 |
) |
Money
market savings deposits
|
|
|
(1,522 |
) |
|
|
2,711 |
|
|
|
(4,233 |
) |
|
|
(11,562 |
) |
|
|
931 |
|
|
|
(12,493 |
) |
Time
deposits
|
|
|
(5,877 |
) |
|
|
1,849 |
|
|
|
(7,726 |
) |
|
|
(5,321 |
) |
|
|
451 |
|
|
|
(5,772 |
) |
Total
borrowings
|
|
|
(969 |
) |
|
|
732 |
|
|
|
(1,701 |
) |
|
|
1,337 |
|
|
|
5,785 |
|
|
|
(4,448 |
) |
Total
interest expense
|
|
|
(8,864 |
) |
|
|
5,321 |
|
|
|
(14,185 |
) |
|
|
(15,763 |
) |
|
|
7,142 |
|
|
|
(22,905 |
) |
Net
interest income
|
|
$ |
(4,456 |
) |
|
$ |
11,738 |
|
|
$ |
(16,194 |
) |
|
$ |
2,671 |
|
|
$ |
8,405 |
|
|
$ |
(5,734 |
) |
*
|
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.
|
Interest
Income
The
Company's interest income decreased by $13.6 million or 8% in 2009, compared to
2008, preceded by a decrease of $12.1 million or 7% compared to
2007. On a tax-equivalent basis, the respective changes were a
decrease of 8% in 2009, and a decrease of 7% in 2008. Table 2 shows
that, in 2009, the decrease in interest income resulted primarily from a decline
in earning asset yields which was partially offset by growth in average earning
assets.
During
2009, average loans and leases, yielding 5.28% versus 6.17% a year earlier,
remained virtually level at $2.4 billion. Average residential real
estate loans decreased 8% due mainly to a 29% decrease in residential
construction loans while average commercial loans and leases increased 2% due
largely to a 14% increase in commercial real estate loans. Average consumer
loans increased 4% due to growth in home equity lines. In 2009,
average loans and leases comprised 73% of average earning assets, compared to
ratios of 84% in 2008 and 79% in 2007. Average total securities,
yielding 3.91% in 2009 versus 5.49% in the prior year, increased 92% to $824.8
million. Average non-taxable securities declined in 2009 by 13%
compared to 2008. Average total securities comprised 25% of average
earning assets in 2009, compared to 15% in 2008 and 19% in 2007. This growth in
investment securities in 2009 was due mainly to the growth in deposits resulting
from the Company’s strategy to grow market share and the decline in loans due to
soft loan demand, higher charge-offs and strict underwriting standards at the
Company. The decrease in investment securities in 2008 was due primarily to the
need to fund loans as a result of the lack of substantial deposit growth during
much of the year.
Interest
Expense
Interest
expense decreased by 15% or $8.9 million in 2009, compared to 2008, primarily as
a result of a 59 basis point decrease in the average rate paid on deposits and
borrowings which decreased to 1.97% from 2.56%. In 2008, interest expense
decreased due to a 94 basis point decline compared to 2007 in the average rate
paid on deposits and borrowings which more than offset the 2% increase in
average interest bearing deposits.
Deposit
and borrowing activity during 2009 was driven primarily by extremely challenging
market conditions due to the overall state of the national and regional economy.
The Company dealt with an intensely competitive market for deposits by launching
its Operation Take Share deposit campaign which was intended to grow deposit
market share as a result of opportunities presented by several bank acquisitions
in its local markets. The centerpiece of this campaign was the
Company’s new Premier money market deposit account which included extremely
competitive rates. Most of this growth in deposits was deployed into investment
securities to provide the necessary liquidity should loan demand increase in the
future.
Interest
Rate Performance
The net
interest margin decreased by 63 basis points in 2009 compared to 2008, as
compared to a decrease in net interest spread of 58 basis points in 2009
compared to 2008. The difference between these two indicators of interest rate
performance is attributable primarily to a significant increase in
noninterest-bearing demand deposits.
In 2008
versus 2007, the yield on earning assets decreased slightly more than the
funding rate on interest-bearing liabilities and together with a lower
percentage of noninterest-bearing demand deposits to total interest-earning
assets resulted in a decrease in the net interest margin and
spread.
Table
3 – Non-interest income
|
|
|
|
|
2009/2008
|
|
|
|
|
|
2008/2007
|
|
|
|
|
Non-interest
Income:
|
|
2009
|
|
|
%
Change
|
|
|
2008
|
|
|
%
Change
|
|
|
2007
|
|
Securities
gains
|
|
$ |
418 |
|
|
|
(37.0 |
)% |
|
$ |
663 |
|
|
|
1,441.9 |
% |
|
$ |
43 |
|
Service
charges on deposit accounts
|
|
|
11,433 |
|
|
|
(10.5 |
) |
|
|
12,778 |
|
|
|
14.6 |
|
|
|
11,148 |
|
Gains
on sales of mortgage loans
|
|
|
3,253 |
|
|
|
42.2 |
|
|
|
2,288 |
|
|
|
(16.5 |
) |
|
|
2,739 |
|
Fees
on sales of investment products
|
|
|
2,823 |
|
|
|
(18.8 |
) |
|
|
3,475 |
|
|
|
16.3 |
|
|
|
2,989 |
|
Trust
and investment management fees
|
|
|
9,421 |
|
|
|
(0.7 |
) |
|
|
9,483 |
|
|
|
(1.1 |
) |
|
|
9,588 |
|
Insurance
agency commissions
|
|
|
5,236 |
|
|
|
(11.4 |
) |
|
|
5,908 |
|
|
|
(10.8 |
) |
|
|
6,625 |
|
Income
from bank owned life insurance
|
|
|
2,906 |
|
|
|
0.1 |
|
|
|
2,902 |
|
|
|
2.6 |
|
|
|
2,829 |
|
Visa
check fees
|
|
|
2,920 |
|
|
|
1.6 |
|
|
|
2,875 |
|
|
|
3.3 |
|
|
|
2,784 |
|
Other
income
|
|
|
6,831 |
|
|
|
16.4 |
|
|
|
5,871 |
|
|
|
5.9 |
|
|
|
5,544 |
|
Total
non-interest income
|
|
$ |
45,241 |
|
|
|
(2.2 |
) |
|
$ |
46,243 |
|
|
|
4.4 |
|
|
$ |
44,289 |
|
Non-interest
Income
Total
non-interest income was $45.2 million in 2009, a $1.0 million or 2% decrease
from 2008. The primary reasons for the decrease in non-interest income for 2009,
as compared to 2008 were a $1.3 million decrease in service charges on deposit
accounts, due primarily to lower overdraft fees, a $0.7 million decrease in fees
on sales of investment products due to lower average assets under management and
a decrease of $0.7 million in insurance agency commissions due mainly to lower
commissions on commercial lines and physicians’ liability insurance. These
decreases were partially offset by increases in gains on sales of mortgage loans
of $1.0 million due to higher mortgage refinancing volumes and other
non-interest income due primarily to higher accrued gains on commercial loan
interest rate swaps. Comparing 2008 to 2007, non-interest income
increased $2.0 million or 4%. This increase was mainly due to increases of 15%
in service charges on deposit accounts from higher overdraft fees and 16% in
fees on sales of investment products due to higher annuity
sales. These increases were partially offset by a decrease of $0.5
million in gains on sales of mortgage loans and a decrease of $0.7 million in
insurance agency commissions.
The
Company recognized securities gains of $0.4 million in 2009 compared to $0.7
million in 2008. Securities gains were insignificant in
2007. The increase in 2008 was due primarily to a $0.4 million gain
on the sale of stock in Visa, Inc.
Service
charges on deposits totaled $11.4 million in 2009, a decrease of $1.3 million or
11% due primarily to lower overdraft fees.
Fees on
sales of investment products decreased to $2.8 million from $3.5 million, a
decrease of $0.7 million or 19% compared to 2008 due to lower average assets
under management and lower sales of mutual funds and variable annuities. Fees on
sales of investment products increased $0.5 million or 16% over 2008 compared to
2007. This growth was due largely to increased sales of annuities as customers
sought out a perceived higher level of safety for their
investments.
Gains on
mortgage sales increased by $1.0 million or 42% in 2009 compared to 2008, after
a decrease of 16% in 2008 compared to 2007. The Company achieved gains of $3.3
million on sales of $341.8 million in 2009 compared to gains of $2.3 million on
sales of $186.7 million in 2008 and gains of $2.7 million on sales of $286.4
million in 2007. Insurance agency commissions decreased by $0.7 million or 11%
in 2009 compared to 2008 after a decrease of $0.7 million or 11% in 2008
compared to 2007. The decrease in 2008 was due to declines in commissions on
commercial lines and contingency fees.
Trust and
investment management fee income amounted to $9.4 million in 2009, a decrease of
$0.1 million or 1% compared to 2008, reflecting a decrease in average assets
under management. During 2009, investment management fees in West Financial
Services increased slightly to $4.7 million due to higher asset management fees
in 2009. Trust services fees declined $0.2 million to $4.8 million
compared to the prior year due mainly to a decrease in average assets under
management. Trust and investment management fees of $9.5 million for
2008 represented a decrease of $0.1 million or 1% compared to 2007. This
decrease was due primarily to a decrease in assets under management at both West
Financial Services and in the Company’s trust department. Total
assets under management for West Financial Services, trust and investment
services decreased $204.6 million or 13% to $1.7 billion at December 31, 2009
compared to December 31, 2008.
Income
from bank owned life insurance remained virtually level in 2009 compared to 2008
and reflected an increase of $0.1 million or 3% from 2008 to 2007. The Company
invests in bank owned life insurance products in order to better manage the cost
of employee benefit plans. Investments totaled $75.7 million at
December 31, 2009 and were well diversified by carrier in accordance with
defined policies and practices. The average tax-equivalent yield on
these insurance contract assets was 6.52% for 2009.
Table
4 – Non-interest Expense
|
|
|
|
2009/2008
|
|
|
|
|
2008/2007
|
|
|
|
|
|
|
2009
|
|
% Change
|
|
|
2008
|
|
% Change
|
|
|
2007
|
|
Non-interest Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
$ |
54,460 |
|
|
2.7
|
% |
|
$ |
53,015 |
|
|
(4.0 |
)% |
|
$ |
55,207 |
|
Occupancy
expense of premises
|
|
|
10,710 |
|
|
(0.5 |
) |
|
|
10,762 |
|
|
3.9 |
|
|
|
10,360 |
|
Equipment
expenses
|
|
|
5,691 |
|
|
(7.6 |
) |
|
|
6,156 |
|
|
(6.2 |
) |
|
|
6,563 |
|
Marketing
|
|
|
2,166 |
|
|
0.1 |
|
|
|
2,163 |
|
|
(3.3 |
) |
|
|
2,237 |
|
Outside
data services
|
|
|
3,721 |
|
|
(14.9 |
) |
|
|
4,373 |
|
|
10.2 |
|
|
|
3,967 |
|
FDIC
insurance
|
|
|
6,092 |
|
|
247.9 |
|
|
|
1,751 |
|
|
304.4 |
|
|
|
433 |
|
Amortization
of intangible assets
|
|
|
3,646 |
|
|
(18.0 |
) |
|
|
4,447 |
|
|
9.0 |
|
|
|
4,080 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
(100.0 |
) |
|
|
4,159 |
|
|
- |
|
|
|
- |
|
Other
expenses
|
|
|
16,553 |
|
|
8.5 |
|
|
|
15,263 |
|
|
(9.9 |
) |
|
|
16,941 |
|
Total
non-interest expense
|
|
$ |
103,039 |
|
|
0.9 |
|
|
$ |
102,089 |
|
|
2.3 |
|
|
$ |
99,788 |
|
Non-interest
Expense
Non-interest
expenses increased $1.0 million or 1% in 2009, compared to 2008. The increase in
expenses in 2009 was driven by an increase of $4.3 million in FDIC insurance
premiums which included a one time special assessment of $1.7 million. In
addition, salaries and benefits expenses increased $1.4 million or 3% over the
prior year due primarily to a $1.5 million pre-tax pension credit in
2008. Comparing 2008 to 2007, non-interest expenses increased $2.3
million or 2%. The increase in expenses in 2008 included goodwill impairment
charges of $4.2 million and an increase of $1.3 million in FDIC insurance
premiums together with a pension prior service credit of $1.5 million
and a decrease of $1.5 million in merger expenses incurred in 2007. Excluding
these transactions, 2008 non-interest expenses were virtually even with
2007.
Salaries
and employee benefits, the largest component of non-interest expenses, increased
$1.4 million or 3% in 2009. Excluding the pension credit in 2008 mentioned
previously, pension expense increased $1.0 million over 2008 due to an increase
in amortization of actuarial losses. Salaries and employee benefits expenses
decreased $2.2 million or 4% in 2008 compared to 2007. This decrease was due
mainly to the pension prior service credit recognized in 2008. Average full-time
equivalent employees decreased to 667 in 2009, representing a decrease of 4%
from 697 in 2008, which was 2% below the 709 full-time equivalent employees in
2007.
In 2009,
occupancy expense remained relatively level as compared with the prior year. In
2008, this expense category increased $0.4 million or 4% over 2007. This
increase was due in part to new branches acquired in an acquisitions during
2007. Equipment expenses decreased $0.5 million or 8% in 2009 compared to 2008
and also decreased $0.4 million or 6% in 2008 compared to 2007. The
decrease in 2009 was due largely to lower depreciation expense. The decrease in
2008 was due mainly to lower negotiated software expenses and one-time expenses
incurred in connection with acquisitions in 2007. Marketing expense did not
change appreciably in 2009 following a decrease of $0.1 million or 3% in 2008.
The decrease in 2008 was due mainly to a company-wide initiative to better
control non-interest expenses.
Expenses
for outside data services decreased $0.7 million or 15% in 2009 compared to 2008
due to lower negotiated expenses with the Company’s outside data services
providers. Outside data services increased $0.4 million or 10% in 2008 compared
to 2007 due to overall growth of the loan and deposit portfolios and the effect
of a full year of expense relating to branches added from acquisitions completed
in 2007.
FDIC
insurance expense increased $4.3 million in 2009 compared to 2008 due to a $1.7
million one-time special assessment and higher deposit balances and increased
assessment rates.
Other
non-interest expenses increased $1.3 million or 1% compared to 2008. This
increase was due primarily to an increase in legal fees resulting from loan
workouts and higher accrued expenses on commercial loan interest rate swaps.
Other non-interest expenses decreased $1.7 million or 10% in 2008 compared to
2007 due mainly to merger expenses of $1.5 million recognized in
2007.
Amortization
of intangible assets decreased $0.8 million or 18% compared to 2008 due to
certain intangibles from branch acquisitions that had fully amortized as of
September, 2009. The Company’s intangible assets are being amortized over
relatively short amortization periods averaging approximately five years at
December 31, 2009. Intangible assets arising from branch acquisitions
were not classified as goodwill and continue to be amortized since the
acquisitions did not meet the definition for business combinations.
In
October 2007, Sandy Spring Bank, as a member of Visa U.S.A. Inc. (“Visa
U.S.A.”), received shares of restricted stock in Visa, Inc. (“Visa”) as a result
of its participation in the global restructuring of Visa U.S.A., Visa Canada
Association, and Visa International Service Association in preparation for an
initial public offering. In November 2007, Visa announced that it had reached a
settlement with American Express related to an antitrust lawsuit. Sandy Spring
Bank and other Visa U.S.A. member banks were obligated to share in potential
losses resulting from this and certain other litigation. In consideration of the
announced American Express settlement, Sandy Spring Bank’s proportionate
membership share of Visa U.S.A., and accounting guidance provided by the SEC,
the Company recorded a liability and corresponding expense in the fourth quarter
of 2007 of $0.2 million with respect to the American Express and certain other
litigation with Visa U.S.A. The Company has not reflected in its financial
statements any value for its membership interest in Visa as a result of the Visa
reorganization. The anticipated IPO was completed during the first quarter of
2008, and as a result, a portion of the Company’s shares in Visa were redeemed
for a total of $0.4 million reported as a gain on securities sold. In addition,
in the first quarter of 2008, the Company reversed the liability of $0.2 million
mentioned above due to the fact that Visa had funded an escrow account with an
amount deemed sufficient to fund any potential losses resulting from the
litigation at that time.
In
October 2008, Visa announced that it had agreed to settle litigation with
Discover Financial Services which involved a payment from the escrow account
mentioned above for approximately $1.7 billion, which exceeded the amount that
Visa had originally funded in the escrow account for this purpose. The Class B
shareholders, such as the Company, bore this cost via a reduction in their
number of shares received as a result of the public offering. The Company
recorded no additional expense as a result of this settlement due to its
immateriality. The Company currently has 15,890 class B shares
remaining that are subject to conversion by Visa.
Operating
Expense Performance
Management
views the efficiency ratio as an important measure of expense performance and
cost management. The ratio expresses the level of non-interest
expenses as a percentage of total revenue (net interest income plus total
non-interest income). This is a GAAP financial
measure. Lower ratios indicate improved productivity.
Non-GAAP
Financial Measure
The
Company has for many years used a traditional efficiency ratio that is a
non-GAAP financial measure of operating expense control and efficiency of
operations. Management believes that its traditional ratio better
focuses attention on the operating performance of the Company over time than
does a GAAP ratio, and is highly useful in comparing period-to-period operating
performance of the Company’s core business operations. It is used by
management as part of its assessment of its performance in managing non-interest
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 non-interest expenses as a percentage of net
interest income plus non-interest income. Non-interest expenses used
in the calculation of the non-GAAP efficiency ratio exclude goodwill impairment
losses, the amortization of intangibles, and non-recurring
expenses. Income for the non-GAAP ratio includes the favorable effect
of tax-exempt income (see Table 1), and excludes securities gains and losses,
which vary widely from period to period without appreciably affecting operating
expenses, and non-recurring gains. The measure is different from the
GAAP efficiency ratio, which also is presented in this report. The
GAAP measure is calculated using non-interest expense and income amounts as
shown on the face of the Consolidated Statements of Income. The GAAP
and non-GAAP efficiency ratios are reconciled in Table 5. As shown in
Table 5, both efficiency ratios increased in 2009. This increase was
mainly the result of higher non-interest expenses in 2009 compared to 2008
coupled with the decrease in net interest income in 2009.
Table
5 – GAAP and Non-GAAP Efficiency Ratios
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses
|
|
$ |
103,039 |
|
|
$ |
102,089 |
|
|
$ |
99,788 |
|
|
$ |
85,096 |
|
|
$ |
77,194 |
|
Net
interest income plus non-interest income
|
|
|
148,949 |
|
|
|
154,702 |
|
|
|
149,115 |
|
|
|
133,651 |
|
|
|
125,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–GAAP
|
|
|
69.18 |
% |
|
|
65.99 |
% |
|
|
66.92 |
% |
|
|
63.67 |
% |
|
|
61.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
efficiency ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses
|
|
$ |
103,039 |
|
|
$ |
102,089 |
|
|
$ |
99,788 |
|
|
$ |
85,096 |
|
|
$ |
77,194 |
|
Less
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
3,646 |
|
|
|
4,447 |
|
|
|
4,080 |
|
|
|
2,967 |
|
|
|
2,198 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
4,159 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
prior service credit
|
|
|
- |
|
|
|
1,473 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Non-interest
expenses as adjusted
|
|
$ |
99,393 |
|
|
$ |
94,956 |
|
|
$ |
95,708 |
|
|
$ |
82,129 |
|
|
$ |
74,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income plus non-interest income
|
|
$ |
148,949 |
|
|
$ |
154,702 |
|
|
$ |
149,115 |
|
|
$ |
133,651 |
|
|
$ |
125,087 |
|
Plus
non-GAAP adjustment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalent
income
|
|
|
4,839 |
|
|
|
4,545 |
|
|
|
5,506 |
|
|
|
6,243 |
|
|
|
7,128 |
|
Less
non-GAAP adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains (losses)
|
|
|
418 |
|
|
|
663 |
|
|
|
43 |
|
|
|
1 |
|
|
|
3,262 |
|
Net
interest income plus non-interest income - as adjusted
|
|
$ |
153,370 |
|
|
$ |
158,584 |
|
|
$ |
154,578 |
|
|
$ |
139,893 |
|
|
$ |
128,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio–Non-GAAP
|
|
|
64.81 |
% |
|
|
59.88 |
% |
|
|
61.92 |
% |
|
|
58.71 |
% |
|
|
58.16 |
% |
Income
Taxes
The
Company had an income tax benefit of $16.0 million in 2009, compared with an
income tax expense of $3.6 million in 2008 and $13.0 million in 2007. The
resulting effective tax rates were 52% for 2009, 19% for 2008, and 29% for 2007.
The change in the effective tax rate for 2009 compared to 2008 was due to the
loss incurred in 2009, primarily related to the provision for loan and lease
losses, coupled with tax advantaged income from investment securities and bank
owned life insurance policies. The decline in the effective tax rate for 2008
compared to 2007 was due to a change in the amount of tax advantaged income as a
percent of taxable income.
FINANCIAL
CONDITION
The
Company's total assets increased $316.8 million to $3.6 billion at December 31,
2009. Earning assets increased $289.7 million to $3.3 billion at December 31,
2009. These increases were due primarily to growth in the investment
portfolio, which was driven by increased deposits offset by the decline in
loans.
Loans
and Leases
Residential
real estate loans, comprised of residential construction and permanent
residential mortgage loans, decreased $97.1 million or 15%, to $549.7 million at
December 31, 2009. Residential construction loans declined to $92.3 million in
2009, a decrease of $97.0 million or 51% reflecting greatly reduced demand as a
result of the regional economic conditions. Permanent residential
mortgages, most of which are 1-4 family, remained virtually even with the prior
year at $457.4 million.
Commercial
loans and leases decreased by $88.9 million or 6%, to $1.3 billion at December
31, 2009. This decrease was due primarily to loan charge-offs during the year,
weak loan demand resulting from weak market conditions in the regional and
national economies and the application of strict underwriting standards by the
Company. Included in this category are commercial real estate loans, commercial
construction loans, equipment leases and other commercial loans.
The
Company's commercial real estate loans consist of owner occupied properties
(62%) where an established banking relationship exists or, to a lesser extent,
involve investment properties (38%) for warehouse, retail, and office space with
a history of occupancy and cash flow. Commercial mortgages rose $47.5
million or 6% during 2009, to $895.0 million at year-end. Commercial
construction loans decreased $91.4 million or 41% during the year, to $131.8
million at December 31, 2009. The unprecedented economic conditions had a
significant effect on builders and developers over the past year which mainly
affected the Company’s acquisition, development and construction loan portfolio.
In response, the Company adopted more conservative underwriting guidelines,
which together with soft demand and increased loan charge-offs caused the
decline in commercial construction loans. Other commercial loans
decreased $37.5 million or 11% during 2009 to $296.2 million at year-end. This
decrease was also due primarily the lower level of loan demand and more
conservative underwriting.
The
Company's equipment leasing business provides leases for essential commercial
equipment used by small to medium sized businesses. Equipment
leasing is conducted through vendor relations and direct solicitation to
end-users located primarily in states along the east coast from New Jersey to
Florida. The typical lease is “small ticket” by industry standards,
averaging less than $100 thousand, with individual leases generally not
exceeding $500 thousand. The leasing portfolio decreased $7.5 million
or 23% in 2009, to $25.7 million at year-end due in large part to market
conditions and their effect on small and medium-sized businesses.
Consumer
lending continues to be important to the Company’s full-service, community
banking business. This category of loans includes primarily home
equity loans and lines of credit. The consumer loan portfolio
decreased 2% or $6.6 million, to $399.7 million at December 31,
2009. This decline was driven largely by a decrease of $8.8 million
or 19% in installment loans during 2009 to $38.2 million at year-end. Home
equity lines and loans increased $2.5 million or 1% during 2009 to $354.4
million at year-end.
Table
6 – Analysis of Loans and Leases
This
table presents the trends in the composition of the loan and lease portfolio
over the previous five years.
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
457,414 |
|
|
$ |
457,571 |
|
|
$ |
456,305 |
|
|
$ |
390,852 |
|
|
$ |
413,324 |
|
Residential
construction
|
|
|
92,283 |
|
|
|
189,249 |
|
|
|
166,981 |
|
|
|
151,399 |
|
|
|
155,379 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage
|
|
|
894,951 |
|
|
|
847,452 |
|
|
|
662,837 |
|
|
|
509,726 |
|
|
|
415,983 |
|
Commercial
construction
|
|
|
131,789 |
|
|
|
223,169 |
|
|
|
262,840 |
|
|
|
192,547 |
|
|
|
178,764 |
|
Leases
|
|
|
25,704 |
|
|
|
33,220 |
|
|
|
35,722 |
|
|
|
34,079 |
|
|
|
23,644 |
|
Other
commercial
|
|
|
296,220 |
|
|
|
333,758 |
|
|
|
316,051 |
|
|
|
182,159 |
|
|
|
162,036 |
|
Consumer
|
|
|
399,649 |
|
|
|
406,227 |
|
|
|
376,295 |
|
|
|
344,817 |
|
|
|
335,249 |
|
Total
loans and leases
|
|
$ |
2,298,010 |
|
|
$ |
2,490,646 |
|
|
$ |
2,277,031 |
|
|
$ |
1,805,579 |
|
|
$ |
1,684,379 |
|
Table
7– Loan Maturities and Interest Rate Sensitivity
|
|
At December 31, 2009
|
|
|
|
Remaining Maturities of Selected Credits in Years
|
|
(In thousands)
|
|
1 or less
|
|
|
Over 1-5
|
|
|
Over 5
|
|
|
Total
|
|
Residential
construction loans
|
|
$ |
91,568 |
|
|
$ |
162 |
|
|
$ |
553 |
|
|
$ |
92,283 |
|
Commercial
construction loans
|
|
|
113,411 |
|
|
|
18,378 |
|
|
|
- |
|
|
|
131,789 |
|
Other
commercial loans (1)
|
|
|
211,765 |
|
|
|
65,618 |
|
|
|
18,837 |
|
|
|
296,220 |
|
Total
|
|
$ |
416,744 |
|
|
$ |
84,158 |
|
|
$ |
19,390 |
|
|
$ |
520,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
Terms:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
$ |
34,433 |
|
|
$ |
55,766 |
|
|
$ |
18,837 |
|
|
$ |
109,036 |
|
Variable
or adjustable
|
|
|
382,311 |
|
|
|
28,392 |
|
|
|
553 |
|
|
|
411,256 |
|
Total
|
|
$ |
416,744 |
|
|
$ |
84,158 |
|
|
$ |
19,390 |
|
|
$ |
520,292 |
|
(1) Loans
not secured by real estate
Securities
The
investment portfolio, consisting of available-for-sale, held-to-maturity and
other equity securities, increased 108% or $531.3 million to $1.0 billion at
December 31, 2009, from $492.5 million at December 31, 2008. This increase in
the investment portfolio was driven by a decline in the size of the loan
portfolio together with a significant growth in deposits as a result of the
Company’s Operation Take Share deposit acquisition campaign. This plan was
implemented in the second quarter of 2009 to capitalize on opportunities to grow
deposit market share afforded by several recent bank mergers in the Company’s
primary market area.
Table 8
which follows shows that most of the above-mentioned funds were invested in U.S.
Agency securities, U.S. Agency mortgage-backed securities and U.S. Agency
collateralized mortgage obligations. This investment strategy has resulted in a
portfolio with minimal risk and relatively short durations and thus will provide
needed liquidity should loan demand increase in the coming year. The portfolio
is monitored on a continuing basis with consideration given to interest rate
trends and the structure of the yield curve and with constant due diligence of
economic projections and analysis.
At
December 31, 2009 the Company owned a total of $ $3.1 million in securities
backed by single issuer trust preferred securities issued by banks. The fair
value of $3.3 million of such securities was determined from available market
quotations. The Company also owns collateralized debt securities, which total
$4.7 million, with a fair value of $3.1 million, which are backed by pooled
trust preferred securities issued by banks, thrifts, and insurance companies.
These particular securities have exhibited limited activity due to the status of
the economy at December 31, 2009 and 2008, respectively. 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 December 31, 2009
and 2008.
|
|
·
|
An
income valuation approach technique (present value technique) that
maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs will be more representative of fair value than a
market approach valuation
technique.
|
|
·
|
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
assumptions used by the Company in order to determine fair value on a present
value basis, in the absence of observable trading prices as noted, included the
following:
|
·
|
Detailed
credit and structural evaluation for each piece of collateral in the
CDO.
|
|
·
|
Collateral
performance projections for each piece of collateral in the CDO (default,
recovery and prepayment/amortization probabilities). Of the approximately
25 issuers, collateral with respect to one has defaulted and two have
deferred payments. Based on the view that it was unlikely that
financing would become available in the foreseeable future, no collateral
prepays were assumed over the lives of the
investments.
|
|
·
|
Terms
of the CDO structure as established in the
indenture.
|
As part
of its formal quarterly evaluation of investment securities for the presence of
other-than-temporary impairment (“OTTI”), the Company considered a number of
factors including:
|
·
|
The
length of time and the extent to which the fair value has been less than
the amortized cost
|
|
·
|
Adverse
conditions specifically related to the security, industry, or geographic
area
|
|
·
|
Historical
and implied volatility of the fair value of the
security
|
|
·
|
Credit
risk concentrations
|
|
·
|
The
ability of the issuer to make scheduled interest or principal
payments
|
|
·
|
Amount
of principal to be recovered by stated
maturity
|
|
·
|
Ratings
changes of the security
|
|
·
|
Performance
of bond collateral
|
|
·
|
Recoveries
of additional declines in fair value subsequent to the date of the
statement of condition
|
|
·
|
The
securities are senior notes with first
priority
|
|
·
|
Other
information currently available, such as the latest trustee
reports
|
|
·
|
An
analysis of the credit worthiness of the individual pooled
banks.
|
As a
result of this evaluation, which takes into account (1) that all payments have
been received on a timely basis, and (2) that the Company has the intent and
ability to hold the securities to maturity, the Company determined that the
credit quality of these securities remains adequate to absorb further economic
declines and that no OTTI existed with respect to these securities at December
31, 2009.
Table
8 – Analysis of Securities
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Available-for-Sale:
(1)
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,973 |
|
U.S.
governement agencies and corporations
|
|
|
355,597 |
|
|
|
137,320 |
|
|
|
139,310 |
|
State
and municipal
|
|
|
42,142 |
|
|
|
2,700 |
|
|
|
2,761 |
|
Mortgage-backed
(2)
|
|
|
453,998 |
|
|
|
145,076 |
|
|
|
32,356 |
|
Trust
preferred
|
|
|
6,346 |
|
|
|
6,281 |
|
|
|
9,051 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
350 |
|
|
|
350 |
|
Total
|
|
|
858,433 |
|
|
|
291,727 |
|
|
|
186,801 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
and Other Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
governement agencies and corporations
|
|
|
- |
|
|
|
- |
|
|
|
34,419 |
|
State
and municipal
|
|
|
131,996 |
|
|
|
170,871 |
|
|
|
199,427 |
|
Mortgage-backed
(2)
|
|
|
597 |
|
|
|
747 |
|
|
|
860 |
|
Other
equity securities
|
|
|
32,773 |
|
|
|
29,146 |
|
|
|
23,766 |
|
Total
|
|
|
165,366 |
|
|
|
200,764 |
|
|
|
258,472 |
|
Total
securities (3)
|
|
$ |
1,023,799 |
|
|
$ |
492,491 |
|
|
$ |
445,273 |
|
(1)
|
At
estimated fair value.
|
(2)
|
Issued
by a U. S. Government Agency or secured by U.S. Government Agency
collateral.
|
(3)
|
The
outstanding balance of no single issuer, except for U.S. Government Agency
securities, exceeded ten percent of stockholders' equity at December 31,
2009, 2008 or 2007.
|
Maturities
and weighted average yields for debt securities available for sale and held to
maturity at December 31, 2009 are presented in Table 9. Amounts
appear in the table at amortized cost, without market value adjustments, by
stated maturity adjusted for estimated calls.
Table
9 – Maturity of Debt Securities
|
|
Years to Maturity at December 31, 2009
|
|
|
|
|
|
|
|
|
Within
|
|
|
After One Year
|
|
|
After Five Years
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
Through Five years
|
|
|
Through Ten Years
|
|
|
Over Ten Years
|
|
|
|
|
|
|
(In thousands)
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Total
|
|
Yield
|
|
Available-for-Sale(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. government agencies and corporations
|
|
$ |
205,164 |
|
|
2.56
|
% |
|
$ |
147,677 |
|
|
2.30
|
% |
|
$ |
- |
|
|
-
|
% |
|
$ |
- |
|
|
-
|
% |
|
$ |
352,841 |
|
|
2.45
|
% |
State and municipal
(2)
|
|
|
200 |
|
|
6.53 |
|
|
|
2,043 |
|
|
7.65 |
|
|
|
39,040 |
|
|
5.62 |
|
|
|
- |
|
|
- |
|
|
|
41,283 |
|
|
5.73 |
|
Mortgage-backed
|
|
|
2,116 |
|
|
4.87 |
|
|
|
427,132 |
|
|
3.67 |
|
|
|
15,467 |
|
|
4.42 |
|
|
|
5,007 |
|
|
3.88 |
|
|
|
449,722 |
|
|
3.70 |
|
Trust
preferred
|
|
|
7,841 |
|
|
9.31 |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
7,841 |
|
|
9.31 |
|
Total
|
|
|
215,321 |
|
|
2.83
|
% |
|
|
576,852 |
|
|
3.34
|
% |
|
|
54,507 |
|
|
5.28
|
% |
|
|
5,007 |
|
|
3.88
|
% |
|
|
851,687 |
|
|
3.34
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held-to-Maturity
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
and municipal
|
|
|
39,582 |
|
|
6.93
|
% |
|
|
85,850 |
|
|
7.34
|
% |
|
|
1,370 |
|
|
7.50
|
% |
|
|
5,195 |
|
|
7.61
|
% |
|
|
131,997 |
|
|
7.23
|
% |
Mortgage-backed
|
|
|
- |
|
|
- |
|
|
|
227 |
|
|
6.16 |
|
|
|
369 |
|
|
5.43 |
|
|
|
- |
|
|
- |
|
|
|
596 |
|
|
5.71 |
|
Total
|
|
$ |
39,582 |
|
|
6.93
|
% |
|
$ |
86,077 |
|
|
7.33
|
% |
|
$ |
1,739 |
|
|
7.06
|
% |
|
$ |
5,195 |
|
|
7.61
|
% |
|
$ |
132,593 |
|
|
7.22
|
% |
(1) At
cost, adjusted for amortization and accretion of purchase premiums and
discounts, respectively.
(2) Yields
on state and municipal securities have been calculated on a tax-equivalent basis
using the applicable federal income tax rate of 35%.
Other
Earning Assets
Residential
mortgage loans held for sale increased $1.1 million to $12.5 million as of
December 31, 2009 from $11.4 million as of December 31,
2008. Originations and sales of these loans and the resulting gains
on sales increased during 2009 due to the an extended period of historically low
interest rates resulting from intervention by the Federal Reserve during the
past year to keep rates low enough to support the housing market.
The
aggregate of federal funds sold and interest-bearing deposits with banks
decreased $50.1 million to $10.4 million in 2009.
Bank
owned life insurance increased $2.9 million or 4% to $75.7 million as of
December 31, 2009 due to the increase in cash surrender value of the underlying
policies.
Deposits
and Borrowings
Total
deposits were $2.7 billion at December 31, 2009, increasing $331.6 million or
14% from $2.4 billion at December 31, 2008. Year-end balances for
non-interest-bearing demand deposits increased $79.1 million or 17% over the
prior year. For the same period, interest-bearing deposits grew
$252.5 million or 13%, attributable in large part to growth in the Company’s new
Premier money market deposit account which caused money market deposits to
increase 40% or $266.5 million. In addition regular savings increased $10.9
million or 7% over 2008. These increases were somewhat offset by a decline in
time deposits of $63.0 million or 7%. When deposits are combined with retail
repurchase agreements from core customers, such growth in customer funding
sources totaled 14% over the prior year. Total borrowings increased by $13.0
million or 2% to $535.6 million at December 31, 2009.
Capital
Management
Management
monitors historical and projected earnings, dividends and asset growth, as well
as risks associated with the various types of on- and off-balance sheet assets
and liabilities, in order to determine appropriate capital levels. During 2009,
total stockholders' equity decreased 5% or $18.3 million to $373.6 million at
December 31, 2009, from $391.9 million at December 31, 2008.
On
December 5, 2008, as part of the TARP Capital Purchase Program, the Company
entered into a Purchase Agreement, with the United States Department of the
Treasury (“Treasury”), pursuant to which the Company issued 83,094 shares of
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, liquidation
preference $1,000 per share and a warrant to purchase 651,547 shares of the
Company’s common stock, par value $1.00 per share, for an aggregate purchase
price of $83.1 million in cash.
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. 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:
|
|
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 |
% |
|
|
|
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.
The
Series A preferred stock qualifies as Tier 1 capital and pays cumulative
dividends at a rate of 5% per annum until February 15, 2014. Beginning February
16, 2014, the dividend rate will increase to 9% per annum. The redemption of the
Series A preferred stock requires prior regulatory approval. The restrictions on
redemption are set forth in the Articles Supplementary to the Company’s Articles
of Incorporation. The warrant is exercisable at $19.13 per share at
any time on or before December 5, 2018. The number of shares of common stock
issuable upon exercise of the warrant and the exercise price per share will be
adjusted if specific events occur. Treasury has agreed not to exercise voting
power with respect to any shares of common stock issued upon exercise of the
warrant.
The
Series A preferred stock and the warrant were issued in a transaction exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933, as
amended. The Company has registered the Series A preferred stock, the warrant,
and the shares of common stock underlying the warrant (the “warrant shares”).
Neither the Series A preferred stock nor the warrant will be subject to any
contractual restrictions on transfer, except that Treasury may not transfer a
portion of the warrant with respect to, or exercise the warrant for, more than
one-half of the warrant shares prior to the earlier of (a) the date on which the
Company has received aggregate gross proceeds of not less than $83,094,000 from
one or more qualified equity offerings and (b) December 31, 2009.
Pursuant
to the terms of the Purchase Agreement, prior to the earlier of (i) December 5,
2011 or (ii) the date on which the Series A preferred stock has been redeemed in
full or Treasury has transferred all of the Series A preferred stock to
non-affiliates, the Company cannot increase its quarterly cash dividend above
$0.24 per share or repurchase any shares of its common stock or other capital
stock or equity securities or trust preferred securities without the consent of
the Treasury.
In
addition, pursuant to the Articles Supplementary, so long as any shares of
Series A preferred stock remain outstanding, the Company may not declare or pay
any dividends or distributions on the Company’s common stock or any class or
series of the Company’s equity securities ranking junior, as to dividends and
upon liquidation, to the Series A preferred stock (“junior stock”) (other than
dividends payable solely in shares of common stock) or any other class or series
of the Company’s equity securities ranking, as to dividends and upon
liquidation, on a parity with the Series A preferred stock (“parity stock”), and
may not repurchase or redeem any common stock, junior stock or parity stock,
unless all accrued and unpaid dividends for past dividend periods, including the
latest completed dividend period, have been paid or have been declared and a
sufficient sum has been set aside for the benefit of the holders of the Series A
preferred stock.
External
capital formation, resulting from exercises of stock options, vesting of
restricted stock and from stock issuances under the employee and director stock
purchase plans totaled $0.5 million during 2009. The ratio of average
equity to average assets was 10.94% for 2009, as compared to 10.31% for 2008 and
9.89% for 2007.
Stockholders’
equity was also affected by a decrease of $4.9 million, net of tax, in
accumulated other comprehensive loss from at December 31, 2008 to at December
31, 2009.
Bank
holding companies and banks are required to maintain capital ratios in
accordance with guidelines adopted by the federal bank regulators. These
guidelines are commonly known as Risk-Based Capital guidelines. The actual
regulatory ratios and required ratios for capital adequacy, in addition to the
ratios required to be categorized as “well capitalized” are summarized in the
Table 10.
Table
10 – Risk-Based Capital Ratios
|
|
|
|
|
|
|
|
Minimum
|
|
|
Considered to
|
|
|
|
Ratios at December 31,
|
|
|
Regulatory
|
|
|
be "Well Capitalized"
|
|
|
|
2009
|
|
|
2008
|
|
|
Requirements
|
|
|
Ratio
|
|
Total
Capital to risk-weighted assets
|
|
|
13.27 |
% |
|
|
13.82 |
% |
|
|
8.00 |
% |
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Capital to risk-weighted assets
|
|
|
12.01 |
% |
|
|
12.56 |
% |
|
|
4.00 |
% |
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier
1 Leverage
|
|
|
9.09 |
% |
|
|
11.00 |
% |
|
|
3.00 |
% |
|
|
5.00 |
% |
Tier 1
capital of $326.1 million and total qualifying capital of $360.5 million each
included $35.0 million in trust preferred securities that are considered
regulatory capital for purposes of determining the Company’s Tier 1 capital
ratio. In addition, Tier 1 capital included $83.1 million in preferred stock
which was sold to the U.S. Treasury under the TARP Capital Purchase Program as
described above. As of December 31, 2009, the Bank met the criteria
for classification as a "well-capitalized" institution under the prompt
corrective action rules of the Federal Deposit Insurance
Act. Designation as a well-capitalized institution under these
regulations is not a recommendation or endorsement of the Company or the Bank by
federal bank regulators. Additional information regarding regulatory
capital ratios is included in “Note 23—Regulatory Matters” of the Notes to the
Consolidated Financial Statements.
Tangible
Common Equity
Tangible
equity and tangible assets are non-GAAP financial measures calculated using GAAP
amounts. We calculate tangible equity by excluding the balance of
goodwill and other intangible assets from our calculation of stockholders’
equity. We calculate tangible assets by excluding the balance of
goodwill and other intangible assets from our calculation of total
assets. We believe that this non-GAAP financial measure provides
information to investors that is useful in understanding our financial
condition. Because not all companies use the same calculation of
tangible equity and tangible assets, this presentation may not be comparable to
other similarly titled measures calculated by other companies. A
reconciliation of the non-GAAP ratio of tangible equity to tangible assets is
provided below.
Table
11 – Tangible Common Equity Ratio – Non-GAAP
|
|
At December 31,
|
|
(Dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Tangible
common equity ratio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
$ |
373,586 |
|
|
$ |
391,862 |
|
|
$ |
315,640 |
|
|
$ |
237,777 |
|
|
$ |
220,058 |
|
Accumulated
other comprehensive loss
|
|
|
2,652 |
|
|
|
7,572 |
|
|
|
1,055 |
|
|
|
4,021 |
|
|
|
594 |
|
Goodwill
|
|
|
(76,816 |
) |
|
|
(76,248 |
) |
|
|
(76,585 |
) |
|
|
(12,494 |
) |
|
|
(12,042 |
) |
Other
intangible assets, net
|
|
|
(8,537 |
) |
|
|
(12,183 |
) |
|
|
(16,630 |
) |
|
|
(10,653 |
) |
|
|
(12,218 |
) |
Preferred
stock
|
|
|
(80,095 |
) |
|
|
(79,440 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Tangible
common equity
|
|
$ |
210,790 |
|
|
$ |
231,563 |
|
|
$ |
223,480 |
|
|
$ |
218,651 |
|
|
$ |
196,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
3,630,478 |
|
|
$ |
3,313,638 |
|
|
$ |
3,043,953 |
|
|
$ |
2,610,457 |
|
|
$ |
2,459,616 |
|
Goodwill
|
|
|
(76,816 |
) |
|
|
(76,248 |
) |
|
|
(76,585 |
) |
|
|
(12,494 |
) |
|
|
(12,042 |
) |
Other
intangible assets, net
|
|
|
(8,537 |
) |
|
|
(12,183 |
) |
|
|
(16,630 |
) |
|
|
(10,653 |
) |
|
|
(12,218 |
) |
Tangible
assets
|
|
$ |
3,545,125 |
|
|
$ |
3,225,207 |
|
|
$ |
2,950,738 |
|
|
$ |
2,587,310 |
|
|
$ |
2,435,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
common equity ratio
|
|
|
5.95 |
% |
|
|
7.18 |
% |
|
|
7.57 |
% |
|
|
8.45 |
% |
|
|
8.06 |
% |
Credit
Risk
The
fundamental lending business of the Company is based on understanding, measuring
and controlling the credit risk inherent in the loan portfolio. The
Company’s loan and lease portfolio is subject to varying degrees of credit
risk. Credit risk entails both general risks, which are inherent in
the process of lending, and risk specific to individual
borrowers. The Company’s credit risk is mitigated through portfolio
diversification, which limits exposure to any single customer, industry or
collateral type. Typically, each consumer and residential lending
product has a generally predictable level of credit losses based on historical
loss experience. Home mortgage and home equity loans and lines
generally have the lowest credit loss experience. Loans secured by
personal property, such as auto loans generally experience medium credit
losses. Unsecured loan products such as personal revolving credit
have the highest credit loss experience, therefore, the Bank has chosen not to
engage in a significant amount of this type of lending. Credit risk
in commercial lending can vary significantly, as losses as a percentage of
outstanding loans can shift widely during economic cycles and are particularly
sensitive to changing economic conditions. Generally, improving
economic conditions result in improved operating results on the part of
commercial customers, enhancing their ability to meet their particular debt
service requirements. Improvements, if any, in operating cash flows
can be offset by the impact of rising interest rates that may occur during
improved economic times. Declining economic conditions have an
adverse affect on the operating results of commercial customers, reducing their
ability to meet debt service obligations.
Recent
economic conditions have had a broad based impact on the Company’s loan
portfolio as a whole. While current economic data has shown the
Mid-Atlantic region is outperforming most other markets in the nation, the
Company’s lending portfolio is dealing with the impact from the economic
pressures that are being experienced by it’s borrowers, especially in the
construction lending portfolios. As unemployment has risen and
collateral values have declined, the construction segments of the loan portfolio
have seen a significant rise in non-performing loans as builders experience
declining home sales. While the diversification of the lending
portfolio among different commercial, residential and consumer product lines
along with different market conditions of the Baltimore metropolitan area, the
D.C. suburbs and Northern Virginia have mitigated some of the risks in the
portfolio, weakened local economic conditions and non-performing loan levels
will continue to be influenced by uncertain future conditions.
To
control and manage credit risk, management has a credit process in place to
ensure credit standards are maintained along with a robust in-house
administration accompanied by strong oversight procedures. The
primary purpose of loan underwriting is the evaluation of specific lending risks
that involves the analysis of the borrower’s ability to service the debt as well
as the assessment of the value of the underlying
collateral. Oversight procedures include the monitoring of the
portfolio credit quality, early identification of potential problem credits and
the aggressive management of the problem credits. As part of the
oversight process the Company maintains an allowance for loan and lease losses
(the “allowance”) to absorb estimated losses in the loan and lease
portfolio. The allowance is based on consistent, continuous review
and evaluation of the loan and lease portfolio, along with ongoing, monthly
assessments of the probable losses 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 ongoing 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
methodology for assessing the appropriateness of the allowance
includes: (1) the general formula allowance reflecting historical
losses, as adjusted, by credit category, and (2) the specific allowance for
risk-rated credits on an individual or portfolio basis. This
systematic allowance methodology is further described in the section entitled
“Critical Accounting Policies” and in “Note 1 – Significant Accounting Policies”
of the Notes to the Consolidated Financial Statements. The amount of
the allowance is reviewed and approved quarterly by the Credit Risk Committee of
the board of directors.
The
general allowance 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 in 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 calculate 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. Loans with specific allowances do not receive an
additional allocation of the general reserve.
The
Company makes provisions for loan and lease losses in amounts necessary to
maintain the allowance at an appropriate level, as established by use of the
allowance methodology. Provisions amounted to $76.8 million in 2009,
$33.2 million in 2008 and $4.1 million in 2007. Net charge-offs of $62.7
million, $7.8 million and $1.3 million, were recorded in 2009, 2008 and 2007,
respectively. The ratio of net charge-offs to average loans and
leases was 2.61% in 2009, 0.32% in 2008 and 0.06% in 2007. At
December 31, 2009, the allowance for loan and lease losses was $64.6 million, or
2.81% of total loans and leases, compared to $50.5 million, or 2.03% of total
loans and leases, at December 31, 2008.
Management
believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses in the loan and lease
portfolio can vary significantly from the amounts actually
observed. While management uses available information to recognize
probable losses, future additions to the allowance may be necessary based on
changes in the credits comprising the portfolio and changes in the financial
condition of borrowers, such as may result from changes in economic conditions.
In addition, federal and state regulatory agencies, as an integral part of their
examination process, and independent consultants engaged by the Bank,
periodically review the loan and lease portfolio and the
allowance. Such reviews may result in adjustments to the provision
based upon their analysis of the information available at the time of each
examination.
Table 12
presents a five-year history for the allocation of the allowance along with the
credit mix (year-end loan and lease allowance balances by category as a percent
of total loans and leases). The allowance is allocated in the
following table to various loan and lease categories based on the methodology
used to estimate loan losses; however, the allocation does not restrict the
usage of the allowance for any specific loan or lease category.
Table
12 – Allowance for Loan and Lease Losses
|
|
December
31,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
% of
Loans
|
|
|
|
% of
Loans
|
|
|
|
% of
Loans
|
|
|
|
% of
Loans
|
|
|
|
% of
Loans
|
|
|
|
|
|
and
|
|
|
|
and
|
|
|
|
and
|
|
|
|
and
|
|
|
|
and
|
|
(In
thousands)
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
|
|
Leases
|
|
Amount
applicable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
8,885 |
|
|
14 |
% |
$ |
4,330 |
|
|
18 |
% |
$ |
3,807 |
|
|
20 |
% |
$ |
2,411 |
|
|
22 |
% |
$ |
2,896 |
|
|
24 |
% |
Residential
construction
|
|
|
2,563 |
|
|
4 |
|
|
2,747 |
|
|
8 |
|
|
1,639 |
|
|
7 |
|
|
1,616 |
|
|
8 |
|
|
1,754 |
|
|
9 |
|
Total
|
|
|
11,448 |
|
|
18 |
|
|
7,077 |
|
|
26 |
|
|
5,446 |
|
|
27 |
|
|
4,027 |
|
|
30 |
|
|
4,650 |
|
|
33 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
mortgage
|
|
|
10,997 |
|
|
17 |
|
|
19,527 |
|
|
34 |
|
|
7,854 |
|
|
29 |
|
|
5,461 |
|
|
28 |
|
|
4,119 |
|
|
25 |
|
Commercial
construction
|
|
|
21,151 |
|
|
33 |
|
|
13,046 |
|
|
9 |
|
|
4,092 |
|
|
12 |
|
|
2,197 |
|
|
11 |
|
|
2,152 |
|
|
11 |
|
Other
commercial
|
|
|
16,915 |
|
|
26 |
|
|
7,174 |
|
|
14 |
|
|
5,317 |
|
|
14 |
|
|
4,857 |
|
|
10 |
|
|
2,587 |
|
|
10 |
|
Subtotal
|
|
|
49,063 |
|
|
76 |
|
|
39,747 |
|
|
57 |
|
|
17,263 |
|
|
55 |
|
|
12,515 |
|
|
49 |
|
|
8,858 |
|
|
46 |
|
Leases
|
|
|
712 |
|
|
1 |
|
|
908 |
|
|
1 |
|
|
525 |
|
|
2 |
|
|
364 |
|
|
2 |
|
|
298 |
|
|
1 |
|
Total
|
|
|
49,775 |
|
|
77 |
|
|
40,655 |
|
|
58 |
|
|
17,788 |
|
|
57 |
|
|
12,879 |
|
|
51 |
|
|
9,156 |
|
|
47 |
|
Consumer
|
|
|
3,336 |
|
|
5 |
|
|
2,794 |
|
|
16 |
|
|
1,858 |
|
|
16 |
|
|
2,586 |
|
|
19 |
|
|
3,080 |
|
|
20 |
|
Total
allowance
|
|
$ |
64,559 |
|
|
100 |
% |
$ |
50,526 |
|
|
100 |
% |
$ |
25,092 |
|
|
100 |
% |
$ |
19,492 |
|
|
100 |
% |
$ |
16,886 |
|
|
100 |
% |
During
2009, there were no major changes in estimation methods that affected the
allowance methodology from the prior year. Variations can occur
over time in the methodology’s assessment of the adequacy of the allowance as a
result of the credit performance of borrowers. There was no
unallocated allowance at year-end 2009 or 2008, when measured against the total
allowance.
The
severe decline in the national and regional economies continues to exert
extraordinary pressures on the housing market. As a result, many residential
real estate developers could not survive the diminished cash flows due to lack
of sales and thus were unable to service their bank debt. Accordingly, this has
resulted in an increase in delinquencies, non-performing loans and charge-offs
particularly in the acquisition development and construction
portfolio. As a result of internal risk rating downgrades,
charge-offs and additional specific reserves primarily related to loans in the
residential real estate development portfolio the provision for loan and lease
losses and the allowance has increased significantly for 2009 as compared to
2008. The allowance increased by $14.0 million or 28% during
2009. The required allowance for commercial real estate and other
commercial loans and leases increased by $9.1 million and is reflective of the
increase in non-performing loans in the commercial portfolio. The
required allowance for consumer and residential loans increased $4.9 million
during the year, mainly due to an increase in non-performing residential
mortgage loans. Management continues to monitor the status of the
portfolio with particular attention directed to loans with apparent credit
issues in the development of the allowance and evaluating its
adequacy.
At
December 31, 2009, total non-performing loans and leases were $133.7 million, or
5.82% of total loans and leases, compared to $69.4 million, or 2.79% of total
loans and leases, at December 31, 2008. The increase in
non-performing loans and leases was due primarily to twenty four residential
real estate development loans totaling $70.5 million which became non-performing
during 2009. This increase was somewhat offset by $27.8 million in pay downs and
charge-offs on previously existing real estate development loans. The
allowance represented 48% of non-performing loans and leases at December 31,
2009 and 73% at 2008. This decline in the coverage ratio is the
direct result of the growth in non-performing loans. A corresponding
growth in the allowance was not necessary due to the validations of the
underlying collateral values on the non-performing loans. In addition, analysis
of the actual loss history on the problem credits in 2009 provided an indication
that the coverage of the inherent losses on the problem credits was
adequate.
The
balance of impaired loans was $99.5 million at December 31, 2009, with reserves
of $6.6 million against those loans, compared to $52.6 million at December 31,
2008, with reserves of $13.8 million. The decline in specific reserves compared
to balances of impaired loans is primarily the result of charge-offs of specific
loan balances down to the appraised collateral values during
2009. The $6.6 million indicates the remaining collateral shortfall
anticipated, based on the current status of the borrowers, of the $99.5 million
in impaired loans.
The
Company's borrowers are concentrated in six counties in Maryland and two
counties in Virginia. Commercial and residential mortgages, including
home equity loans and lines, represented 74% of total loans and leases at
December 31, 2009, compared to 67% at December 31, 2008. Certain loan
terms may create concentrations of credit risk and increase the lender’s
exposure to loss. These include terms that permit the deferral of principal
payments or payments that are smaller than normal interest accruals (negative
amortization); loans with high loan-to-value ratios; loans, such as option
adjustable-rate mortgages, that may expose the borrower to future increases in
repayments that are in excess of increases that would result solely from
increases in market interest rates; and interest-only loans. The
Company does not make loans that provide for negative amortization. The Company
originates option adjustable-rate mortgages infrequently and sells all of them
in the secondary market.
Table
13 – Summary of Loan and Lease Loss Experience
|
|
Year
Ended December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Balance,
January 1
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
$ |
16,886 |
|
|
$ |
14,654 |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
33,192 |
|
|
|
4,094 |
|
|
|
2,795 |
|
|
|
2,600 |
|
Allowance
acquired from acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
2,798 |
|
|
|
- |
|
|
|
- |
|
Loan
charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
(4,847 |
) |
|
|
(4,798 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
Commercial
loans and leases
|
|
|
(57,099 |
) |
|
|
(2,677 |
) |
|
|
(1,103 |
) |
|
|
(230 |
) |
|
|
(491 |
) |
Consumer
|
|
|
(1,575 |
) |
|
|
(988 |
) |
|
|
(341 |
) |
|
|
(85 |
) |
|
|
(44 |
) |
Total
charge-offs
|
|
|
(63,521 |
) |
|
|
(8,463 |
) |
|
|
(1,444 |
) |
|
|
(315 |
) |
|
|
(535 |
) |
Loan
recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
41 |
|
|
|
21 |
|
|
|
12 |
|
|
|
- |
|
|
|
64 |
|
Commercial
loans and leases
|
|
|
641 |
|
|
|
475 |
|
|
|
110 |
|
|
|
89 |
|
|
|
89 |
|
Consumer
|
|
|
110 |
|
|
|
209 |
|
|
|
30 |
|
|
|
37 |
|
|
|
14 |
|
Total
recoveries
|
|
|
792 |
|
|
|
705 |
|
|
|
152 |
|
|
|
126 |
|
|
|
167 |
|
Net
charge-offs
|
|
|
(62,729 |
) |
|
|
(7,758 |
) |
|
|
(1,292 |
) |
|
|
(189 |
) |
|
|
(368 |
) |
Balance,
period end
|
|
$ |
64,559 |
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
|
$ |
16,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs to average loans and leases
|
|
|
2.61 |
% |
|
|
0.32 |
% |
|
|
0.06 |
% |
|
|
0.01 |
% |
|
|
0.02 |
% |
Allowance
to total loans and leases
|
|
|
2.81 |
% |
|
|
2.03 |
% |
|
|
1.10 |
% |
|
|
1.08 |
% |
|
|
1.00 |
% |
Table
14 – Analysis of Credit Risk
|
|
At
December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Non-accrual
loans and leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
$ |
9,520 |
|
|
$ |
11,679 |
|
|
$ |
599 |
|
|
$ |
354 |
|
|
$ |
- |
|
Commercial
loans and leases
|
|
|
100,894 |
|
|
|
55,890 |
|
|
|
22,368 |
|
|
|
1,534 |
|
|
|
409 |
|
Consumer
|
|
|
766 |
|
|
|
381 |
|
|
|
73 |
|
|
|
22 |
|
|
|
28 |
|
Total
non-accrual loans and leases (1)
|
|
|
111,180 |
|
|
|
67,950 |
|
|
|
23,040 |
|
|
|
1,910 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and leases 90 days past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
14,887 |
|
|
|
471 |
|
|
|
3,992 |
|
|
|
123 |
|
|
|
281 |
|
Commercial
loans and leases
|
|
|
3,321 |
|
|
|
567 |
|
|
|
7,236 |
|
|
|
1,665 |
|
|
|
663 |
|
Consumer
|
|
|
793 |
|
|
|
- |
|
|
|
134 |
|
|
|
35 |
|
|
|
14 |
|
Total
90 days past due loans and leases
|
|
|
19,001 |
|
|
|
1,038 |
|
|
|
11,362 |
|
|
|
1,823 |
|
|
|
958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured
loans and leases
|
|
|
3,549 |
|
|
|
395 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
non-performing loans and leases (2)
|
|
|
133,730 |
|
|
|
69,383 |
|
|
|
34,402 |
|
|
|
3,733 |
|
|
|
1,395 |
|
Other
real estate owned, net
|
|
|
7,464 |
|
|
|
2,860 |
|
|
|
461 |
|
|
|
182 |
|
|
|
- |
|
Total
non-performing assets
|
|
$ |
141,194 |
|
|
$ |
72,243 |
|
|
$ |
34,863 |
|
|
$ |
3,915 |
|
|
$ |
1,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing
loans to total loans and leases
|
|
|
5.82 |
% |
|
|
2.79 |
% |
|
|
1.51 |
% |
|
|
0.21 |
% |
|
|
0.08 |
% |
Non-performing
assets to total assets
|
|
|
3.89 |
% |
|
|
2.18 |
% |
|
|
1.15 |
% |
|
|
0.15 |
% |
|
|
0.06 |
% |
Allowance
for loan and leases to non-performing loans and leases
|
|
|
48.28 |
% |
|
|
72.82 |
% |
|
|
72.94 |
% |
|
|
522.15 |
% |
|
|
1210.47 |
% |
(1)
|
Gross
interest income that would have been recorded in 2009 if non-accrual loans
and leases shown above had been current and in accordance with their
original terms was $6.4 million. No interest was recorded on these loans
during the year. Please see Note 1 of the Notes to Consolidated Financial
Statements for a description of the Company’s policy for placing loans on
non-accrual status.
|
(2)
|
Performing
loans considered potential problem loans, as defined and identified by
management, amounted to $63.3 million at December 31, 2009. Although these
are loans where known information about the borrowers' possible credit
problems causes management to have doubts as to the borrowers' ability to
comply with the loan repayment terms, most are well collateralized and are
not believed to present significant risk of loss. Loans
classified for regulatory purposes not included in either non-performing
or potential problem loans consist only of "other loans especially
mentioned" and do not, in management's opinion, represent or result from
trends or uncertainties reasonably expected to materially impact future
operating results, liquidity or capital resources, or represent material
credits where known information about the borrowers' possible credit
problems causes management to have doubts as to the borrowers' ability to
comply with the loan repayment
terms.
|
Market
Risk Management
The
Company's net income is largely dependent on its net interest
income. Net interest income is susceptible to interest rate risk to
the extent that interest-bearing liabilities mature or re-price on a different
basis than interest-earning assets. When interest-bearing liabilities
mature or re-price more quickly than interest-earning assets in a given period,
a significant increase in market rates of interest could adversely affect net
interest income. Similarly, when interest-earning assets mature or
re-price more quickly than interest-bearing liabilities, falling interest rates
could result in a decrease in net interest income. Net interest income is also
affected by changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds, such as
noninterest-bearing deposits and stockholders' equity.
The
Company’s interest rate risk management goals are (1) to increase net interest
income at a growth rate consistent with the growth rate of total assets, and (2)
to minimize fluctuations in net interest margin as a percentage of earning
assets. Management attempts to achieve these goals by balancing,
within policy limits, the volume of floating-rate liabilities with a similar
volume of floating-rate assets; by keeping the average maturity of fixed-rate
asset and liability contracts reasonably matched; by maintaining a pool of
administered core deposits; and by adjusting pricing rates to market conditions
on a continuing basis.
The
Company’s board of directors has established a comprehensive interest rate risk
management policy, which is administered by management’s ALCO. The policy
establishes limits on risk, which are quantitative measures of the percentage
change in net interest income (a measure of net interest income at risk) and the
fair value of equity capital (a measure of economic value of equity or “EVE” at
risk) resulting from a hypothetical change in U.S. Treasury interest rates for
maturities from one day to thirty years. The Company measures the potential
adverse impacts that changing interest rates may have on its short-term
earnings, long-term value, and liquidity by employing simulation analysis
through the use of computer modeling. The simulation model captures optionality
factors such as call features and interest rate caps and floors imbedded in
investment and loan portfolio contracts. As with any method of gauging interest
rate risk, there are certain shortcomings inherent in the interest rate modeling
methodology used by the Company. When interest rates change, actual movements in
different categories of interest-earning assets and interest-bearing
liabilities, loan prepayments, and withdrawals of time and other deposits, may
deviate significantly from assumptions used in the model. Finally, the
methodology does not measure or reflect the impact that higher rates may have on
adjustable-rate loan customers’ ability to service their debts, or the impact of
rate changes on demand for loan, lease, and deposit products.
The
Company prepares a current base case and eight alternative simulations at least
once a quarter, and reports the analysis to the board of
directors. In addition, more frequent forecasts are produced when
interest rates are particularly uncertain or when other business conditions so
dictate.
The
statement of condition is subject to quarterly testing for eight alternative
interest rate shock possibilities to indicate the inherent interest rate
risk. Average interest rates are shocked by +/- 100, 200, 300, and
400 basis points (“bp”), although the Company may elect not to use particular
scenarios that it determines are impractical in a current rate
environment. It is management’s goal to structure the balance sheet
so that net interest earnings at risk over a twelve-month period and the
economic value of equity at risk do not exceed policy guidelines at the various
interest rate shock levels.
The
Company augments its quarterly interest rate shock analysis with alternative
external interest rate scenarios on a monthly basis. These alternative interest
rate scenarios may include non-parallel rate ramps and non-parallel yield curve
twists. If a measure of risk produced by the alternative simulations
of the entire balance sheet violates policy guidelines, ALCO is required to
develop a plan to restore the measure of risk to a level that complies with
policy limits within two quarters.
Measures
of net interest income at risk produced by simulation analysis are indicators of
an institution’s short-term performance in alternative rate
environments. These measures are typically based upon a relatively
brief period, usually one year. They do not necessarily indicate the
long-term prospects or economic value of the institution.
Table
15 - 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 |
% |
December
31, 2009
|
|
|
(15.27 |
)% |
|
|
(9.52 |
)% |
|
|
(5.03 |
)% |
|
|
(1.71 |
)% |
|
|
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 |
|
As shown
above, measures of net interest income at risk increased from December 31, 2008
at all interest rate shock levels. All measures remained well within
prescribed policy limits.
The risk
position increased substantially in the rising rate scenarios due to a
lengthening of durations in the securities portfolio resulting from growth in
CMO’s, a decrease in variable rate loans, and an increase in money market
deposit accounts due to the growth in the newly introduced money market product.
Also, the subordinated debt, which previously carried a fixed rate, converted to
a much lower floating rate in 2009 and now re-prices to the higher shock rates
therefore adding to the overall net interest income risk.
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 by discounting the cash flows to estimate the present
value of assets and liabilities. The difference between these
discounted values of the assets and liabilities is the economic value of equity,
which, in theory, approximates the fair value of the Company’s net
assets.
Table
16 - 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 |
% |
December
31, 2009
|
|
|
-23.29 |
% |
|
|
-12.78 |
% |
|
|
-7.43 |
% |
|
|
-2.29 |
% |
|
|
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 increased over year-end 2008 in
all interest rate shock levels. The economic value of equity exposure at +200 bp
is now -7.43% compared to 3.61% at year-end 2008, and is well within the policy
limit of 22.5%, as are measures at all other shock levels.
During
2009, the securities portfolio has realized a negative impact compared to 2008
due to the significant growth in the portfolio and the lengthening of the
duration of the portfolio due to rising interest rates. The increase
in the balance of the newly introduced money market product is causing a
negative impact to EVE in the rising shock bands as those funds provide no
additional premium as the interest rates move upward because of the assumption
that the rate will re-price to market as rates increase.
Liquidity
Management
Liquidity
is measured by a financial institution's ability to raise funds through loan and
lease repayments, maturing investments, deposit growth, borrowed funds, capital
and the sale of highly marketable assets such as investment securities and
residential mortgage loans. The Company's liquidity position, considering both
internal and external sources available, exceeded anticipated short-term and
long-term needs at December 31, 2009. Management considers core
deposits, defined to include all deposits other than time deposits of $100
thousand or more, to be a relatively stable funding source. Core deposits
equaled 70% of total earning assets at December 31, 2009. In
addition, loan and lease payments, maturities, calls and pay downs of
securities, deposit growth and earnings contribute a flow of funds available to
meet liquidity requirements. In assessing liquidity, management considers
operating requirements, the seasonality of deposit flows, investment, loan and
deposit maturities and calls, expected funding of loans and deposit withdrawals,
and the market values of available-for-sale investments, so that sufficient
funds are available on short notice to meet obligations as they arise and to
ensure that the Company is able to pursue new business
opportunities.
Liquidity
is measured using an approach designed to take into account, in addition to
factors already discussed above, the Company’s growth and mortgage banking
activities. Also considered are changes in the liquidity of the
investment portfolio due to fluctuations in interest rates. Under
this approach, implemented by the Funds Management Subcommittee of ALCO under
formal policy guidelines, the Company’s liquidity position is measured weekly,
looking forward at thirty day intervals from thirty (30) to three hundred sixty
(360) days. The measurement is based upon the projection of funds
sold or purchased position, along with ratios and trends developed to measure
dependence on purchased funds and core growth. Resulting projections
as of December 31, 2009, show short-term investments exceeding short-term
borrowings by $52.8 million over the subsequent 360 days. This
projected excess of liquidity versus requirements provides the Company with
flexibility in how it funds loans and other earning assets.
The
Company also has external sources of funds, which can be drawn upon when
required. The main sources of external liquidity are available lines
of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve.
The line of credit with the Federal Home Loan Bank of Atlanta totaled $1.1
billion, of which $493.8 million was available for borrowing based on pledged
collateral, with $426.6 million borrowed against it as of December 31, 2009. The
line of credit at the Federal Reserve totaled $272.7 million, all of which was
available for borrowing based on pledged collateral, with no borrowings against
it as of December 31, 2009. Other external sources of liquidity
available to the Company in the form of unsecured lines of credit granted by
correspondent banks totaled $40.0 million at December 31, 2009, against which
there were no outstanding borrowings. In addition, the Company had a
secured line of credit with a correspondent bank of $20.0 million as of December
31, 2009. Based upon its liquidity analysis, including external sources of
liquidity available, management believes the liquidity position was appropriate
at December 31, 2009.
The
parent company (“Bancorp”) is a separate legal entity from the Bank and must
provide for its own liquidity. In addition to its operating expenses, Bancorp is
responsible for paying any dividends declared to its common shareholders,
dividends on its preferred stock, and interest and principal on outstanding
debt. Bancorp’s primary source of income is dividends received from the Bank.
The amount of dividends that the Bank may declare and pay to Bancorp in any
calendar year, without the receipt of prior approval from the Federal Reserve,
cannot exceed net income for that year to date plus retained net income (as
defined) for the preceding two calendar years. At December 31, 2009, Bancorp had
liquid assets of $2.8 million.
The
Company has various contractual obligations that affect its cash flows and
liquidity. For information regarding material contractual
obligations, please see “Market Risk Management” above, “Contractual
Obligations” below, and “Note 7-Premises and Equipment,” “Note 10-Borrowings,”
“Note 14-Pension, Profit Sharing and Other Employee Benefit Plans,” “Note
19-Financial Instruments with Off-balance Sheet Risk and Derivatives,” and “Note
21-Fair Value” of the Notes to the Consolidated Financial
Statements.
Off-Balance
Sheet Arrangements
With the
exception of the Company’s obligations in connection with its trust preferred
securities, irrevocable letters of credit, and loan commitments, the Company has
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on the Company’s financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures, or capital resources, that is material to
investors. The trust preferred securities were issued by Sandy Spring
Capital Trust II (the “Trust”), a subsidiary of the Company created for the
purpose of issuing the trust preferred securities and purchasing the Company’s
junior subordinated debentures, which are its sole assets. These
junior subordinated debentures bear a maturity date of October 7, 2034, which
may be shortened, subject to conditions, to a date no earlier than October 7,
2009. The Company owns all of the Trust’s outstanding securities. The
Company and the Trust believe that, taken together, the Company’s obligations
under the junior subordinated debentures, the Indenture, the Trust Agreement,
and the Guarantee entered into in connection with the issuance of the trust
preferred securities and the debentures, in the aggregate constitute a full,
irrevocable and unconditional guarantee of the Trust’s
obligations. For additional information on off-balance sheet
arrangements, please see “Note 19-Financial Instruments with Off-balance Sheet
Risk and Derivatives” and “Note 10- Borrowings” of the Notes to the Consolidated
Financial Statements, and “Capital Management” and
“Securities”.
Table 17 – Contractual Obligations
(1)
|
|
Payment
Due by Period
|
|
|
|
|
|
|
Less
than
|
|
|
|
|
|
|
|
|
After
|
|
(In
thousands)
|
|
Total
|
|
|
1
year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
5
Years
|
|
Advances
from FHLB
|
|
$ |
411,584 |
|
|
$ |
5,476 |
|
|
$ |
- |
|
|
$ |
1,108 |
|
|
$ |
405,000 |
|
Certificates
of deposit
|
|
|
785,785 |
|
|
|
616,400 |
|
|
|
136,105 |
|
|
|
33,280 |
|
|
|
- |
|
Operating
lease obligations
|
|
|
24,947 |
|
|
|
5,133 |
|
|
|
8,753 |
|
|
|
5,781 |
|
|
|
5,280 |
|
Preferred
stock dividends
|
|
|
45,885 |
|
|
|
4,155 |
|
|
|
8,309 |
|
|
|
10,987 |
|
|
|
22,434 |
|
Purchase
obligations
(2)
|
|
|
11,937 |
|
|
|
2,397 |
|
|
|
4,975 |
|
|
|
4,565 |
|
|
|
- |
|
Total
|
|
$ |
1,280,138 |
|
|
$ |
633,561 |
|
|
$ |
158,142 |
|
|
$ |
55,721 |
|
|
$ |
432,714 |
|
(1)
|
The
Company enters into contractual obligations in the normal course of
business. Among these obligations are FHLB advances, operating
leases related to branch and administrative facilities, a long-term
contract with a data processing provider and purchase contracts related to
construction of new branch offices. Payments required under
these obligations, are set forth in the table below as of December 31,
2009. Assumed a seven year term for purposes of this
table.
|
(2)
|
Represents
payments required under contract, based on average monthly charges for
2010 and assuming a growth rate of 3% with the Company’s current data
processing service provider that expires in September
2014.
|
PART
II
Item
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Internal
Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting. As required by SEC rules,
the Company’s management evaluated the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. The
Company’s chief executive officer and chief financial officer participated in
the evaluation, which was based upon the criteria for effective internal control
over financial reporting included in the “Internal Control-Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, the Company’s chief executive
officer and chief financial officer concluded that the Company’s internal
control over financial reporting was effective as of December 31,
2009.
The
attestation report by the Company’s independent registered public accounting
firm, Grant Thornton LLP, on the Company’s internal control over financial
reporting begins on the following pages.
Fourth
Quarter 2009 Changes In Internal Controls Over Financial Reporting
No change
occurred during the fourth quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal controls over
financial reporting.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited Sandy Spring Bancorp, Inc. (a Maryland corporation) and subsidiaries’
(the Company) internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal
Control over Financial Reporting. Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. In our opinion, Sandy Spring
Bancorp, Inc. and subsidiaries maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control— Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sandy Spring
Bancorp, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of income, stockholders’ equity and cash flows for each
of the two years in the period ended December 31, 2009. Our report dated March
12, 2010, expressed an unqualified opinion.
Philadelphia,
Pennsylvania
March 12,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited the accompanying consolidated balance sheets of Sandy Spring Bancorp,
Inc. (a Maryland corporation) and subsidiaries (the Company) as of December 31,
2009 and 2008, and the related consolidated statements of income, stockholders’
equity and cash flows for each of the two years in the period ended December 31,
2009. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Sandy Spring Bancorp, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of its
consolidated operations and its cash flows for each of the two years in the
period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 21 to the consolidated financial statements, the
Company adopted the guidance for fair value measurements and disclosures issued
by the Financial Accounting Standard Board (FASB) in 2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Sandy Spring Bancorp, Inc. and subsidiaries’
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 12, 2010 expressed an
unqualified opinion on internal control over financial reporting.
Philadelphia,
Pennsylvania
March 12,
2010
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Sandy
Spring Bancorp, Inc.
We have
audited the consolidated statements of income, changes in stockholders’ equity
and cash flows of Sandy Spring Bancorp, Inc. and Subsidiaries for the year ended
December 31, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of the Company’s operations
and cash flows for the year ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.
Frederick,
Maryland
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CONDITION
|
|
December
31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
Assets:
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$ |
49,430 |
|
|
$ |
44,738 |
|
Federal
funds sold
|
|
|
1,863 |
|
|
|
1,110 |
|
Interest-bearing
deposits with banks
|
|
|
8,503 |
|
|
|
59,381 |
|
Cash
and cash equivalents
|
|
|
59,796 |
|
|
|
105,229 |
|
Residential
mortgage loans held for sale (at fair value)
|
|
|
12,498 |
|
|
|
11,391 |
|
Investments
available-for-sale (at fair value)
|
|
|
858,433 |
|
|
|
291,727 |
|
Investments
held-to-maturity — fair value of $137,787 (2009) and $175,908
(2008)
|
|
|
132,593 |
|
|
|
171,618 |
|
Other
equity securities
|
|
|
32,773 |
|
|
|
29,146 |
|
Total
loans and leases
|
|
|
2,298,010 |
|
|
|
2,490,646 |
|
Less:
allowance for loan and lease losses
|
|
|
(64,559 |
) |
|
|
(50,526 |
) |
Net
loans and leases
|
|
|
2,233,451 |
|
|
|
2,440,120 |
|
Premises
and equipment, net
|
|
|
49,606 |
|
|
|
51,410 |
|
Other
real estate owned
|
|
|
7,464 |
|
|
|
2,860 |
|
Accrued
interest receivable
|
|
|
13,653 |
|
|
|
11,810 |
|
Goodwill
|
|
|
76,816 |
|
|
|
76,248 |
|
Other
intangible assets, net
|
|
|
8,537 |
|
|
|
12,183 |
|
Other
assets
|
|
|
144,858 |
|
|
|
109,896 |
|
Total
assets
|
|
$ |
3,630,478 |
|
|
$ |
3,313,638 |
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposits
|
|
$ |
540,578 |
|
|
$ |
461,517 |
|
Interest-bearing
deposits
|
|
|
2,156,264 |
|
|
|
1,903,740 |
|
Total
deposits
|
|
|
2,696,842 |
|
|
|
2,365,257 |
|
Securites
sold under retail repurchase agreements and federal funds
purchased
|
|
|
89,062 |
|
|
|
75,106 |
|
Advances
from FHLB
|
|
|
411,584 |
|
|
|
412,552 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
35,000 |
|
Accrued
interest payable and other liabilities
|
|
|
24,404 |
|
|
|
33,861 |
|
Total
liabilities
|
|
|
3,256,892 |
|
|
|
2,921,776 |
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock—par value $1.00 (liquidation preference of $1,000 per share) shares
authorized 83,094; issued and outstanding 83,094, net of discount of
$2,999 (2009) and $3,654 (2008)
|
|
|
80,095 |
|
|
|
79,440 |
|
Common
stock — par value $1.00; shares authorized 49,916,906 for 2009 and
2008; shares issued and outstanding 16,487,852 (2009) and 16,398,523
(2008)
|
|
|
16,488 |
|
|
|
16,399 |
|
Warrants
|
|
|
3,699 |
|
|
|
3,699 |
|
Additional
paid in capital
|
|
|
87,334 |
|
|
|
85,486 |
|
Retained
earnings
|
|
|
188,622 |
|
|
|
214,410 |
|
Accumulated
other comprehensive loss
|
|
|
(2,652 |
) |
|
|
(7,572 |
) |
Total
stockholders' equity
|
|
|
373,586 |
|
|
|
391,862 |
|
Total
liabilities and stockholders' equity
|
|
$ |
3,630,478 |
|
|
$ |
3,313,638 |
|
The
accompanying notes are an integral part of these statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Year
Ended December 31,
|
|
(Dollars
in thousands, except per share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Interest
Income:
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans and leases
|
|
$ |
126,899 |
|
|
$ |
148,765 |
|
|
$ |
152,723 |
|
Interest
on loans held for sale
|
|
|
767 |
|
|
|
436 |
|
|
|
815 |
|
Interest
on deposits with banks
|
|
|
149 |
|
|
|
112 |
|
|
|
1,123 |
|
Interest
and dividends on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
19,945 |
|
|
|
10,177 |
|
|
|
13,989 |
|
Exempt
from federal income taxes
|
|
|
7,467 |
|
|
|
8,800 |
|
|
|
10,168 |
|
Interest
on federal funds sold
|
|
|
3 |
|
|
|
555 |
|
|
|
2,157 |
|
Total
interest income
|
|
|
155,230 |
|
|
|
168,845 |
|
|
|
180,975 |
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
34,921 |
|
|
|
42,816 |
|
|
|
59,916 |
|
Interest
on retail repurchase agreements and federal funds
purchased
|
|
|
308 |
|
|
|
1,795 |
|
|
|
4,392 |
|
Interest
on advances from FHLB
|
|
|
14,708 |
|
|
|
13,553 |
|
|
|
9,618 |
|
Interest
on subordinated debt
|
|
|
1,585 |
|
|
|
2,222 |
|
|
|
2,223 |
|
Total
interest expense
|
|
|
51,522 |
|
|
|
60,386 |
|
|
|
76,149 |
|
Net
interest income
|
|
|
103,708 |
|
|
|
108,459 |
|
|
|
104,826 |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
33,192 |
|
|
|
4,094 |
|
Net
interest income after provision for loan and lease losses
|
|
|
26,946 |
|
|
|
75,267 |
|
|
|
100,732 |
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
418 |
|
|
|
663 |
|
|
|
43 |
|
Service
charges on deposit accounts
|
|
|
11,433 |
|
|
|
12,778 |
|
|
|
11,148 |
|
Gains
on sales of mortgage loans
|
|
|
3,253 |
|
|
|
2,288 |
|
|
|
2,739 |
|
Fees
on sales of investment products
|
|
|
2,823 |
|
|
|
3,475 |
|
|
|
2,989 |
|
Trust
and investment management fees
|
|
|
9,421 |
|
|
|
9,483 |
|
|
|
9,588 |
|
Insurance
agency commissions
|
|
|
5,236 |
|
|
|
5,908 |
|
|
|
6,625 |
|
Income
from bank owned life insurance
|
|
|
2,906 |
|
|
|
2,902 |
|
|
|
2,829 |
|
Visa
check fees
|
|
|
2,920 |
|
|
|
2,875 |
|
|
|
2,784 |
|
Other
income
|
|
|
6,831 |
|
|
|
5,871 |
|
|
|
5,544 |
|
Total
noninterest income
|
|
|
45,241 |
|
|
|
46,243 |
|
|
|
44,289 |
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
54,460 |
|
|
|
53,015 |
|
|
|
55,207 |
|
Occupancy
expense of premises
|
|
|
10,710 |
|
|
|
10,762 |
|
|
|
10,360 |
|
Equipment
expenses
|
|
|
5,691 |
|
|
|
6,156 |
|
|
|
6,563 |
|
Marketing
|
|
|
2,166 |
|
|
|
2,163 |
|
|
|
2,237 |
|
Outside
data services
|
|
|
3,721 |
|
|
|
4,373 |
|
|
|
3,967 |
|
FDIC
insurance
|
|
|
6,092 |
|
|
|
1,751 |
|
|
|
433 |
|
Amortization
of intangible assets
|
|
|
3,646 |
|
|
|
4,447 |
|
|
|
4,080 |
|
Goodwill
impairment loss
|
|
|
- |
|
|
|
4,159 |
|
|
|
- |
|
Other
expenses
|
|
|
16,553 |
|
|
|
15,263 |
|
|
|
16,941 |
|
Total
noninterest expense
|
|
|
103,039 |
|
|
|
102,089 |
|
|
|
99,788 |
|
Income
(loss) before income taxes
|
|
|
(30,852 |
) |
|
|
19,421 |
|
|
|
45,233 |
|
Income
tax expense (benefit)
|
|
|
(15,997 |
) |
|
|
3,642 |
|
|
|
12,971 |
|
Net
income (loss)
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Preferred
stock dividends and discount accretion
|
|
|
4,810 |
|
|
|
334 |
|
|
|
- |
|
Net
income (loss) available to common stockholders
|
|
$ |
(19,665 |
) |
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Per Share Amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
(0.90 |
) |
|
$ |
0.96 |
|
|
$ |
2.01 |
|
Basic
net income (loss) per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
Diluted
net income (loss) per share
|
|
|
(0.90 |
) |
|
$ |
0.96 |
|
|
$ |
2.01 |
|
Diluted
net income (loss) per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
Dividends
declared per common share
|
|
|
0.37 |
|
|
$ |
0.96 |
|
|
$ |
0.92 |
|
The
accompanying notes are an integral part of these statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year
Ended December 31,
|
|
(Dollars
in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Adjustments
to reconcile net income (loss) to net cash (used in ) provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
9,827 |
|
|
|
10,837 |
|
|
|
10,648 |
|
Goodwill
impairment loss
|
|
|
|
|
|
|
4,159 |
|
|
|
- |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
33,192 |
|
|
|
4,094 |
|
Share
based compensation expense
|
|
|
762 |
|
|
|
772 |
|
|
|
1,128 |
|
Deferred
income tax benefit
|
|
|
(7,237 |
) |
|
|
(10,517 |
) |
|
|
(2,721 |
) |
Origination
of loans held for sale
|
|
|
(339,553 |
) |
|
|
(188,899 |
) |
|
|
(280,152 |
) |
Proceeds
from sales of loans held for sale
|
|
|
341,798 |
|
|
|
186,723 |
|
|
|
286,398 |
|
Gains
on sales of loans held for sale
|
|
|
(3,352 |
) |
|
|
(2,126 |
) |
|
|
(2,739 |
) |
Securities
gains
|
|
|
(418 |
) |
|
|
(663 |
) |
|
|
(43 |
) |
Gains
(losses) on sales of premises and equipment
|
|
|
- |
|
|
|
46 |
|
|
|
(289 |
) |
Net
(increase) decrease in accrued interest receivable
|
|
|
(1,843 |
) |
|
|
3,145 |
|
|
|
2,020 |
|
Net
increase in other assets
|
|
|
(30,914 |
) |
|
|
(8,647 |
) |
|
|
(4,931 |
) |
Net
(decrease) increase in accrued expenses and other
liabilities
|
|
|
(9,688 |
) |
|
|
8,620 |
|
|
|
(2,913 |
) |
Other
– net
|
|
|
5,602 |
|
|
|
(2,610 |
) |
|
|
5,153 |
|
Net
cash provided by operating activities
|
|
|
26,891 |
|
|
|
49,811 |
|
|
|
47,915 |
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in interest-bearing deposits with banks
|
|
|
- |
|
|
|
- |
|
|
|
2,609 |
|
Purchases of
other equity securities
|
|
|
(3,627 |
) |
|
|
(5,379 |
) |
|
|
(4,548 |
) |
Purchases
of investments available-for-sale
|
|
|
(911,277 |
) |
|
|
(295,661 |
) |
|
|
(83,440 |
) |
Proceeds
from maturities, calls and principal payments of investments
held-to-maturity
|
|
|
39,184 |
|
|
|
63,105 |
|
|
|
36,038 |
|
Proceeds
from maturities, calls and principal payments of investments
available-for-sale
|
|
|
347,856 |
|
|
|
189,569 |
|
|
|
208,555 |
|
Proceeds
from redemption of VISA stock
|
|
|
- |
|
|
|
429 |
|
|
|
- |
|
Net
decrease (increase) in loans and leases
|
|
|
124,290 |
|
|
|
(231,853 |
) |
|
|
(179,464 |
) |
Contingent
consideration payout
|
|
|
(2,308 |
) |
|
|
(3,915 |
) |
|
|
(1,491 |
) |
Acquisition
of business activity, net
|
|
|
- |
|
|
|
- |
|
|
|
(15,729 |
) |
Proceeds
from the sales of other real estate owned
|
|
|
967 |
|
|
|
240 |
|
|
|
(179 |
) |
Proceeds
from the sales of premises and equipment
|
|
|
- |
|
|
|
- |
|
|
|
650 |
|
Expenditures
for premises and equipment
|
|
|
(3,110 |
) |
|
|
(2,250 |
) |
|
|
(4,780 |
) |
Net
cash used in investing activities
|
|
|
(408,025 |
) |
|
|
(285,715 |
) |
|
|
(41,779 |
) |
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in deposits
|
|
|
331,585 |
|
|
|
91,389 |
|
|
|
(57,031 |
) |
Net
increase in retail repurchase agreements and federal funds
purchased
|
|
|
13,956 |
|
|
|
(22,911 |
) |
|
|
(26,483 |
) |
Proceeds
from advances from FHLB
|
|
|
- |
|
|
|
246,000 |
|
|
|
187,212 |
|
Repayment
of advances from FHLB
|
|
|
(968 |
) |
|
|
(126,956 |
) |
|
|
(110,861 |
) |
Common
stock issued pursuant to West Financial Services
acquisition
|
|
|
628 |
|
|
|
- |
|
|
|
- |
|
Proceeds
from issuance of common stock
|
|
|
521 |
|
|
|
743 |
|
|
|
1,823 |
|
Common
stock purchased and retired
|
|
|
- |
|
|
|
- |
|
|
|
(4,354 |
) |
Proceeds
from issuance of preferred stock
|
|
|
- |
|
|
|
83,094 |
|
|
|
- |
|
Tax
benefits associated with shared based compensation
|
|
|
26 |
|
|
|
51 |
|
|
|
110 |
|
Dividends
paid
|
|
|
(10,047 |
) |
|
|
(15,764 |
) |
|
|
(14,988 |
) |
Net
cash provided (used) by financing activities
|
|
|
335,701 |
|
|
|
255,646 |
|
|
|
(24,572 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(45,433 |
) |
|
|
19,742 |
|
|
|
(18,436 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
105,229 |
|
|
|
85,487 |
|
|
|
103,923 |
|
Cash
and cash equivalents at end of period
|
|
$ |
59,796 |
|
|
$ |
105,229 |
|
|
$ |
85,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
payments
|
|
$ |
52,416 |
|
|
$ |
59,902 |
|
|
$ |
76,000 |
|
Income
tax payments
|
|
|
3,920 |
|
|
|
21,404 |
|
|
|
14,149 |
|
Transfers
from loans to other real estate owned
|
|
|
5,617 |
|
|
|
2,723 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details
of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of assets ascuired
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
417,434 |
|
Fair
value of liabilites assumed
|
|
|
- |
|
|
|
- |
|
|
|
(365,709 |
) |
Stock
issued for acquisition
|
|
|
- |
|
|
|
- |
|
|
|
(58,916 |
) |
Purchase
price in excess of net assets acquired
|
|
|
- |
|
|
|
- |
|
|
|
62,600 |
|
Cash
paid for acquisitions
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
55,409 |
|
Cash
and cash equivalents acquired with acquisitions
|
|
|
- |
|
|
|
- |
|
|
|
(39,680 |
) |
Acquisition
of business activity, net
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
15,729 |
|
The
accompanying notes are an integral part of these statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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Accumulated
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Additional
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Other
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Total
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Preferred
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Common
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Paid-In
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Retained
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Comprehensive
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Stockholders’
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(Dollars
in thousands, except per share data)
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Stock
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Stock
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Warrants
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Capital
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Earnings
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Loss
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Equity
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Balances
at December 31, 2006
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$ |
- |
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|
$ |
14,827 |
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|
$ |
- |
|
|
$ |
27,869 |
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|
$ |
199,102 |
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|
$ |
(4,021 |
) |
|
$ |
237,777 |
|
Comprehensive
Income:
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|
|
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|
|
|
|
|
|
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|
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Net
income
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- |
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|
- |
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|
- |
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|
- |
|
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|
32,262 |
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|
- |
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|
32,262 |
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Other
comprehensive income , net of tax:
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|
|
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|
|
|
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Net
unrealized gain on debt securities, net of reclassification
adjustment
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|
- |
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|
- |
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|
|
- |
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- |
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|
- |
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|
1,261 |
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|
1,261 |
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Change
in funded status of defined benefit pension
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- |
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|
- |
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|
|
- |
|
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|
- |
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|
|
- |
|
|
|
1,705 |
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|
|
1,705 |
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Total
Comprehensive Income
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|
|
|
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|
|
|
|
|
|
|
|
|
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35,228 |
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Common
stock dividends - $0.92 per share
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|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
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(14,988 |
) |
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- |
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(14,988 |
) |
Stock
compensation expense
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- |
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- |
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- |
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1,128 |
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- |
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- |
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1,128 |
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Common
stock repurchases - 156,249 shares
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- |
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(156 |
) |
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- |
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|
(4,198 |
) |
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- |
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|
|
- |
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|
|
(4,354 |
) |
Common
stock issued pursuant to:
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Acquisition
of Potomac Bank - 886,989 shares
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- |
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887 |
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- |
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32,190 |
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- |
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- |
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33,077 |
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Acquisition
of CN Bancorp, Inc. - 690,047 shares
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- |
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690 |
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- |
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25,149 |
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- |
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- |
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25,839 |
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Stock
option plan - 68,098 shares (78,264 shares issued less 10,166 shares
retired)
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- |
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68 |
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- |
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1,095 |
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- |
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- |
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1,163 |
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Employee
stock purchase plan – 25,147 shares
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- |
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25 |
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- |
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|
662 |
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|
- |
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- |
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|
687 |
|
Director
stock purchase plan – 2,402 shares
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- |
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2 |
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- |
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|
75 |
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|
- |
|
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|
- |
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|
77 |
|
Restricted
stock- 6,078 shares
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|
- |
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6 |
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|
|
- |
|
|
|
- |
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|
- |
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|
|
- |
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|
|
6 |
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Balances
at December 31, 2007
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|
- |
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16,349 |
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|
- |
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|
83,970 |
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216,376 |
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(1,055 |
) |
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315,640 |
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Adjustment
to reflect adoption of EITF Issue 06-04 effective January 1,
2008
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- |
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- |
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- |
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- |
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(1,647 |
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- |
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|
(1,647 |
) |
Balance
as of January 1, 2008 following adoption of EITF issue
06-04
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- |
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16,349 |
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- |
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83,970 |
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214,729 |
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|
(1,055 |
) |
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313,993 |
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Comprehensive
Income:
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|
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Net
income
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|
- |
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|
- |
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- |
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- |
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15,779 |
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- |
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15,779 |
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Other
comprehensive income (loss), net of tax:
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Net
unrealized gain on debt securities, net of reclassification
adjustment
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|
- |
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|
|
- |
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|
|
- |
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|
- |
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|
- |
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|
(581 |
) |
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|
(581 |
) |
Change
in funded status of defined benefit pension
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|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
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|
|
- |
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|
|
(5,936 |
) |
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|
(5,936 |
) |
Total
Comprehensive Income
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|
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|
|
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|
9,262 |
|
Common
stock dividends- $0.96 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,764 |
) |
|
|
- |
|
|
|
(15,764 |
) |
Preferred
stock dividends - $3.48 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(289 |
) |
|
|
- |
|
|
|
(289 |
) |
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
772 |
|
|
|
- |
|
|
|
- |
|
|
|
772 |
|
Common
stock issued pursuant to:
|
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|
|
|
|
|
|
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|
|
|
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|
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|
|
|
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|
|
|
|
|
|
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|
Stock
option plan - 9,127 shares (16,837 shares issued less 7,710 shares
retired)
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|
|
- |
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|
|
9 |
|
|
|
- |
|
|
|
53 |
|
|
|
- |
|
|
|
- |
|
|
|
62 |
|
Employee
stock purchase plan – 32,891 shares
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|
|
- |
|
|
|
33 |
|
|
|
- |
|
|
|
609 |
|
|
|
- |
|
|
|
- |
|
|
|
642 |
|
Director
stock purchase plan – 1,479 shares
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|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
38 |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Restricted
stock- 5,709 shares
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|
|
- |
|
|
|
6 |
|
|
|
- |
|
|
|
44 |
|
|
|
- |
|
|
|
- |
|
|
|
50 |
|
Preferred
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TARP
- 83,094 shares
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|
|
83,094 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
83,094 |
|
Discount
from issuance of preferred stock
|
|
|
(3,699 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,699 |
) |
Discount
accretion
|
|
|
45 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(45 |
) |
|
|
- |
|
|
|
- |
|
Warrant
issued
|
|
|
- |
|
|
|
- |
|
|
|
3,699 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,699 |
|
Balances
at December 31, 2008
|
|
|
79,440 |
|
|
|
16,399 |
|
|
|
3,699 |
|
|
|
85,486 |
|
|
|
214,410 |
|
|
|
(7,572 |
) |
|
|
391,862 |
|
Comprehensive
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,855 |
) |
|
|
- |
|
|
|
(14,855 |
) |
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain on debt securities, net of reclassification
adjustment
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,384 |
|
|
|
3,384 |
|
Change
in funded status of defined benefit pension
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,536 |
|
|
|
1,536 |
|
Total
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,935 |
) |
Cash
dividends- $0.37 per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(6,123 |
) |
|
|
- |
|
|
|
(6,123 |
) |
Preferred
stock dividends - $50.00per share
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,155 |
) |
|
|
- |
|
|
|
(4,155 |
) |
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
762 |
|
|
|
- |
|
|
|
- |
|
|
|
762 |
|
Discount
accretion
|
|
|
655 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(655 |
) |
|
|
- |
|
|
|
- |
|
Common
stock issued pursuant to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration relating to 2005 acquisition of West Financial - 31,663
shares
|
|
|
- |
|
|
|
32 |
|
|
|
- |
|
|
|
596 |
|
|
|
- |
|
|
|
- |
|
|
|
628 |
|
Employee
stock purchase plan - 40,598 shares
|
|
|
- |
|
|
|
41 |
|
|
|
- |
|
|
|
429 |
|
|
|
- |
|
|
|
- |
|
|
|
470 |
|
Director
stock purchase plan - 2,988 shares
|
|
|
- |
|
|
|
3 |
|
|
|
- |
|
|
|
37 |
|
|
|
- |
|
|
|
- |
|
|
|
40 |
|
Restricted
stock - 11,574 shares
|
|
|
- |
|
|
|
11 |
|
|
|
- |
|
|
|
(6 |
) |
|
|
- |
|
|
|
- |
|
|
|
5 |
|
DRIP
plan - 2,560 shares
|
|
|
- |
|
|
|
2 |
|
|
|
- |
|
|
|
30 |
|
|
|
- |
|
|
|
- |
|
|
|
32 |
|
Balances
at December 31, 2009
|
|
$ |
80,095 |
|
|
$ |
16,488 |
|
|
$ |
3,699 |
|
|
$ |
87,334 |
|
|
$ |
188,622 |
|
|
$ |
(2,652 |
) |
|
$ |
373,586 |
|
The
accompanying notes are an integral part of these statements
SANDY
SPRING BANCORP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 – SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accounting and reporting policies of the Company, which include Sandy Spring
Bancorp, Inc. and its wholly-owned subsidiary, Sandy Spring Bank (the "Bank"),
together with the Bank’s subsidiaries, Sandy Spring Insurance Corporation, The
Equipment Leasing Company, and West Financial Services, Inc., conform to
accounting principles generally accepted in the United States (“GAAP”) and to
general practice within the financial services industry.
Policy
for Consolidation
The
consolidated financial statements include the accounts of Sandy Spring Bancorp,
Inc. and the Bank. Consolidation has resulted in the elimination of all
significant inter-company balances and transactions. The financial statements of
Sandy Spring Bancorp, Inc. (Parent Only) include its investment in the Bank
under the equity method of accounting.
Use
of Estimates
The
preparation of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Examples of such
estimates that could change significantly relate to the provision for loan and
lease losses and the related allowance, potential impairment of
goodwill or intangibles, estimates with respect to other than temporary
impairment involving investment securities, non-accrual loans, other real estate
owned, prepayment rates, share-based payment, litigation, income taxes and
projections of pension expense and the related liability.
Nature
of Operations
Through
its subsidiary bank, the Company conducts a full-service commercial banking,
mortgage banking and trust business. Services to individuals and businesses
include accepting deposits, extending real estate, consumer and commercial loans
and lines of credit, equipment leasing, general insurance, personal trust, and
investment and wealth management services. The Company operates in the six
Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery, and
Prince George's, and in Fairfax and Loudoun counties in Virginia. The Company
offers investment and wealth management services through the Bank’s subsidiary,
West Financial Services. Insurance products are available to clients
through Chesapeake Insurance Group, and Neff & Associates, which are
agencies of Sandy Spring Insurance Corporation. The Equipment Leasing Company
provides leasing for primarily technology-based equipment for retail
businesses.
Assets
Under Management
Assets
held for others under fiduciary and agency relationships are not assets of the
Company or its subsidiaries and are not included in the accompanying balance
sheets. Trust department income and investment management fees are
presented on an accrual basis.
Cash
Flows
For
purposes of reporting cash flows, cash and cash equivalents include cash and due
from banks, federal funds sold and interest-bearing deposits with banks (items
with an original maturity of three months or less).
Residential
Mortgage Loans Held for Sale
The
Company engages in sales of residential mortgage loans originated by the
Bank. Loans held for sale are carried at the lower of aggregate cost
or fair value. Fair value is derived from secondary market quotations for
similar instruments. Gains and losses on sales of these loans are recorded as a
component of non-interest income in the Consolidated Statements of
Income. The Company's current practice is to sell such loans on a
servicing released basis.
Derivative
Financial Instruments
Derivative Loan
Commitments
Mortgage
loan commitments are referred to as derivative loan commitments if the loan that
will result from exercise of the commitment will be held for sale upon
funding. Loan commitments that are derivatives are recognized at fair
value on the consolidated balance sheet in other assets or other liabilities
with changes in their fair values recorded in net gain on sale of
loans.
The
Company records a zero value for the loan commitment at the time the commitment
is issued to a borrower. Subsequent to inception, changes in the fair
value of the loan commitment are recognized based on changes in the fair value
of the underlying mortgage loan due to interest rate changes, changes in the
probability the derivative loan commitment will be exercised, and the passage of
time. In estimating fair value, the Company assigns a probability to
a loan commitment based on an expectation that it will be exercised and the loan
will be funded.
Forward Loan Sale
Commitments
The
Company carefully evaluates all loan sales agreements to determine whether they
meet the definition of a derivative as facts and circumstances may differ
significantly. If agreements qualify, to protect against the price risk inherent
in derivative loan commitments, the Company utilizes both “mandatory delivery”
and “best efforts” forward loan sale commitments to mitigate the risk of
potential decreases in the values of loans that would result from the exercise
of the derivative loan commitments. Mandatory delivery contracts are accounted
for as derivative instruments. Generally, the Company’s best efforts contracts
also meet the definition of derivative instruments after the loan to the
borrower has closed. Accordingly, forward loan sale commitments that
economically hedge the closed loan inventory are recognized at fair value on the
Consolidated Balance Sheets in other assets and other liabilities with changes
in their fair values recorded in net gain on sale of loans. The
Company estimates the fair value of its forward loan sales commitments using a
methodology similar to that used for derivative loan commitments.
Interest Rate Swap
Agreements
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. The swaps are
reported at fair value in other assets or other liabilities. The accounting for
changes in the fair value of a swap depends on whether it has been designated
and qualifies as part of a hedging relationship. The Company's swaps qualify as
derivatives, but are not designated as hedging instruments, thus any gain or
loss resulting from changes in the fair value is recognized in net
income. Further discussion of the Company's financial derivatives is
set forth Note 19 to the Consolidated Financial Statements.
Investments
Held to Maturity and Other Equity Securities
Investments
held to maturity are those securities which the Company has the ability and
positive intent to hold until maturity. These securities are recorded at cost at
the time of purchase. The carrying values of securities held to maturity are
adjusted for premium amortization and discount accretion to the maturity
date. Related interest and dividends are included in interest income.
Declines in the fair value of individual held-to-maturity securities below their
cost that are other-than-temporary result in write-downs of the individual
securities to their fair value. Factors that may affect the
determination of whether other-than-temporary impairment has occurred include a
downgrading of the security by the rating agency, a significant deterioration in
the financial condition of the issuer, or that management would not have the
ability to hold a security for a period of time sufficient to allow for any
anticipated recovery in fair value. Other equity securities represent Federal
Reserve Bank, Federal Home Loan Bank of Atlanta stock and Atlantic Central
Banker’s Bank stocks are considered restricted as to marketability and recorded
at cost.
Investments
Available for Sale
Marketable
equity securities and debt securities not classified as held to maturity or
trading are classified as securities available for sale. Securities available
for sale are acquired as part of the Company's asset/liability management
strategy and may be sold in response to changes in interest rates, loan demand,
changes in prepayment risk and other factors. Securities available for sale are
carried at fair value, with unrealized gains or losses based on the difference
between amortized cost and fair value, reported net of deferred tax, as
accumulated other comprehensive income (loss), a separate component of
stockholders' equity. The carrying values of securities available for sale are
adjusted for premium amortization and discount accretion to the maturity date.
Realized gains and losses, using the specific identification method, are
included as a separate component of non-interest income. Related interest and
dividends are included in interest income. Declines in the fair value
of individual available-for-sale securities below their cost that are
other-than-temporary result in write-downs of the individual securities to their
fair value. Factors affecting the determination of whether
other-than-temporary impairment has occurred include a downgrading of the
security by a rating agency, a significant deterioration in the financial
condition of the issuer, or a change in management’s intent and ability to hold
a security for a period of time sufficient to allow for any anticipated recovery
in fair value.
Loans
and Leases
Loans are
stated at their principal balance outstanding net of any deferred fees and
costs. Interest income on loans is accrued at the contractual rate based on the
principal outstanding. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method. Lease financing assets, all of which are direct
financing leases, include aggregate lease rentals, net of related unearned
income. Leasing income is recognized on a basis that achieves a
constant periodic rate of return on the outstanding lease financing balances
over the lease terms.
The
Company generally places loans and leases, except for consumer loans, on
non-accrual when any portion of the principal or interest is ninety days past
due and collateral is insufficient to discharge the debt in full. Interest
accrual may also be discontinued earlier if, in management's opinion, collection
of amounts that are contractually due are unlikely. Generally, consumer
installment loans are not placed on non-accrual, but are charged off when they
are five months past due. Accrual of interest on non-accrual loans is
discontinued and all previously accrued but unpaid interest is
reversed. Interest on non-accrual loans is accounted for on the
cash-basis or cost-recovery method, until the loan returns to accrual
status. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
Loans are
considered impaired when, based on available information, it is probable that
the Company will not collect all principal and interest payments according to
contractual terms. Generally, loans are considered impaired once principal and
interest payments are past due and they are placed on non-accrual. Management
also considers the financial condition of the borrower, cash flows of the loan
and the value of the related collateral. Impaired loans do not include large
groups of smaller balance homogeneous credits such as residential real estate,
consumer installment loans, and commercial leases, which are evaluated
collectively for impairment. Loans specifically reviewed for impairment are not
considered impaired during periods of "minimal delay" in payment (usually ninety
days or less) provided eventual collection of all amounts due is expected. The
impairment of a loan is measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate, or the fair value
of the collateral if repayment is expected to be provided by the collateral.
Generally, the Company measures impairment on such loans by reference to the
fair value of the collateral. Fair value of the collateral is
generally determined using third party appraisals that are reviewed by
management for propriety and reasonableness. Third party appraisals are
conducted at least annually. Additionally, internal evaluations of
collateral value are conducted quarterly to ensure any further deterioration of
the collateral value is recognized on a timely basis. Once a
loss is determined to have occurred, the loan is charged-down to the fair value
of the collateral, net of any disposal costs, or net realizable
value. Income on impaired loans is recognized similar to the
method followed on nonaccrual loans.
Allowance
for Loan and Lease Losses
The
allowance for loan and lease losses (“allowance”) represents an estimated amount
which, in management's judgment, is adequate to absorb the estimate of probable
losses on outstanding loans and leases. The allowance is reduced by
charge-offs and is increased by the provision for loan and lease losses and
recoveries of previous losses. The provision for loan losses is
charged to earnings to bring the total allowance to a level considered necessary
by management. 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 consolidated 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. Assessment of the collectability of amounts due from the loan
and lease portfolios is based on management’s continuing review and credit risk
evaluation of the respective lending portfolios.
The
Company’s allowance for loan and lease losses is comprised of 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. The use
of historical loss factors is intended to reduce the differences between
estimated losses inherent in the loan and lease portfolio and actual
losses.
The
adequacy of the allowance is determined through careful and continuous
evaluation of the loan and lease portfolio, and involves consideration of a
number of factors, as outlined below, to establish a prudent
level. Determination of the allowance is inherently subjective and
requires significant estimates, including estimated losses on pools of
homogeneous loans based on historical loss experience and consideration of
current economic trends, which may be susceptible to significant
change. The Company’s systematic methodology for assessing the
appropriateness of the allowance includes a formula allowance reflecting
historical losses, as adjusted, by credit category, and a specific allowance for
risk-rated credits on an individual basis. 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
formula allowance is based upon historical loss factors, as adjusted, and
establishes allowances for the major loan categories based upon adjusted
historical loss experience over the prior eight quarters, weighted so that
losses realized in the most recent quarters have the greatest
effect. The factors used to adjust the historical loss experience
address various risk characteristics of the Company’s loan portfolio including:
(1) trends in delinquencies and other non-performing loans, (2) changes in the
risk profile related to large loans in the portfolio, (3) changes in the
categories of loans comprising the loan portfolio, (4) concentrations of loans
to specific industry segments, (5) changes in economic conditions on both a
local and national level, (6) changes in the Company’s credit administration and
loan portfolio management processes, and (7) quality of the Company’s credit
risk identification processes.
The
specific allowance is used to calculate an allowance for specifically identified
impaired loans. Analysis resulting in specific allowances, including those on
loans identified for evaluation of impairment, includes consideration of the
borrower’s overall financial condition, resources and payment record, support
available from financial guarantors and the sufficiency of
collateral. These factors are combined to estimate the probability
and severity of potential losses. Then a specific allowance is
established based on the Company’s calculation of the probable loss inherent in
the individual loan. Allowances are also established by application
of credit risk factors to other internally risk-rated homogeneous pools of
loans, such as consumer and residential loans and commercial leases having
reached non-accrual or 90-day past due status. Each risk rating
category is assigned a credit risk factor based on management’s estimate of the
associated risk, complexity, and size of the individual loans within the
category. Additional allowances may also be established in special
circumstances involving a particular group of credits or portfolio within a risk
category when management becomes aware that losses incurred may exceed those
determined by application of the risk factor alone. 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
Management
believes that it uses relevant information available to make determinations
about the allowance and that it has established the existing allowance in
accordance with GAAP. However, the determination of the allowance 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 management’s judgments of information
available at the time of each examination.
Premises
and Equipment
Premises
and equipment are stated at cost, less accumulated depreciation and
amortization, computed using the straight-line method. Premises and equipment
are depreciated over the useful lives of the assets, which generally range from
3 to 10 years for furniture, fixtures and equipment, 3 to 5 years for computer
software and hardware, and 10 to 40 years for buildings and building
improvements. Leasehold improvements are amortized over the terms of
the respective leases or the estimated useful lives of the improvements,
whichever is shorter. The costs of major renewals and betterments are
capitalized, while the costs of ordinary maintenance and repairs are included in
non-interest expense.
Other
Real Estate Owned (“OREO”)
OREO is
comprised of properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at the lower of cost, or fair value less
estimated costs of disposal, on the date acquired. Losses arising at the time of
acquisition of such properties are charged against the allowance for loan and
lease losses. Subsequent write-downs that may be required are expensed as
incurred. Gains and losses realized from the sale of OREO, as well as valuation
adjustments, are included in non-interest income. Expenses of operation are
included in non-interest expense.
Goodwill
and Other Intangible Assets
Goodwill
represents the excess of the cost of an acquisition over the fair value of the
net assets acquired. Other intangible assets represent purchased
assets that also lack physical substance but can be distinguished from goodwill
because of contractual or other legal rights or because the asset is capable of
being sold or exchanged either on its own or in combination with a related
contract, asset, or liability. Goodwill is not amortized over an
estimated life, but rather is tested at least annually for impairment. If it is
determined that an event has occurred that may indicate that the value of the
goodwill has become impaired (a “triggering event”) then the goodwill is subject
to impairment testing. The initial step in the process determines
whether the fair value of a reporting unit is less than its cost
basis. If this is indicated, the Company proceeds to a second step
and uses various methods to determine the extent, if any, of the impairment
based on a composite of valuation methods comprised of market value indicators
and discounted cash flows from both the assets and liabilities of the reporting
unit. Any impairment is realized through a reduction of goodwill and
an offsetting charge to non-interest expense.
Intangible
assets that have finite lives are amortized over their estimated useful lives
and also continue to be subject to impairment testing. All of the
Company’s other intangible assets have finite lives and are being amortized on a
straight-line basis over varying periods that initially did not exceed 15
years.
A summary
of the Company’s goodwill and other intangible assets is included in Note 8. The
unidentifiable intangible assets resulting from branch acquisitions resulted
from two transactions: the purchase of a commercial bank in 1996 and the
purchase of seven commercial bank branches in a single transaction in 1999. No
goodwill was recorded as a result of these branch
acquisitions. Accordingly, the Company has continued to
amortize these unidentifiable intangible assets without a change in
method.
Valuation
of Long-Lived Assets
The
Company reviews long-lived assets and certain identifiable intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of
the long-lived asset is measured by a comparison of the carrying amount of the
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the estimated fair value of the assets. Assets to be
disposed of are reportable at the lower of the carrying amount or the fair
value, less costs to sell.
Transfers
of Financial Assets
Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Insurance
Commissions and Fees
Commission
revenue is recognized on the date the customer is billed. The Company
also receives contingent commissions from insurance companies as additional
incentive for achieving specified premium volume goals and/or the loss
experience of the insurance placed by the Company. Contingent commissions from
insurance companies are recognized when determinable, which is generally when
such commissions are received.
Advertising
Costs
Advertising
costs are expensed as incurred and included in non-interest
expenses.
Earnings
per Common Share
Basic
earnings per common share is derived by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding, and
does not include the impact of any potentially dilutive common stock
equivalents. The diluted earnings per common share is derived by dividing net
income by the weighted-average number of common shares outstanding, adjusted, if
applicable, for the dilutive effect of outstanding stock options as well as any
adjustment to income that would result from the assumed issuance. The
number of potential shares issued pursuant to the stock option plans is
determined using the treasury stock method.
Income
Taxes
Income
tax expense is based on the results of operations, adjusted for permanent
differences between items of income or expense reported in the financial
statements and those reported for tax purposes. Deferred income tax assets and
liabilities are determined using the liability method. Under the liability
method, deferred income taxes are determined based on the differences between
the financial statement carrying amounts and the income tax bases of assets and
liabilities and are measured at the enacted tax rates that will be in effect
when these differences reverse.
The
Company does not have uncertain tax positions that are deemed material, and did
not recognize any adjustments for unrecognized tax benefits. The Company’s
policy is to recognize interest and penalties on income taxes in other
non-interest expenses. The Company remains subject to examination for income tax
returns for the years ending after December 31, 2007.
Adopted
Accounting Pronouncements
The
Company applies the guidance of the Financial Accounting Standards Board
(“FASB”) Accounting Standards Topic (“ASC”) 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 adopted new guidance 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. This topic is effective for
interim and annual reporting periods ending after June 15, 2009. This
guidance 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 adopted new guidance 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.
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”). These EPS computation
requirements were 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. 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.
The
Company adopted new guidance related to the disclosure of information about fair
value measurements of plan assets that would be similar to the currently
required disclosures about fair value measurements. The adoption of
the disclosure requirements in 2009 did not have a material impact on the
Company’s financial position, results of operations or cash flows.
Pending
Accounting Pronouncements
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 de-recognition 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 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,
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 to 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.
NOTE
2 – ACQUISITIONS
On
February 15, 2007, the Company completed the acquisition of Potomac Bank of
Virginia (“Potomac”), a bank headquartered in Fairfax,
Virginia. Potomac operated five branch offices in the Northern
Virginia metropolitan market at the time of the acquisition. The
total consideration paid to Potomac shareholders and related merger costs in
connection with the acquisition was $68.2 million. The results of
Potomac’s operations have been included in the Company’s consolidated financial
results subsequent to February 15, 2007. The assets and liabilities of Potomac
were recorded on the Consolidated Balance Sheet at their respective fair
values. The fair values were determined as of February 15, 2007 and
are not subject to further refinements. The transaction resulted in total assets
acquired as of February 15, 2007 of $252.5 million, including approximately
$196.0 million of loans and leases; liabilities assumed were $224.3 million,
including $197.0 million of deposits. Additionally, the Company recorded $40.0
million of goodwill, $5.1 million of core deposit intangibles (“CDI”) and $0.3
million of other intangibles. CDI’s are subject to amortization and are being
amortized over seven years on a straight-line basis.
On May
31, 2007, the Company completed the acquisition of CN Bancorp Inc. (“CNB”) and
it’s wholly owned subsidiary, County National Bank (“County”). County
was headquartered in Glen Burnie, Maryland, and had four full-service branches
located in Anne Arundel County, Maryland at the time of the acquisition. The
total consideration paid to CNB shareholders and related merger costs in
connection with the acquisition was $46.1 million. The results of
CNB’s operations have been included in the Company’s consolidated financial
results subsequent to May 31, 2007. The assets and liabilities
of CNB were recorded on the Consolidated Balance Sheet at their respective fair
values. The fair values were determined as of May 31, 2007 and are
not subject to further refinements. The transaction resulted in total assets
acquired as of May 31, 2007 of $164.9 million, including approximately $98.7
million of loans; liabilities assumed were $141.4 million, including $138.4
million of deposits. Additionally, the Company recorded $22.6 million
of goodwill, $4.6 million of CDI’s and $0.1 million of other
intangibles. CDI’s are subject to amortization and are being
amortized over seven years on a straight-line basis.
The
acquisitions of Potomac and CNB, individually and in the aggregate, were not
considered material acquisitions for purposes of any required pro forma
disclosures.
NOTE
3 – CASH AND DUE FROM BANKS
Regulation
D of the Federal Reserve Act requires that banks maintain reserve balances with
the Federal Reserve Bank based principally on the type and amount of their
deposits. At its option, the Company maintains additional balances to compensate
for clearing and safekeeping services. The average balance maintained in 2009
was $58.9 million and in 2008 was $10.2 million. The increase in the
average balance from 2008 to 2009 was the result of the Federal Reserve paying
interest on excess balances maintained after November 2008.
NOTE
4 – INVESTMENTS
Portfolio quality
discussion
At
December 31, 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 December 31, 2009 and the Company believes it
will receive all contractual cash flows due on this portfolio. The
mortgage-backed securities portfolio at December 31, 2009 is composed entirely
of either the most senior tranches of GNMA collateralized mortgage obligations
($189.8 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($264.2
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.
At
December 31, 2009 the Company owned a total of $ $3.1 million in securities
backed by single issuer trust preferred securities issued by banks. The fair
value of $3.3 million of such securities was determined from available market
quotations. The Company also owns collateralized debt securities, which total
$4.7 million, with a fair value of $3.1 million, which are backed by pooled
trust preferred securities issued by banks, thrifts, and insurance companies.
These particular securities have exhibited limited activity due to the status of
the economy at December 31, 2009 and 2008, respectively. 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:
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·
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The
few observable transactions and market quotations that are available are
not reliable for purposes of determining fair value at December 31, 2009
and 2008.
|
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·
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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 more representative of fair value than a
market approach valuation
technique.
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·
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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
assumptions used by the Company in order to determine fair value on a present
value basis, in the absence of observable trading prices as noted, included the
following:
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·
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Detailed
credit and structural evaluation for each piece of collateral in the
CDO.
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·
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Collateral
performance projections for each piece of collateral in the CDO (default,
recovery and prepayment/amortization probabilities). Of the approximately
25 issuers, collateral with respect to one has defaulted and two have
deferred payments. Based on the view that it was unlikely that
financing would become available in the foreseeable future, no collateral
prepays were assumed over the lives of the
investments.
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·
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Terms
of the CDO structure as established in the
indenture.
|
As part
of its formal quarterly evaluation of investment securities for the presence
of OTTI, the Company considered a number of factors
including:
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·
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The
length of time and the extent to which the fair value has been less than
the amortized cost
|
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·
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Adverse
conditions specifically related to the security, industry, or geographic
area
|
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·
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Historical
and implied volatility of the fair value of the
security
|
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·
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Credit
risk concentrations
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·
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The
ability of the issuer to make scheduled interest or principal
payments
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·
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Amount
of principal to be recovered by stated
maturity
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·
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Ratings
changes of the security
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·
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Performance
of bond collateral
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·
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Recoveries
of additional declines in fair value subsequent to the date of the
statement of condition
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·
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The
securities are senior notes with first
priority
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·
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Other
information currently available, such as the latest trustee
reports
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·
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An
analysis of the credit worthiness of the individual pooled
banks.
|
As a
result of this evaluation, which takes into account (1) that all payments have
been received on a timely basis, and (2) that the Company has the intent and
ability to hold the securities to maturity, the Company determined that the
credit quality of these securities remains adequate to absorb further economic
declines and that no OTTI existed with respect to these securities at December
31, 2009.
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 December 31, 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
|
|
$ |
352,841 |
|
|
$ |
3,190 |
|
|
$ |
(434 |
) |
|
$ |
355,597 |
|
|
$ |
135,418 |
|
|
$ |
2,003 |
|
|
$ |
(101 |
) |
|
$ |
137,320 |
|
State
and municipal
|
|
|
41,283 |
|
|
|
903 |
|
|
|
(44 |
) |
|
|
42,142 |
|
|
|
2,663 |
|
|
|
78 |
|
|
|
(41 |
) |
|
|
2,700 |
|
Mortgage-backed
|
|
|
449,722 |
|
|
|
5,767 |
|
|
|
(1,491 |
) |
|
|
453,998 |
|
|
|
144,638 |
|
|
|
1,358 |
|
|
|
(920 |
) |
|
|
145,076 |
|
Trust
preferred
|
|
|
7,841 |
|
|
|
180 |
|
|
|
(1,675 |
) |
|
|
6,346 |
|
|
|
7,890 |
|
|
|
24 |
|
|
|
(1,633 |
) |
|
|
6,281 |
|
Total
debt securities
|
|
|
851,687 |
|
|
|
10,040 |
|
|
|
(3,644 |
) |
|
|
858,083 |
|
|
|
290,609 |
|
|
|
3,463 |
|
|
|
(2,695 |
) |
|
|
291,377 |
|
Marketable
equity securities
|
|
|
350 |
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
|
|
350 |
|
|
|
- |
|
|
|
- |
|
|
|
350 |
|
Total
investments available-for-sale
|
|
$ |
852,037 |
|
|
$ |
10,040 |
|
|
$ |
(3,644 |
) |
|
$ |
858,433 |
|
|
$ |
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:
|
|
|
|
|
|
|
|
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
|
|
|
10 |
|
|
$ |
72,793 |
|
|
$ |
434 |
|
|
$ |
- |
|
|
$ |
434 |
|
State
and municipal
|
|
|
5 |
|
|
|
5,805 |
|
|
|
40 |
|
|
|
4 |
|
|
|
44 |
|
Mortgage-backed
|
|
|
30 |
|
|
|
150,369 |
|
|
|
1,454 |
|
|
|
37 |
|
|
|
1,491 |
|
Trust
preferred
|
|
|
3 |
|
|
|
4,366 |
|
|
|
24 |
|
|
|
1,651 |
|
|
|
1,675 |
|
Total
|
|
|
48 |
|
|
$ |
233,333 |
|
|
$ |
1,952 |
|
|
$ |
1,692 |
|
|
$ |
3,644 |
|
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
97% of the bonds carried in the available-for-sale investment portfolio
experiencing unrealized losses as of December 31, 2009 were rated AAA, 1% were
rated AA, 1% were rated BBB+ and 1% 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 December 31, 2009 and December 31, 2008 all
have modest duration risk (2.93 years in 2009 and 2.41 years in 2008), low
credit risk, and minimal loss (approximately 1.54% 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 December 31, 2009 and 2008 by contractual maturity are
shown below. The Company has allocated mortgage-backed securities into the four
maturity groupings shown using the expected average life of the individual
securities based upon statistics provided by independent third party industry
sources. Expected maturities will differ from contractual maturities as
borrowers may have the right to prepay obligations with or without prepayment
penalties.
There
were no sales of investments available-for-sale during the year ended 2009 or
2008.
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
215,321 |
|
|
$ |
214,412 |
|
|
$ |
99,232 |
|
|
$ |
99,677 |
|
Due
after one year through five years
|
|
|
576,851 |
|
|
|
583,389 |
|
|
|
190,302 |
|
|
|
190,625 |
|
Due
after five years through ten years
|
|
|
54,508 |
|
|
|
55,261 |
|
|
|
1,075 |
|
|
|
1,075 |
|
Due
after ten years
|
|
|
5,007 |
|
|
|
5,021 |
|
|
|
- |
|
|
|
- |
|
Total
debt securities available for sale
|
|
$ |
851,687 |
|
|
$ |
858,083 |
|
|
$ |
290,609 |
|
|
$ |
291,377 |
|
At
December 31, 2009 and December 31, 2008, investments available-for-sale with a
book value of $290.2 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 December 31, 2009 and 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 December 31, 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
|
|
$ |
131,996 |
|
|
$ |
5,156 |
|
|
$ |
(1 |
) |
|
$ |
137,151 |
|
|
$ |
170,871 |
|
|
$ |
4,415 |
|
|
$ |
(159 |
) |
|
$ |
175,127 |
|
Mortgage-backed
|
|
|
597 |
|
|
|
39 |
|
|
|
- |
|
|
|
636 |
|
|
|
747 |
|
|
|
34 |
|
|
|
- |
|
|
|
781 |
|
Total
investments held-to-maturity
|
|
$ |
132,593 |
|
|
$ |
5,195 |
|
|
$ |
(1 |
) |
|
$ |
137,787 |
|
|
$ |
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:
|
|
|
|
|
|
|
|
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
|
|
|
4 |
|
|
$ |
1,782 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
1 |
|
Total
|
|
|
4 |
|
|
$ |
1,782 |
|
|
$ |
1 |
|
|
$ |
- |
|
|
$ |
1 |
|
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 |
|
Approximately
22% of the bonds carried in the held-to-maturity investment portfolio
experiencing continuous unrealized losses as of December 31, 2009, were rated
AAA and approximately 78% were rated A-. 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 2.74 years in 2009 compared to 6.27 years in 2008.
These securities have low credit risk and minimal unrealized losses
(approximately 0.06 % 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, so as to allow for any anticipated
recovery in fair value substantiates that the unrealized losses in the
held-to-maturity portfolio are temporary.
The
amortized cost and estimated fair values of debt securities held to maturity at
December 31, 2009 and 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.
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(In thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
Due
in one year or less
|
|
$ |
39,582 |
|
|
$ |
40,165 |
|
|
$ |
55,231 |
|
|
$ |
55,941 |
|
Due
after one year through five years
|
|
|
86,077 |
|
|
|
90,282 |
|
|
|
108,406 |
|
|
|
111,718 |
|
Due
after five years through ten years
|
|
|
1,740 |
|
|
|
1,863 |
|
|
|
1,997 |
|
|
|
2,043 |
|
Due
after ten years
|
|
|
5,194 |
|
|
|
5,477 |
|
|
|
5,984 |
|
|
|
6,206 |
|
Total
debt securities held-to-maturity
|
|
$ |
132,593 |
|
|
$ |
137,787 |
|
|
$ |
171,618 |
|
|
$ |
175,908 |
|
At
December 31, 2009 and 2008, investments held to maturity with a book value of
$115.7 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
December 31, 2009 and 2008.
Equity
securities
Other
equity securities for the periods indicated are as
follows:
|
|
December
31,
|
|
|
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
equity securities
|
|
$ |
32,773 |
|
|
$ |
29,146 |
|
Securities
gains
There
were no sales of investments available for sale during 2009, 2008 and 2007.
Gains on investments available for sale resulted from the call redemptions of
securities or the sale of Visa restricted stock received in 2007.
NOTE
5 – LOANS AND LEASES
Major
categories at December 31 are presented below:
(In thousands)
|
|
2009
|
|
|
2008
|
|
Residential
real estate:
|
|
|
|
|
|
|
Residential
mortgages
|
|
$ |
457,414 |
|
|
$ |
457,571 |
|
Residential
construction
|
|
|
92,283 |
|
|
|
189,249 |
|
Commercial
loans and leases:
|
|
|
|
|
|
|
|
|
Commercial
mortgages
|
|
|
894,951 |
|
|
|
847,452 |
|
Commercial
construction
|
|
|
131,789 |
|
|
|
223,169 |
|
Leases
|
|
|
25,704 |
|
|
|
33,220 |
|
Other
commercial
|
|
|
296,220 |
|
|
|
333,758 |
|
Consumer
|
|
|
399,649 |
|
|
|
406,227 |
|
Total
loans and leases
|
|
$ |
2,298,010 |
|
|
$ |
2,490,646 |
|
NOTE
6 – ALLOWANCE FOR LOAN AND LEASE LOSSES
Activity
in the allowance for loan and lease losses for the three years ended December 31
is shown below:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance
at beginning of year
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
$ |
19,492 |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
33,192 |
|
|
|
4,094 |
|
Allowance
acquired with acquisition of other institutions
|
|
|
- |
|
|
|
- |
|
|
|
2,798 |
|
Loan
and lease charge-offs
|
|
|
(63,520 |
) |
|
|
(8,463 |
) |
|
|
(1,444 |
) |
Loan
and lease recoveries
|
|
|
791 |
|
|
|
705 |
|
|
|
152 |
|
Net
charge-offs
|
|
|
(62,729 |
) |
|
|
(7,758 |
) |
|
|
(1,292 |
) |
Balance
at year end
|
|
$ |
64,559 |
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
Information regarding impaired
loans comprised of commercial real estate, commercial construction and
commercial business loans at December 31, and for the respective years then
ended, is as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Impaired
loans with a valuation allowance
|
|
$ |
23,683 |
|
|
$ |
45,525 |
|
|
$ |
5,710 |
|
Impaired
loans without a valuation allowance
|
|
|
75,769 |
|
|
|
7,098 |
|
|
|
16,174 |
|
Total
impaired loans
|
|
$ |
99,452 |
|
|
$ |
52,623 |
|
|
$ |
21,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan and lease losses related to impaired loans
|
|
$ |
6,613 |
|
|
$ |
13,803 |
|
|
$ |
936 |
|
Allowance
for loan and lease losses related to other than impaired
loans
|
|
|
57,946 |
|
|
|
36,723 |
|
|
|
24,156 |
|
Total
allowance for loan and lease losses
|
|
$ |
64,559 |
|
|
$ |
50,526 |
|
|
$ |
25,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
impaired loans for the year
|
|
$ |
100,387 |
|
|
$ |
45,947 |
|
|
$ |
14,496 |
|
Contractual
interest income due on loans in non-accrual status during the
year
|
|
$ |
6,355 |
|
|
$ |
4,000 |
|
|
$ |
1,100 |
|
Interest
income on impaired loans recognized on a cash basis
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Total
non-accrual loans and leases including the impaired loans reflected in the
preceding table, totaled $111.2 million and $68.0 million at December 31, 2009
and 2008, respectively. The Company’s policy is to discontinue accrual of
interest on loans over 90 days delinquent unless the specific circumstances of
the loan dictate otherwise. In those cases, such loans are then classified
as non-accrual loans. At December 31, 2009 and 2008, loans 90 days past due and
still accruing interest totaled $19.0 million and $1.0 million,
respectively.
Other
real estate owned totaled $7.5 million and $2.9 million at December 31, 2009 and
2008.
NOTE
7 – PREMISES AND EQUIPMENT
Premises
and equipment at December 31 consist of:
|
|
2009
|
|
|
2008
|
|
Land
|
|
$ |
9,954 |
|
|
$ |
9,954 |
|
Buildings
and leasehold improvements
|
|
|
58,202 |
|
|
|
56,707 |
|
Equipment
|
|
|
36,356 |
|
|
|
35,272 |
|
Total
premises and equipment
|
|
|
104,512 |
|
|
|
101,933 |
|
Less:
accumulated depreciation and amortization
|
|
|
(54,906 |
) |
|
|
(50,523 |
) |
Net
premises and equipment
|
|
$ |
49,606 |
|
|
$ |
51,410 |
|
Depreciation
and amortization expense for premises and equipment amounted to $4.8 million for
2009, $5.0 million for 2008 and $4.9 million for 2007. There were no
contractual commitments at December 31, 2009 to construct branch
facilities.
Total
rental expense of premises and equipment, net of rental income, for the three
years ended December 31, 2009, 2008 and 2007 was $5.6 million, $5.7 million and
$4.5 million, respectively. Lease commitments entered into by the Company bear
initial terms varying from 3 to 15 years, or they are 20-year ground leases, and
are associated with premises.
Future
minimum lease payments, including any additional rents due to escalation
clauses, as of December 31, 2009 for all non-cancelable operating leases
are:
|
|
Operating
|
|
(In thousands)
|
|
Leases
|
|
2010
|
|
$ |
5,133 |
|
2011
|
|
|
4,717 |
|
2012
|
|
|
4,036 |
|
2013
|
|
|
3,124 |
|
2014
|
|
|
2,657 |
|
Thereafter
|
|
|
5,280 |
|
Total
minimum lease payments
|
|
$ |
24,947 |
|
NOTE
8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
is tested for impairment annually or more frequently if events or circumstances
indicate a possible impairment. Acquired intangible assets apart from
goodwill are reviewed for impairment annually and are being amortized over their
remaining estimated lives.
Throughout
2009, the Company was trading below its book value consistent with its peer
group. However during the fourth quarter the market value of the Company’s
stock declined significantly below its tangible book value at December 31, 2009.
Management considered this decrease to be a triggering event indicating the
possibility of impairment in the Community Banking and “Other” segments at
December 31, 2009. The Company engaged a third party valuation specialist to
assist management in the determination of the fair value of the Community
Banking segment as estimated using an income approach (discounted future
benefits method) along with a market approach (guideline public company method).
Two additional methodologies based on market approaches were also performed
which focused on the stock price of the Company. Significant assumptions used in
the above methods include:
|
·
|
an
estimated control premium based on management’s estimate of the cost
savings that would be available to an
acquirer.
|
|
·
|
a
discount rate equal to 16.6%
|
|
·
|
price
to book ratio of 0.85
|
|
·
|
price
to trailing twelve months income of 1.54;
and
|
|
·
|
price
to assets of 0.074.
|
All
methods were subjected to sensitivity analysis which included application of
differing weightings of the respective methods to obtain a range of fair values
for the Community Banking segment. Based on the lowest fair value within the
range management determined that the Community Banking segment failed Step 1 of
the two-step impairment analysis and needed to perform additional valuation
analysis to determine whether the goodwill attributed to the Community Banking
segment was impaired and, if so, the amount of the impairment.
In
performing the Step 2 analysis, the Company determines the fair value of its
assets and liabilities and deducts this amount from the fair value of the
Community Banking segment as determined in Step 1 to imply a fair value of its
goodwill in an acquisition. The Company utilized prices from recent
comparable transactions in the Mid-Atlantic region to value the Company’s core
deposit intangibles and market quotes to value the investment portfolio. An
outside third party valuation specialist estimated the fair value of the loan
portfolio using a discounted cash flow approach. Significant assumptions used in
the loan portfolio valuation involved (1) the stratification of the loan
portfolio into pools based on their respective credit risk characteristics, (2)
the individual pool yields were compared to market yields in conjunction with
their remaining months to maturity and prepayments speeds, and (3) a credit loss
factor was incorporated into the cash flows. Management performed a detailed
review of all projections and their underlying assumptions. The key assumptions
used in the Company’s analysis involved the level of credit quality and thus the
credit risk existing within each pool of the loan portfolio. Factors that could
negatively affect the Company’s key assumptions involve the adverse performance
of the national and regional economies in excess of the levels projected in the
valuation models. Should the current regional economic recovery stall or reverse
it could have a significant effect on the Company’s recovery from its recent
performance trends.
The
Company determined at the conclusion of its Step 2 analysis that the fair value
of the goodwill in the Community Banking segment exceeded its carrying value of
$62.6 million by $31.9 million or 51%, and that no impairment of goodwill
existed at December 31, 2009.
As a
result of its impairment assessment in 2008, the Company determined that The
Equipment Leasing Company was impaired and determined that the goodwill had no
remaining value at December 31, 2008. Accordingly, the Company recorded an
impairment charge of $4.2 million in 2008.
All other
remaining goodwill and intangibles associated with other segments of the Company
not previously discussed above were reviewed at December 31, 2009 and 2008,
respectively, for any indications of impairment. Based on the review, no
impairment was noted for the years ended December 31, 2009 and 2008, related to
the Investment Management and Insurance segments.
The
significant components of goodwill and acquired intangible assets are as
follows:
|
|
|
|
|
Intangible
Assets
|
|
|
Other
|
|
|
Core
Deposit
|
|
|
|
|
|
|
|
|
|
Resulting
From
|
|
|
Identifiable
|
|
|
Intangible
|
|
|
|
|
(Dollars in thousands)
|
|
Goodwill
|
|
|
Branch Acquisitions
|
|
|
Intangibles
|
|
|
Assets
|
|
|
Total
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
81,516 |
|
|
$ |
17,854 |
|
|
$ |
8,301 |
|
|
$ |
9,716 |
|
|
$ |
117,387 |
|
Purchase
price adjustment
|
|
|
568 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
568 |
|
Impairment
losses
|
|
|
(4,159 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,159 |
) |
Accumulated
amortization*
|
|
|
(1,109 |
) |
|
|
(17,854 |
) |
|
|
(5,680 |
) |
|
|
(3,800 |
) |
|
|
(28,443 |
) |
Net
carrying amount
|
|
$ |
76,816 |
|
|
$ |
- |
|
|
$ |
2,621 |
|
|
$ |
5,916 |
|
|
$ |
85,353 |
|
Weighted
average remaining life
|
|
|
|
|
|
|
|
|
|
4.7
years
|
|
|
4.3
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$ |
77,694 |
|
|
$ |
17,854 |
|
|
$ |
8,301 |
|
|
$ |
9,716 |
|
|
$ |
113,565 |
|
Purchase
price adjustment
|
|
|
3,822 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,822 |
|
Impairment
losses
|
|
|
(4,159 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,159 |
) |
Accumulated
amortization
|
|
|
(1,109 |
) |
|
|
(16,549 |
) |
|
|
(4,727 |
) |
|
|
(2,412 |
) |
|
|
(24,797 |
) |
Net
carrying amount
|
|
$ |
76,248 |
|
|
$ |
1,305 |
|
|
$ |
3,574 |
|
|
$ |
7,304 |
|
|
$ |
88,431 |
|
Weighted
average remaining life
|
|
|
|
|
|
0.8
years
|
|
|
5.7
years
|
|
|
5.3
years
|
|
|
|
|
|
*The
accumulated amortization in the table above reflects amortization of goodwill
prior to the adoption of current accounting standards.
The
changes in the carrying amount of goodwill by segment for the twelve months
ended December 31, 2009 and 2008 are as follows:
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Management
|
|
|
Total
|
|
Balance
January 1, 2008
|
|
$ |
62,730 |
|
|
$ |
4,623 |
|
|
$ |
4,159 |
|
|
$ |
5,073 |
|
|
$ |
76,585 |
|
Purchase
price adjustment
|
|
|
(94 |
) |
|
|
- |
|
|
|
- |
|
|
|
3,916 |
|
|
|
3,822 |
|
Impairment
losses
|
|
|
- |
|
|
|
- |
|
|
|
(4,159 |
) |
|
|
- |
|
|
|
(4,159 |
) |
Balance
December 31, 2008
|
|
|
62,636 |
|
|
|
4,623 |
|
|
|
- |
|
|
|
8,989 |
|
|
|
76,248 |
|
Purchase
price adjustment
|
|
|
- |
|
|
|
568 |
|
|
|
- |
|
|
|
- |
|
|
|
568 |
|
Impairment
losses
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance
December 31, 2009
|
|
$ |
62,636 |
|
|
$ |
5,191 |
|
|
$ |
- |
|
|
$ |
8,989 |
|
|
$ |
76,816 |
|
Future
estimated annual amortization expense is presented below:
|
|
Amount
|
|
2010
|
|
$ |
1,958 |
|
2011
|
|
|
1,845 |
|
2012
|
|
|
1,845 |
|
2013
|
|
|
1,778 |
|
2014
|
|
|
752 |
|
Thereafter
|
|
|
359 |
|
Total
amortizing intangibles
|
|
$ |
8,537 |
|
NOTE
9 – DEPOSITS
Deposits
outstanding at December 31 consist of:
(In thousands)
|
|
2009
|
|
|
2008
|
|
Noninterest-bearing
deposits
|
|
$ |
540,578 |
|
|
$ |
461,517 |
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
|
282,045 |
|
|
|
243,986 |
|
Money
market savings
|
|
|
931,362 |
|
|
|
664,837 |
|
Regular
savings
|
|
|
157,072 |
|
|
|
146,140 |
|
Time
deposits of less than $100,000
|
|
|
421,978 |
|
|
|
477,148 |
|
Time
deposits of $100,000 or more
|
|
|
363,807 |
|
|
|
371,629 |
|
Total
interest-bearing deposits
|
|
|
2,156,264 |
|
|
|
1,903,740 |
|
Total
deposits
|
|
$ |
2,696,842 |
|
|
$ |
2,365,257 |
|
Interest
expense on time deposits of $100 thousand or more amounted to $10.7 million,
$12.7 million and $14.8 million for the years ended 2009, 2008 and 2007,
respectively.
The
following is a maturity schedule for time deposits maturing within years ending
December 31:
|
|
Amount
|
|
2010
|
|
$ |
616,400 |
|
2011
|
|
|
117,993 |
|
2012
|
|
|
18,112 |
|
2013
|
|
|
10,385 |
|
2014
|
|
|
22,895 |
|
Total
time deposits
|
|
$ |
785,785 |
|
The
Company's time deposits of $100 thousand or more represented 13.5% of total
deposits at December 31, 2009 and are shown by maturity in the table
below.
|
|
Months to Maturity
|
|
|
|
|
|
|
3
or
|
|
|
Over
3
|
|
|
Over
6
|
|
|
Over
|
|
|
|
|
(In thousands)
|
|
Less
|
|
|
to 6
|
|
|
to 12
|
|
|
12
|
|
|
Total
|
|
Time
deposits--$100 thousand or more
|
|
$ |
77,151 |
|
|
$ |
108,200 |
|
|
$ |
97,796 |
|
|
$ |
80,660 |
|
|
$ |
363,807 |
|
NOTE
10 – BORROWINGS
Information
relating to retail repurchase agreements and other short-term borrowings is as
follows for the years ended December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
At
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
repurchase agreements
|
|
$ |
74,062 |
|
|
|
0.20 |
% |
|
$ |
75,106 |
|
|
|
0.20 |
% |
|
$ |
98,015 |
|
|
|
3.00 |
% |
Average
for the Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
repurchase agreements
|
|
$ |
87,828 |
|
|
|
0.35 |
% |
|
$ |
88,214 |
|
|
|
1.18 |
% |
|
$ |
109,353 |
|
|
|
3.92 |
% |
Other
short-term borrowings
|
|
|
1 |
|
|
|
0.69 |
|
|
|
3 |
|
|
|
2.73 |
|
|
|
92 |
|
|
|
5.58 |
|
Maximum
Month-end Balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
repurchase agreements
|
|
$ |
98,827 |
|
|
|
|
|
|
$ |
101,666 |
|
|
|
|
|
|
$ |
122,130 |
|
|
|
|
|
Other
short-term borrowings
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
The
Company pledges U.S. Agencies and Corporate securities, based upon their market
values, as collateral for 102.5% of the principal and accrued interest of its
retail repurchase agreements.
At
December 31, 2009, the Company has an available line of credit for $1.1 billion
with the Federal Home Loan Bank of Atlanta (the "FHLB") under which its
borrowings are limited to $493.8 million based on pledged collateral at interest
rates based upon current market conditions, of which $426.6 million was
outstanding. At December 31, 2008, such lines of credit totaled $956.9
million under which $591.7 million was available based on pledged collateral of
which $412.5 million was outstanding. Both short-term and long-term FHLB
advances are fully collateralized by pledges of loans. The Company has
pledged, under a blanket lien, qualifying residential mortgage loans amounting
to $296.3 million, commercial loans amounting to $498.1 million, home equity
lines of credit (“HELOC”) amounting to $327.6 million and multifamily loans
amounting to $18.4 million at December 31, 2009 as collateral under the
borrowing agreement with the FHLB. At December 31, 2008 the Company had
pledged collateral of qualifying mortgage loans of $292.0 million, commercial
loans of $525.8 million, HELOC loans of $326.1 million and multifamily loans of
$19.5 million under the FHLB borrowing agreement. The Company also
had lines of credit available from the Federal Reserve and correspondent banks
of $312.7 million and $574.4 million at December 31, 2009 and 2008,
respectively, collateralized by loans and state and municipal securities. In
addition, the Company had an unsecured line of credit with a correspondent bank
of $20.0 million at December 31, 2008 against which there were no outstanding
borrowings.
Advances
from FHLB at December 31 consisted of the following:
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Amounts
|
|
|
Rate
|
|
|
Amounts
|
|
|
Rate
|
|
Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
One
year
|
|
$ |
5,476 |
|
|
|
4.89 |
% |
|
$ |
- |
|
|
|
- |
% |
Two
years
|
|
|
- |
|
|
|
- |
|
|
|
6,094 |
|
|
|
4.88 |
|
Three
years
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Four
years
|
|
|
1,108 |
|
|
|
4.13 |
|
|
|
- |
|
|
|
- |
|
Five
years
|
|
|
- |
|
|
|
- |
|
|
|
1,458 |
|
|
|
4.13 |
|
Six
years
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Seven years
|
|
|
160,000 |
|
|
|
4.51 |
|
|
|
- |
|
|
|
- |
|
Eight
years
|
|
|
85,000 |
|
|
|
3.57 |
|
|
|
160,000 |
|
|
|
4.51 |
|
Nine
years
|
|
|
160,000 |
|
|
|
2.45 |
|
|
|
85,000 |
|
|
|
3.57 |
|
Ten
years
|
|
|
- |
|
|
|
- |
|
|
|
160,000 |
|
|
|
2.45 |
|
Total
advances from FHLB
|
|
$ |
411,584 |
|
|
|
3.52 |
% |
|
$ |
412,552 |
|
|
|
3.52 |
% |
The
actual maturity may differ from the contractual maturity if the Company elects
to prepay obligations or the advance is called by the Federal Home Loan
Bank.
The
following is a maturity schedule for long-term borrowings within the years
ending December 31:
(In
thousands)
|
|
Amount
|
|
2010
|
|
$ |
5,476 |
|
2011
|
|
|
- |
|
2012
|
|
|
- |
|
2013
|
|
|
1,108 |
|
2014
|
|
|
- |
|
After
2014
|
|
|
405,000 |
|
Total
advances from FHLB
|
|
$ |
411,584 |
|
NOTE
11 – SUBORDINATED DEBENTURES
The
Company formed Sandy Spring Capital Trust II (“Capital Trust”) to facilitate the
pooled placement issuance of $35.0 million of trust preferred securities on
August 10, 2004. In conjunction with this issuance, the Company issued
subordinated debt to the Capital Trust. The subordinated debt
converted from a fixed rate interest of 6.35% at July 7, 2009 to a variable
rate, adjusted quarterly, equal to 225 basis points over the three month
Libor. At December 31, 2009, the rate on the subordinated debt was
2.53% and has re-priced on January 7, 2010 (2.50%). The subordinated
obligations of the Company are subordinated to all other debt except other trust
preferred subordinated, which may have equal subordination. The debt
has a maturity date of October 7, 2034, but may be called by the Company at any
time subsequent to October 7, 2009 on each respective quarterly distribution
date.
NOTE
12 – STOCKHOLDERS’ EQUITY
The
Company’s Articles of Incorporation authorize 50,000,000 shares of capital stock
(par value $1.00 per share). Issued shares have been classified as
common stock. The Articles of Incorporation provide that remaining
unissued shares may later be designated as either common or preferred
stock.
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 was exercisable immediately, in whole or in part. The Treasury
Department has agreed not to vote any common shares acquired upon exercise of
the warrant.
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 except in periods for which its
effects would be anti-dilutive.
Pursuant
to the terms of the Purchase Agreement, prior to the earlier of (i) December 5,
2011 or (ii) the date on which the Series A preferred stock has been redeemed in
full or Treasury has transferred all of the Series A preferred stock to
non-affiliates, the Company cannot increase its quarterly cash dividend above
$0.24 per share or repurchase any shares of its common stock or other capital
stock or equity securities or trust preferred securities without the consent of
the Treasury. The Company may not declare or pay any dividends or
distributions on the Company’s common stock or any class or series of the
Company’s equity securities ranking junior, as to dividends and upon
liquidation, to the Series A preferred stock (“junior stock”) (other than
dividends payable solely in shares of common stock) or any other class or series
of the Company’s equity securities ranking, as to dividends and upon
liquidation, on a parity with the Series A preferred stock (“parity stock”), and
may not repurchase or redeem any common stock, junior stock or parity stock,
unless all accrued and unpaid dividends for past dividend periods, including the
latest completed dividend period, have been paid or have been declared and a
sufficient sum has been set aside for the benefit of the holders of the Series A
preferred stock.
The
Company has a director stock purchase plan (the “Director Plan”) which commenced
on May 1, 2004. Under the Director Plan, members of the board of
directors may elect to use a portion (minimum 50%) of their annual retainer fee
to purchase shares of Company stock. The Company has reserved 15,000
authorized but unissued shares of common stock for purchase under the
plan. Purchases are made at the fair market value of the stock on the
purchase date. At December 31, 2009, there were 3,011 shares
available for issuance under the plan.
The
Company has an employee stock purchase plan (the “Purchase Plan”) which
commenced on July 1, 2001, with consecutive monthly offering periods
thereafter. The Company has reserved 450,000 authorized but unissued
shares of common stock for purchase under the plan. Shares are
purchased at 85% of the fair market value on the exercise date through monthly
payroll deductions of not less than 1% or more than 10% of cash compensation
paid in the month. The Purchase Plan is administered by a committee
of at least three directors appointed by the board of directors. At
December 31, 2009, there were 249,104 shares available for issuance under this
plan.
As a
result of participating in the TARP Capital Purchase Program, until December 5,
2011, the Company may not repurchase any shares of its common stock, other than
in connection with the administration of an employee benefit plan, without the
consent of the Treasury Department. No shares were repurchased during 2009 or
2008. Share repurchases are limited by certain restrictions imposed due to the
issuance of the Series A preferred stock mentioned above.
The
Company has a dividend reinvestment plan that is sponsored and administered by
the Registrar and Transfer Company (“R&T”) as independent agent, which
enables current shareholders as well as first-time buyers to purchase and sell
common stock of Sandy Spring Bancorp, Inc. directly through R&T at low
commissions. Participants may reinvest cash dividends and make
periodic supplemental cash payments to purchase additional shares.
Bank and
holding company regulations, as well as Maryland law, impose certain
restrictions on dividend payments by the Bank, as well as restricting extensions
of credit and transfers of assets between the Bank and the Company. At December
31, 2009, the Bank must have regulatory approval to pay dividends to the parent
company. In conjunction with the Company’s long-term borrowing from
Capital Trust, the Bank issued a note to Bancorp for $35.0 million which was
outstanding at December 31, 2009. There were no other loans outstanding between
the Bank and the Company at December 31, 2009 and 2008,
respectively.
NOTE
13 – SHARE BASED COMPENSATION
At
December 31, 2009, the Company had two share 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 1,212,233 are available for issuance at December
31, 2009, has a term of ten years, and is administered by a committee of at
least three directors appointed by the Board of Directors. Options
granted under the plan have an exercise price which may not be less than 100% of
the fair market value of the common stock on the date of the grant and must be
exercised within seven to ten years from the date of grant. The
exercise price of stock options must be paid for in full in cash or shares of
common stock, or a combination of both. The Stock Option Committee
has the discretion when making a grant of stock options to impose restrictions
on the shares to be purchased 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.
The fair
values of all of the options granted during the last three years have been
estimated using a binomial option-pricing model with the following
weighted-average assumptions as of December 31:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Dividend
yield
|
|
|
4.00 |
% |
|
|
3.42 |
% |
|
|
3.12 |
% |
Weighted
average expected volatility
|
|
|
35.32 |
% |
|
|
19.65 |
% |
|
|
26.71 |
% |
Weighted
average risk-free interest rate
|
|
|
2.59 |
% |
|
|
2.88 |
% |
|
|
4.35 |
% |
Weighted
average expected lives (in years)
|
|
|
6 |
|
|
|
6 |
|
|
|
7 |
|
Weighted
average grant-date fair value
|
|
$ |
3.22 |
|
|
$ |
4.47 |
|
|
$ |
7.50 |
|
The
dividend yield is based on estimated future dividend yields. The
risk-free rate for periods within the contractual term of the share option is
based on the U.S. Treasury yield curve in effect at the time of the
grant. Expected volatilities are generally based on historical
volatilities. The expected term of share options granted is generally
derived from historical experience.
Compensation
expense is recognized on a straight-line basis over the vesting period of the
respective stock option or restricted stock grant. The Company recognized
compensation expense of $1.0 million and $0.7 million for the years ended
December 31, 2009 and 2008, respectively, related to the awards of stock options
and restricted stock grants. For the year ended December 31, 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 year ended December 31, 2008 was $0.2
million. The total of unrecognized compensation cost related to stock
options was approximately $0.3 million as of December 31, 2009. That
cost is expected to be recognized over a weighted average period of
approximately 1.7 years. The total of unrecognized compensation cost
related to restricted stock was approximately $1.4 million as of December 31,
2009. That cost is expected to be recognized over a weighted period
of approximately 3.4 years.
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.
A summary
of share option activity for the year ended December 31, 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 |
|
|
|
|
|
$ |
- |
|
Granted
|
|
|
73,560 |
|
|
|
12.01 |
|
|
|
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
Forfeited
or expired
|
|
|
(213,563 |
) |
|
|
29.81 |
|
|
|
|
|
|
- |
|
Balance
at December 31, 2009
|
|
|
833,727 |
|
|
$ |
32.56 |
|
|
|
3.5 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2009
|
|
|
710,639 |
|
|
$ |
34.74 |
|
|
|
3.2 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value of options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
granted
during the year
|
|
|
|
|
|
$ |
3.22 |
|
|
|
|
|
|
|
|
|
A
summary of the activity for the Company’s non-vested options and restricted
stock for the year ended December 31, 2009 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Grant-Date
|
|
(In dollars, except share data):
|
|
of Shares
|
|
|
Fair Value
|
|
Non-vested
options at January 1, 2009
|
|
|
134,010 |
|
|
$ |
5.26 |
|
Granted
|
|
|
73,560 |
|
|
|
3.22 |
|
Vested
|
|
|
(59,978 |
) |
|
|
6.06 |
|
Forfeited
or expired
|
|
|
(24,504 |
) |
|
|
4.09 |
|
Non-vested
options at December 31, 2009
|
|
|
123,088 |
|
|
$ |
3.88 |
|
|
|
|
|
|
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
|
|
|
(13,061 |
) |
|
|
23.29 |
|
Forfeited
or expired
|
|
|
(13,976 |
) |
|
|
17.44 |
|
Restricted
stock at December 31, 2009
|
|
|
111,173 |
|
|
$ |
16.64 |
|
NOTE
14 – PENSION, PROFIT SHARING, AND OTHER EMPLOYEE BENEFIT PLANS
Defined
Benefit Pension Plan
The
Company has a qualified, noncontributory, defined benefit pension plan covering
substantially all employees. Benefits after January 1, 2005, are based on the
benefit earned as of December 31, 2004, plus benefits earned in future years of
service based on the employee’s compensation during each such year. On November
14, 2007, the Company informed employees that the plan would be frozen for new
and existing entrants after December 31, 2007. All benefit accruals for
employees were frozen as of December 31, 2007 based on past service and thus
future salary increases and additional years of service will no longer affect
the defined benefit provided by the plan although additional vesting may
continue to occur.
The
Company's funding policy is to contribute amounts to the plan sufficient to meet
the minimum funding requirements of the Employee Retirement Income Security Act
of 1974 (“ERISA”), as amended. In addition, the Company contributes additional
amounts as it deems appropriate based on benefits attributed to service prior to
the date of the plan freeze. The Plan invests primarily in a diversified
portfolio of managed fixed income and equity funds.
The
Plan’s funded status as of December 31 is as follows:
(In thousands)
|
|
2009
|
|
|
2008
|
|
Reconciliation
of Projected Benefit Obligation:
|
|
|
|
|
|
|
Projected
obligation at January 1
|
|
$ |
28,511 |
|
|
$ |
22,942 |
|
Service
cost
|
|
|
- |
|
|
|
- |
|
Interest
cost
|
|
|
1,436 |
|
|
|
1,421 |
|
Actuarial
loss
|
|
|
352 |
|
|
|
456 |
|
Curtailment
|
|
|
- |
|
|
|
- |
|
Increase/(decrease)
due to amendments during the year
|
|
|
- |
|
|
|
- |
|
Increase/(decrease)
due to discount rate change
|
|
|
- |
|
|
|
4,429 |
|
Benefit
payments
|
|
|
(920 |
) |
|
|
(737 |
) |
Projected
obligation at December 31
|
|
|
29,379 |
|
|
|
28,511 |
|
Reconciliation
of Fair Value of Plan Assets:
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at January 1
|
|
|
24,973 |
|
|
|
23,799 |
|
Actual
return on plan assets
|
|
|
2,788 |
|
|
|
(2,488 |
) |
Employer
contributions
|
|
|
- |
|
|
|
4,400 |
|
Benefit
payments
|
|
|
(920 |
) |
|
|
(738 |
) |
Fair
value of plan assets at December 31
|
|
|
26,841 |
|
|
|
24,973 |
|
|
|
|
|
|
|
|
|
|
Funded
status at December 31
|
|
$ |
(2,538 |
) |
|
$ |
(3,538 |
) |
|
|
|
|
|
|
|
|
|
Unrecognized
prior service cost (benefit)
|
|
$ |
- |
|
|
$ |
- |
|
Unrecognized
net actuarial loss
|
|
|
10,806 |
|
|
|
13,362 |
|
Net
periodic pension cost not yet recognized
|
|
$ |
10,806 |
|
|
$ |
13,362 |
|
|
|
|
|
|
|
|
|
|
Accumulated
benefit obligation at December 31
|
|
$ |
29,379 |
|
|
$ |
28,511 |
|
Net
periodic benefit cost for the previous three years includes the following
components:
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Service
cost for benefits earned
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,315 |
|
Interest
cost on projected benefit obligation
|
|
|
1,436 |
|
|
|
1,421 |
|
|
|
1,337 |
|
Expected
return on plan assets
|
|
|
(1,242 |
) |
|
|
(1,304 |
) |
|
|
(1,508 |
) |
Amortization
of prior service cost
|
|
|
- |
|
|
|
(1,589 |
) |
|
|
(175 |
) |
Recognized
net actuarial loss
|
|
|
1,362 |
|
|
|
393 |
|
|
|
512 |
|
Net
periodic benefit cost
|
|
$ |
1,556 |
|
|
$ |
(1,079 |
) |
|
$ |
1,481 |
|
The
following shows the amounts recognized in accumulated other comprehensive income
as of the beginning of the fiscal year, the amount arising during the year, the
adjustment due to being recognized as a component of net periodic benefit cost
during the year and the amount remaining to be recognized and therefore a part
of accumulated other comprehensive income (loss) as of December 31,
2009:
|
|
Prior
Service
|
|
|
Net
|
|
(In thousands)
|
|
Cost
|
|
|
Gain/(Loss)
|
|
Included
in accumulated other comprehensive income (loss) at January 1,
2007
|
|
$ |
(1,764 |
) |
|
$ |
8,053 |
|
Net
gain due to plan curtailment
|
|
|
- |
|
|
|
(2,322 |
) |
Additions
during the year
|
|
|
- |
|
|
|
(142 |
) |
Reclassifications
due to recognition as net periodic pension cost
|
|
|
175 |
|
|
|
(511 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2007
|
|
|
(1,589 |
) |
|
|
5,078 |
|
Net
gain due to plan curtailment
|
|
|
- |
|
|
|
4,248 |
|
Additions
during the year
|
|
|
- |
|
|
|
4,429 |
|
Reclassifications
due to recognition as net periodic pension cost
|
|
|
1,589 |
|
|
|
(393 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2008
|
|
|
- |
|
|
|
13,362 |
|
Additions
during the year
|
|
|
- |
|
|
|
(1,194 |
) |
Increase
due to change in discount rate assumption
|
|
|
- |
|
|
|
(1,362 |
) |
Included
in accumulated other comprehensive income (loss) as of December 31,
2009
|
|
|
- |
|
|
|
10,806 |
|
Applicable
tax effect
|
|
|
- |
|
|
|
(4,309 |
) |
Included
in accumulated other comprehensive income (loss) net of tax effect at
December 31, 2009
|
|
$ |
- |
|
|
$ |
6,497 |
|
|
|
|
|
|
|
|
|
|
Amount
expected to be recognized as part of net periodic pension cost in the next
fiscal year
|
|
$ |
- |
|
|
$ |
1,246 |
|
There are
no plan assets expected to be returned to the employer in the next twelve
months.
The
following items have not yet been recognized as a component of net periodic
benefit cost as December 31, 2010, 2009 and 2008, respectively:
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
Prior
service cost
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,415 |
|
Net
actuarial loss
|
|
|
(10,806 |
) |
|
|
(13,362 |
) |
|
|
(4,806 |
) |
Net
periodic benefit cost not yet recognized
|
|
$ |
(10,806 |
) |
|
$ |
(13,362 |
) |
|
$ |
(3,391 |
) |
Additional
Information
Weighted-average
assumptions used to determine benefit obligations at December 31 are as
follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
6.00 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4.00 |
% |
Weighted-average
assumptions used to determine net periodic benefit cost for years ended December
31 are as follows:
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Discount
rate
|
|
|
5.00 |
% |
|
|
6.00 |
% |
|
|
6.00 |
% |
Expected
return on plan assets
|
|
|
4.50 |
% |
|
|
5.50 |
% |
|
|
7.50 |
% |
Rate
of compensation increase
|
|
|
N/A |
|
|
|
N/A |
|
|
|
4.00 |
% |
The
expected rate of return on assets of 4.50% reflects the Plan’s predominant
investment of assets in cash and debt type securities and an analysis of the
average rate of return of the S&P 500 index and the Lehman Brothers
Gov’t/Corp. index over the past 20 years.
Plan
Assets
The
Company’s pension plan weighted average allocations at December 31 for the
indicated periods are as follows:
(In thousands)
|
|
2009
|
|
|
2008
|
|
Asset Category:
|
|
|
|
|
|
|
Cash
and certificates of deposit
|
|
|
29.7
|
% |
|
|
18.1
|
% |
Equity
Securities:
|
|
|
20.0 |
|
|
|
25.6 |
|
Debt
Securities
|
|
|
50.3 |
|
|
|
56.3 |
|
Total
pension plan sssets
|
|
|
100.0
|
% |
|
|
100.0
|
% |
The
Company has a written investment policy approved by the board of directors that
governs the investment of the defined benefit pension fund trust
portfolio. The investment policy is designed to provide limits on
risk that is undertaken by the investment managers both in terms of market
volatility of the portfolio and the quality of the individual assets that are
held in the portfolio. The investment policy statement focuses on the
following areas of concern: preservation of capital, diversification, risk
tolerance, investment duration, rate of return, liquidity and investment
management costs.
The
Company has constituted the Retirement Plans Investment Committee (“RPIC”) in
part to monitor the investments of the Plan as well as to recommend to executive
management changes in the Investment Policy Statement which governs the Plan’s
investment operations. These recommendations include asset allocation changes
based on a number of factors including the investment horizon for the Plan. The
Company’s Investment Management and Fiduciary Services Division is the
investment manager of the Plan and also serves as an advisor to RPIC on the
Plan’s investment matters.
Investment
strategies and asset allocations are based on careful consideration of plan
liabilities, the plan’s funded status and the Company’s financial condition.
Investment performance and asset allocation are measured and monitored on an
ongoing basis. The current target allocations for plan assets are 0-30% for
equity securities, 0-100% for fixed income securities and 0-100% for cash funds
and emerging market debt funds. This relatively conservative asset allocation
has been set after taking into consideration the Plan’s current frozen status
and the possibility of partial plan terminations over the intermediate
term.
Market
volatility risk is controlled by limiting the asset allocation of the most
volatile asset class, equities, to no more than 30% of the portfolio and by
ensuring that there is sufficient liquidity to meet distribution requirements
from the portfolio without disrupting long-term
assets. Diversification of the equity portion of the portfolio is
controlled by limiting the value of any initial acquisition so that it does not
exceed 5% of the market value of the portfolio when purchased. The
policy requires the sale of any portion of an equity position when its value
exceeds 10% of the portfolio. Fixed income market volatility risk is
managed by limiting the term of fixed income investments to five
years. Fixed income investments must carry an “A” or better rating by
a recognized credit rating agency. Corporate debt of a single issuer
may not exceed 10% of the market value of the portfolio. The
investment in derivative instruments such as “naked” call options, futures,
commodities, and short selling is prohibited. Investment in equity
index funds and the writing of “covered” call options (a conservative strategy
to increase portfolio income) are permitted. Foreign
currency-denominated debt instruments are not permitted. At December 31, 2009,
management is of the opinion that there are no significant concentrations of
risk in the assets of the plan with respect to any single entity, industry,
country, commodity or investment fund that are not otherwise mitigated by FDIC
insurance available to the participants of the plan and collateral pledged for
any such amount that may not be covered by FDIC insurance. Investment
performance is measured against industry accepted benchmarks. The
risk tolerance and asset allocation limitations imposed by the policy are
consistent with attaining the rate of return assumptions used in the actuarial
funding calculations. The RPIC committee meets quarterly to review the
activities of the investment managers to ensure adherence with the Investment
Policy Statement.
Fair
Values
The fair
values of the Company’s pension plan assets at December 31, 2009 by asset
category are as follows:
|
|
At December 31, 2009
|
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
(In thousands)
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
Asset Category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and certificates of deposit
|
|
$ |
13,405 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
13,405 |
|
Equity
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stocks
|
|
|
6,471 |
|
|
|
- |
|
|
|
- |
|
|
|
6,471 |
|
American
Depositary Receipts
|
|
|
1,488 |
|
|
|
- |
|
|
|
- |
|
|
|
1,488 |
|
Fixed
income securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.
S. Government Agencies
|
|
|
- |
|
|
|
2,269 |
|
|
|
- |
|
|
|
2,269 |
|
Corporate
bonds
|
|
|
- |
|
|
|
3,112 |
|
|
|
- |
|
|
|
3,112 |
|
Other
|
|
|
96 |
|
|
|
- |
|
|
|
- |
|
|
|
96 |
|
Total
pension plan sssets
|
|
$ |
21,460 |
|
|
$ |
5,381 |
|
|
$ |
- |
|
|
$ |
26,841 |
|
Contributions
The
decision as to whether or not to make a plan contribution and the amount of any
such contribution is dependent on a number of factors. Such factors include the
investment performance of the plan assets in the current economy and, since the
plan is currently frozen, the remaining investment horizon of the
plan. Given these uncertainties, management has not yet determined
the amount of the plan contribution for the coming year.
Estimated
Future Benefit Payments
The
following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:
|
|
Pension
|
|
|
|
Benefits
|
|
2009
|
|
$ |
530 |
|
2010
|
|
|
625 |
|
2011
|
|
|
752 |
|
2012
|
|
|
905 |
|
2013
|
|
|
1,010 |
|
2014-2018
|
|
|
6,077 |
|
Cash
and Deferred Profit Sharing Plan
The Sandy
Spring Bancorp, Inc. Cash and Deferred Profit Sharing Plan includes a 401(k)
provision with a Company match. The 401(k) provision is voluntary and covers all
eligible employees after ninety days of service. Employees
contributing to the 401(k) provision receive a matching contribution of 100% of
the first 3% of compensation and 50% of the next 2% of compensation subject to
employee contribution limitations. The Company match vests
immediately. The Plan permits employees to purchase shares of Sandy
Spring Bancorp, Inc. common stock with their 401(k) contributions, Company
match, and other contributions under the Plan. Profit sharing
contributions and Company match are included in non-interest expenses and
totaled $1.4 million in 2008, $1.5 million in 2007, and $1.4 million in
2006.
The
Company also had a performance based compensation benefit in 2007 that at one
time was integrated with the Cash and Deferred Profit Sharing Plan and provided
incentives to employees based on the Company's financial results as measured
against key performance indicator goals set by management. Payments were made
annually and amounts included in non-interest expense under the plan amounted to
$0.2 million in 2007. For 2008, this incentive plan was replaced with
a new short-term incentive plan named the Sandy Spring Leadership Incentive
Plan. It provides a cash bonus to key members of management based on
the Company's financial results using a weighted formula. There was no expense
related to this plan amounted to in 2009 as compared to an expense
of $0.2 million in 2008.
Executive
Incentive Retirement Plan
In past
years, the Company had Supplemental Executive Retirement Agreements ("SERAs")
with its executive officers providing for retirement income benefits as well as
pre-retirement death benefits. Retirement benefits payable under the SERAs, if
any, were integrated with other pension plan and Social Security retirement
benefits expected to be received by the executive. The Company accrued the
present value of these benefits over the remaining number of years to the
executives' retirement dates. Effective January 1, 2008, these agreements were
replaced with a defined contribution plan, the “Executive Incentive Retirement
Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as
of December 31, 2007, and those amounts accrued were transferred to the new plan
on behalf of each participant. Additionally, under the new Plan, officers
designated by the board of directors earned a deferral bonus which was accrued
annually based on the Company’s financial performance compared to a selected
group of peer banks. For current participants, accruals for 2008 vested
immediately. Amounts transferred to the Plan from the SERAs on behalf
of each participant continue to vest based on years of service. No bonus was
accrued in 2009 due to limitations placed on such incentive plans under
TARP. Benefit costs related to the Plan included in
non-interest expenses for 2009, 2008 and 2007 were $0.3 million, $0.4 million,
and $0.9 million, respectively.
Executive
Health Reimbursement Plan
In past
years, the Company had an Executive Health Reimbursement Plan that provided for
payment of defined medical and dental expenses not otherwise covered by
insurance for selected executives and their families. Benefits, which were paid
during both employment and retirement, were subject to a $6,500 limitation for
each executive per year. Effective January 1, 2008 this plan was eliminated with
respect to all active executives and liabilities accrued for such payments upon
retirement by such executives were reversed, which resulted in a credit to
expense in 2007 of $0.4 million. Executives that retired prior to the
elimination of this plan will continue to receive this benefit. There was no
expense recorded for this plan in 2009 or 2008.
NOTE
15 – INCOME TAXES
Income
tax expense for the years ended December 31 consists of:
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Current
income taxes:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(7,059 |
) |
|
$ |
11,404 |
|
|
$ |
13,178 |
|
State
|
|
|
(1,701 |
) |
|
|
2,755 |
|
|
|
2,514 |
|
Total
current
|
|
|
(8,760 |
) |
|
|
14,159 |
|
|
|
15,692 |
|
Deferred
income taxes (benefits):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(5,831 |
) |
|
|
(8,593 |
) |
|
|
(2,003 |
) |
State
|
|
|
(1,406 |
) |
|
|
(1,924 |
) |
|
|
(718 |
) |
Total
deferred
|
|
|
(7,237 |
) |
|
|
(10,517 |
) |
|
|
(2,721 |
) |
Total
income tax expense
|
|
$ |
(15,997 |
) |
|
$ |
3,642 |
|
|
$ |
12,971 |
|
Temporary
differences between the amounts reported in the financial statements and the tax
bases of assets and liabilities result in deferred taxes. Deferred tax assets
and liabilities, shown as the sum of the appropriate tax effect for each
significant type of temporary difference, are presented below for the years
ended December 31:
|
|
2009
|
|
|
2008
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
Allowance
for loan and lease losses
|
|
$ |
25,748 |
|
|
$ |
20,152 |
|
Loan
and deposit premium/discount
|
|
|
546 |
|
|
|
775 |
|
Intangible
assets
|
|
|
170 |
|
|
|
- |
|
Employee
benefits
|
|
|
1,918 |
|
|
|
2,518 |
|
Pension
plan OCI
|
|
|
4,309 |
|
|
|
5,328 |
|
Deferred
loan fees and costs
|
|
|
78 |
|
|
|
- |
|
Non-qualified
stock option expense
|
|
|
245 |
|
|
|
296 |
|
Other
|
|
|
187 |
|
|
|
228 |
|
Gross
deferred tax assets
|
|
|
33,201 |
|
|
|
29,297 |
|
Deferred
Tax Liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(271 |
) |
|
|
(549 |
) |
Intangible
assets
|
|
|
- |
|
|
|
(286 |
) |
Deferred
loan fees and costs
|
|
|
- |
|
|
|
(741 |
) |
Unrealized
gains on investments available for sale
|
|
|
(2,551 |
) |
|
|
(306 |
) |
Bond
accretion
|
|
|
(256 |
) |
|
|
(336 |
) |
Pension
plan costs
|
|
|
(3,297 |
) |
|
|
(3,917 |
) |
Other
|
|
|
(8 |
) |
|
|
(1 |
) |
Gross
deferred tax liabilities
|
|
|
(6,383 |
) |
|
|
(6,136 |
) |
Net
deferred tax asset
|
|
$ |
26,818 |
|
|
$ |
23,161 |
|
No
valuation allowance exists with respect to deferred tax items.
A
three-year reconcilement of the difference between the statutory federal income
tax rate and the effective tax rate for the Company for the years indicated is
as follows:
(dollars in thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
Statutory
federal income tax rate
|
|
|
35.0
|
% |
|
$ |
(10,798 |
) |
|
|
35.0
|
% |
|
$ |
6,797 |
|
|
|
35.0
|
% |
|
$ |
15,832 |
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
exempt income, net
|
|
|
11.2 |
|
|
|
(3,446 |
) |
|
|
(19.5 |
) |
|
|
(3,793 |
) |
|
|
(9.1 |
) |
|
|
(4,118 |
) |
State
income taxes, net of federal income tax benefits
|
|
|
6.5 |
|
|
|
(2,020 |
) |
|
|
2.8 |
|
|
|
540 |
|
|
|
3.0 |
|
|
|
1,348 |
|
State
tax rate change on deferred tax assets
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(181 |
) |
Other,
net
|
|
|
(0.8 |
) |
|
|
267 |
|
|
|
0.5 |
|
|
|
98 |
|
|
|
0.2 |
|
|
|
90 |
|
Effective
tax rate
|
|
|
51.9
|
% |
|
$ |
(15,997 |
) |
|
|
18.8
|
% |
|
$ |
3,642 |
|
|
|
28.7
|
% |
|
$ |
12,971 |
|
NOTE
16 – NET INCOME (LOSS) PER COMMON SHARE
The
calculation of net income (loss) per common share is as follows:
|
|
Years Ended December 31,
|
|
(Dollars and amounts in thousands, except per
share data)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Less:
Dividends - preferred stock
|
|
|
4,810 |
|
|
|
334 |
|
|
|
- |
|
Net
income (loss) available to common stockholders
|
|
$ |
(19,665 |
) |
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS shares
|
|
|
16,449 |
|
|
|
16,373 |
|
|
|
16,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss)
|
|
$ |
(0.90 |
) |
|
$ |
0.96 |
|
|
$ |
2.01 |
|
Basic
net income (loss) per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Less:
Dividends - preferred stock
|
|
|
4,810 |
|
|
|
334 |
|
|
|
- |
|
Net
income (loss) available to common stockholders
|
|
$ |
(19,665 |
) |
|
$ |
15,445 |
|
|
$ |
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS shares
|
|
|
16,449 |
|
|
|
16,373 |
|
|
|
16,015 |
|
Dilutive
common stock equivalents
|
|
|
- |
|
|
|
56 |
|
|
|
72 |
|
Dilutive
EPS shares
|
|
|
16,449 |
|
|
|
16,429 |
|
|
|
16,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) per share
|
|
$ |
(0.90 |
) |
|
$ |
0.96 |
|
|
$ |
2.01 |
|
Diluted
net income (loss) per common share
|
|
|
(1.20 |
) |
|
|
0.94 |
|
|
|
2.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive
shares
|
|
|
1,001 |
|
|
|
873 |
|
|
|
733 |
|
NOTE
17 – OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive
income (loss) is defined as net income plus transactions and other occurrences
that are the result of non-owner changes in equity. For financial
statements presented for the Company, non-equity changes are comprised of
unrealized gains or losses on available for sale debt securities and any minimum
pension liability adjustments. These do not have an impact on the
Company’s net income. Below are the components of other comprehensive
income (loss) and the related tax effects allocated to each
component.
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Investments
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in unrealized gains (losses) on investments
available-for-sale
|
|
|
5,210 |
|
|
|
(1,200 |
) |
|
|
2,141 |
|
Related
income tax (expense) benefit
|
|
|
(2,078 |
) |
|
|
478 |
|
|
|
(854 |
) |
Net
investment gains (losses) reclassified into earnings
|
|
|
418 |
|
|
|
235 |
|
|
|
(43 |
) |
Related
income tax (expense) benefit
|
|
|
(167 |
) |
|
|
(94 |
) |
|
|
17 |
|
Net
effect on other comprehensive income (loss) for the period
|
|
|
3,384 |
|
|
|
(581 |
) |
|
|
1,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of prior service costs
|
|
|
- |
|
|
|
(1,589 |
) |
|
|
(175 |
) |
Recognition
of unrealized gain (loss)
|
|
|
2,555 |
|
|
|
(8,284 |
) |
|
|
2,975 |
|
Related
income tax benefit (expense)
|
|
|
(1,019 |
) |
|
|
3,937 |
|
|
|
(1,095 |
) |
Net
effect on other comprehensive income (loss) for the period
|
|
|
1,536 |
|
|
|
(5,936 |
) |
|
|
1,705 |
|
Total
other comprehensive income (loss)
|
|
|
4,920 |
|
|
|
(6,517 |
) |
|
|
2,966 |
|
Comprehensive
income (loss)
|
|
$ |
(9,935 |
) |
|
$ |
9,262 |
|
|
$ |
35,228 |
|
The
following table presents net accumulated other comprehensive income (loss) for
the periods indicated:
|
|
Year ended December 31,
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized Gains
(Losses) on Investments
Available-for-Sale
|
|
|
Total
|
|
Balance
at January 1, 2007
|
|
$ |
(3,802 |
) |
|
$ |
(219 |
) |
|
$ |
(4,021 |
) |
Period
change, net of tax
|
|
|
1,705 |
|
|
|
1,261 |
|
|
|
2,966 |
|
Balance
at December 31, 2007
|
|
$ |
(2,097 |
) |
|
$ |
1,042 |
|
|
$ |
(1,055 |
) |
Period
change, net of tax
|
|
|
(5,936 |
) |
|
|
(581 |
) |
|
|
(6,517 |
) |
Balance
at December 31, 2008
|
|
$ |
(8,033 |
) |
|
$ |
461 |
|
|
$ |
(7,572 |
) |
Period
change, net of tax
|
|
|
1,536 |
|
|
|
3,384 |
|
|
|
4,920 |
|
Balance
at December 31, 2009
|
|
$ |
(6,497 |
) |
|
$ |
3,845 |
|
|
$ |
(2,652 |
) |
NOTE
18 – RELATED PARTY TRANSACTIONS
Certain
directors and executive officers have loan transactions with the Company. Such
loans were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with outsiders. The following schedule summarizes
changes in amounts of loans outstanding, both direct and indirect, to these
persons during the years indicated.
|
|
2009
|
|
|
2008
|
|
Balance
at January 1
|
|
$ |
26,758 |
|
|
$ |
25,708 |
|
Additions
|
|
|
1,184 |
|
|
|
2,156 |
|
Repayments
|
|
|
(2,653 |
) |
|
|
(1,106 |
) |
Balance
at December 31
|
|
$ |
25,289 |
|
|
$ |
26,758 |
|
NOTE
19 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND
DERIVATIVES
In the
normal course of business, the Company has various outstanding credit
commitments that are not reflected in the financial statements. These
commitments are made to satisfy the financing needs of the Company's clients.
The associated credit risk is controlled by subjecting such activity to the same
credit and quality controls as exist for the Company's lending and investing
activities. The commitments involve diverse business and consumer customers and
are generally well collateralized. Collateral held varies, but may
include residential real estate, commercial real estate, property and equipment,
inventory and accounts receivable. Since a portion of the commitments have some
likelihood of not being exercised, the amounts do not necessarily represent
future cash requirements. A summary of the financial instruments with
off-balance sheet credit risk is as follows at December 31:
|
|
2009
|
|
|
2008
|
|
Commercial
|
|
$ |
47,541 |
|
|
$ |
96,026 |
|
Real
estate-development and construction
|
|
|
51,288 |
|
|
|
58,132 |
|
Real
estate-residential mortgage
|
|
|
18,416 |
|
|
|
26,308 |
|
Lines
of credit, principally home equity and business lines
|
|
|
587,174 |
|
|
|
614,090 |
|
Standby
letters of credit
|
|
|
65,242 |
|
|
|
64,856 |
|
Total
Commitments to extend credit and available credit lines
|
|
$ |
769,661 |
|
|
$ |
859,412 |
|
Beginning
in 2007, the Company entered into interest rate swaps (“swaps”) to facilitate
customer transactions and meet their financing needs. These swaps qualify as
derivatives, but are not designated as hedging instruments. Interest rate swap
contracts involve the risk of dealing with counterparties and their ability to
meet contractual terms. When the fair value of a derivative instrument contract
is positive, this generally indicates that the counterparty or customer owes the
Company, and results in credit risk to the Company. When the fair value of a
derivative instrument contract is negative, the Company owes the customer or
counterparty and therefore, has no credit risk.
A summary
of the Company’s interest rate swaps at December 31 is included in the following
table:
|
|
2009
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Years
to
|
|
|
Receive
|
|
|
Pay
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Maturity
|
|
|
Rate
|
|
|
Rate
|
|
Interest
Rate Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
Fixed/Receive Variable Swaps
|
|
$ |
23,650 |
|
|
$ |
(289 |
) |
|
|
4.8 |
|
|
|
2.84 |
% |
|
|
5.27 |
% |
Pay
Variable/Receive Fixed Swaps
|
|
|
23,650 |
|
|
|
289 |
|
|
|
4.8 |
|
|
|
5.27 |
% |
|
|
2.84 |
% |
Total
Swaps
|
|
$ |
47,300 |
|
|
$ |
- |
|
|
|
4.8 |
|
|
|
4.06 |
% |
|
|
4.06 |
% |
|
|
2008
|
|
|
|
Notional
|
|
|
Estimated
|
|
|
Years
to
|
|
|
Receive
|
|
|
Pay
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Fair Value
|
|
|
Maturity
|
|
|
Rate
|
|
|
Rate
|
|
Interest
Rate Swap Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pay
Fixed/Receive Variable Swaps
|
|
$ |
4,141 |
|
|
$ |
(307 |
) |
|
|
2.3 |
|
|
|
2.84 |
% |
|
|
7.39 |
% |
Pay
Variable/Receive Fixed Swaps
|
|
|
4,141 |
|
|
|
307 |
|
|
|
2.3 |
|
|
|
7.39 |
% |
|
|
2.84 |
% |
Total
Swaps
|
|
$ |
8,282 |
|
|
$ |
- |
|
|
|
2.3 |
|
|
|
5.12 |
% |
|
|
5.12 |
% |
NOTE
20 – LITIGATION
In the
normal course of business, the Company becomes involved in litigation arising
from the banking, financial, and other activities it conducts. Management, after
consultation with legal counsel, does not anticipate that the ultimate
liability, if any, arising out of these matters will have a material effect on
the Company's financial condition, operating results or liquidity.
NOTE
21 – FAIR VALUE
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
On
January 1, 2008, the Company adopted the fair value option for mortgage loans
held for sale. The fair value option on residential mortgage loans
held for sale allows 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 year ended December 31, 2009 and 2008, respectively.
Simultaneously
with the adoption of the fair value option, the Company adopted the standards
for fair value measurement which clarified that fair value is an exit price,
representing the amount that would be received for sale of 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.
Assets and
Liabilities
Mortgage loans held for
sale
Mortgage
loans held for sale are valued based quotations from the secondary
market for similar instruments and are classified as level 2 of the
fair value hierarchy.
Investment
securities
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
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 tables set forth the Company’s financial assets and liabilities at
December 31, 2009 and 2008, 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 December 31, 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
|
|
$ |
- |
|
|
$ |
12,498 |
|
|
$ |
- |
|
|
$ |
12,498 |
|
Investments
available-for-sale
|
|
|
- |
|
|
|
855,300 |
|
|
|
3,133 |
|
|
|
858,433 |
|
Interest
rate swap agreements
|
|
|
- |
|
|
|
289 |
|
|
|
- |
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
- |
|
|
$ |
(289 |
) |
|
$ |
- |
|
|
$ |
(289 |
) |
|
|
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 trading activity due to the
state of the economy at December 31, 2009 and 2008,
respectively. 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 December 31, 2009
and 2008.
|
|
·
|
An
income valuation approach technique (present value technique) that
maximizes the use of relevant observable inputs and minimizes the use of
unobservable inputs will be equally or more representative of fair value
than the market approach valuation technique used at prior measurement
dates.
|
|
·
|
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 December 31, 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)
|
|
|
(21 |
) |
Balance
at December 31, 2009
|
|
$ |
3,133 |
|
Assets Measured at Fair
Value on a Nonrecurring Basis
The
following table sets forth the Company’s financial assets subject to fair value
adjustments (impairment) on a nonrecurring basis as they are valued at the lower
of cost or market. Assets are classified in their entirety based on
the lowest level of input that is significant to the fair value
measurement:
|
|
At December 31, 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
|
|
Total Losses
|
|
Impaired
loans
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
92,810 |
|
|
$ |
92,810 |
|
|
$ |
39,241 |
|
Impaired
loans totaling $99.5 million were written down to fair value of $92.8 million as
a result of loan loss reserves of $6.6 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
3 in the fair
value hierarchy. Collateral may be real estate and/or business assets
including equipment, inventory and/or accounts receivable. The value
of business equipment, inventory and accounts receivable collateral is based on
net book value on the business’ financial statements and, if necessary,
discounted based on management’s review and analysis. Appraised
and reported values may be discounted based on management’s historical
knowledge, changes in market conditions from the time of valuation, and/or
management’s expertise and knowledge of the client and client’s
business. Impaired loans are reviewed and evaluated on at least a
quarterly basis for additional impairment and adjusted accordingly, based on the
same factors identified above.
Fair Value of Financial
Instruments
The
Company discloses fair value information about financial instruments for which
it is practicable to estimate the value, whether or not such financial
instruments are recognized on the balance sheet. Financial
instruments have been defined broadly to encompass 95.9% of the Company's assets
and 99.3% of its liabilities at December 31, 2009 and 95.0% of the Company's
assets and 99.0% of its liabilities at December 31, 2008. Fair value
is the amount at which a financial instrument could be exchanged in a current
transaction between willing parties, other than in a forced sale or liquidation,
and is best evidenced by a quoted market price, if one exists.
Quoted
market prices, where available, are shown as estimates of fair market values.
Because no quoted market prices are available for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on the amount and timing of future cash flows and estimated
discount rates.
Present
value techniques used in estimating the fair value of many of the Company's
financial instruments are significantly affected by the assumptions used. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate cash settlement of the instrument. Additionally, the accompanying
estimates of fair values are only representative of the fair values of the
individual financial assets and liabilities, and should not be considered an
indication of the fair value of the Company.
The
estimated fair values of the Company's financial instruments are as follows for
the periods indicated:
|
|
At December 31, 2009
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In thousands)
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and temporary investments (1)
|
|
$ |
72,294 |
|
|
$ |
72,294 |
|
|
$ |
116,620 |
|
|
$ |
116,620 |
|
Investments
available-for-sale
|
|
|
858,433 |
|
|
|
858,433 |
|
|
|
291,727 |
|
|
|
291,727 |
|
Investments
held-to-maturity and other equity securities
|
|
|
165,366 |
|
|
|
170,560 |
|
|
|
200,764 |
|
|
|
205,054 |
|
Loans,
net of allowance
|
|
|
2,233,451 |
|
|
|
2,022,029 |
|
|
|
2,440,120 |
|
|
|
2,467,993 |
|
Accrued
interest receivable and other assets (2)
|
|
|
89,315 |
|
|
|
89,315 |
|
|
|
85,219 |
|
|
|
85,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$ |
2,696,842 |
|
|
$ |
2,702,142 |
|
|
$ |
2,365,257 |
|
|
$ |
2,380,527 |
|
Securities
sold under retail repurchase agreements and federal funds
purchased
|
|
|
89,062 |
|
|
|
89,092 |
|
|
|
75,106 |
|
|
|
75,106 |
|
Advances
from FHLB
|
|
|
411,584 |
|
|
|
441,020 |
|
|
|
412,552 |
|
|
|
456,563 |
|
Subordinated
debentures
|
|
|
35,000 |
|
|
|
8,077 |
|
|
|
35,000 |
|
|
|
33,956 |
|
Accrued
interest payable and other liabilities (2)
|
|
|
3,156 |
|
|
|
3,156 |
|
|
|
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 by GAAP are included in other assets and other
liabilities.
The
following methods and assumptions were used to estimate the fair value of each
category of financial instruments for which it is practicable to estimate that
value:
Cash
and Temporary Investments:
Cash and due from banks, federal
funds sold and interest-bearing deposits with banks. The carrying amount
approximated the fair value.
Residential mortgage loans held for
sale. The fair value of residential mortgage loans held for sale was
derived from secondary market quotations for similar instruments.
Investments. The fair value
for U.S. Treasury, U.S. Agency, state and municipal, corporate debt and some
trust preferred securities was based upon quoted market bids; for
mortgage-backed securities upon bid prices for similar pools of fixed and
variable rate assets, considering current market spreads and prepayment speeds;
and, for equity securities upon quoted market prices. Certain trust
preferred securities were estimated by utilizing the discounted value of
estimated cash flows.
Loans. The fair value was
estimated by computing the discounted value of estimated cash flows, adjusted
for potential loan and lease losses, for pools of loans having similar
characteristics. The discount rate was based upon the current loan origination
rate for a similar loan. Non-performing loans have an assumed interest rate of
0%.
Accrued interest receivable.
The carrying amount approximated the fair value of accrued interest, considering
the short-term nature of the receivable and its expected
collection.
Other assets. The carrying
amount approximated the fair value considering their short-term
nature.
Deposits. The fair value of
demand, money market savings and regular savings deposits, which have no stated
maturity, were considered equal to their carrying amount, representing the
amount payable on demand. While management believes that the Bank’s core deposit
relationships provide a relatively stable, low-cost funding source that has a
substantial intangible value separate from the value of the deposit balances,
these estimated fair values do not include the intangible value of core deposit
relationships, which comprise a significant portion of the Bank’s deposit
base.
The fair
value of time deposits was based upon the discounted value of contractual cash
flows at current rates for deposits of similar remaining
maturity.
Short-term borrowings. The
carrying amount approximated the fair value of repurchase agreements due to
their variable interest rates. The fair value of Federal Home Loan Bank of
Atlanta advances was estimated by computing the discounted value of contractual
cash flows payable at current interest rates for obligations with similar
remaining terms.
Long-term borrowings. The fair
value of the Federal Home Loan Bank of Atlanta advances and subordinated
debentures was estimated by computing the discounted value of contractual cash
flows payable at current interest rates for obligations with similar remaining
terms.
Accrued interest payable and other
liabilities. The carrying amount approximated the fair value of accrued
interest payable, accrued dividends and premiums payable, considering their
short-term nature and expected payment.
NOTE
22 – PARENT COMPANY FINANCIAL INFORMATION
The
condensed financial statements for Sandy Spring Bancorp, Inc. (Parent Only)
pertaining to the periods covered by the Company's consolidated financial
statements are presented below:
Statements of
Condition
|
|
December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,754 |
|
|
$ |
3,021 |
|
Investments
available for sale (at fair value)
|
|
|
350 |
|
|
|
350 |
|
Investment
in subsidiary
|
|
|
371,748 |
|
|
|
386,199 |
|
Loan
to subsidiary
|
|
|
35,000 |
|
|
|
35,000 |
|
Other
assets
|
|
|
253 |
|
|
|
4,315 |
|
Total
assets
|
|
$ |
410,105 |
|
|
$ |
428,885 |
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Subordinated
debentures
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
Accrued
expenses and other liabilities
|
|
|
1,519 |
|
|
|
2,023 |
|
Total
liabilities
|
|
|
36,519 |
|
|
|
37,023 |
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
80,095 |
|
|
|
79,440 |
|
Common
stock
|
|
|
16,488 |
|
|
|
16,399 |
|
Warrants
|
|
|
3,699 |
|
|
|
3,699 |
|
Additional
paid in capital
|
|
|
87,334 |
|
|
|
85,486 |
|
Retained
earnings
|
|
|
188,622 |
|
|
|
214,410 |
|
Accumulated
other comprehensive loss
|
|
|
(2,652 |
) |
|
|
(7,572 |
) |
Total
stockholders’ equity
|
|
|
373,586 |
|
|
|
391,862 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
410,105 |
|
|
$ |
428,885 |
|
Statements of
Income
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Income:
|
|
|
|
|
|
|
|
|
|
Cash
dividends from subsidiary
|
|
$ |
5,115 |
|
|
$ |
7,912 |
|
|
$ |
68,880 |
|
Other
income
|
|
|
1,607 |
|
|
|
2,609 |
|
|
|
2,802 |
|
Total
income
|
|
|
6,722 |
|
|
|
10,521 |
|
|
|
71,682 |
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
1,585 |
|
|
|
2,223 |
|
|
|
2,223 |
|
Other
expenses
|
|
|
847 |
|
|
|
796 |
|
|
|
1,972 |
|
Total
expenses
|
|
|
2,432 |
|
|
|
3,019 |
|
|
|
4,195 |
|
Income
before income taxes and equity in undistributed income of
subsidiary
|
|
|
4,290 |
|
|
|
7,502 |
|
|
|
67,487 |
|
Income
tax expense (benefit)
|
|
|
(200 |
) |
|
|
(41 |
) |
|
|
(309 |
) |
Income
before equity in undistributed income of subsidiary
|
|
|
4,490 |
|
|
|
7,543 |
|
|
|
67,796 |
|
Equity
in undistributed (excess distributions) income (loss) of
subsidiary
|
|
|
(19,345 |
) |
|
|
8,236 |
|
|
|
(35,534 |
) |
Net
income (loss)
|
|
|
(14,855 |
) |
|
|
15,779 |
|
|
|
32,262 |
|
Preferred
stock dividends and discount accretion
|
|
|
4,810 |
|
|
|
334 |
|
|
|
- |
|
Net
income (loss) available to common shareholders
|
|
$ |
(19,665 |
) |
|
$ |
15,445 |
|
|
$ |
32,262 |
|
Statements of Cash
Flows
|
|
Years Ended December 31,
|
|
(In thousands)
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
(14,855 |
) |
|
$ |
15,779 |
|
|
$ |
32,262 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
distributions of (equity in undistributed)
income-subsidiary
|
|
|
- |
|
|
|
(8,237 |
) |
|
|
35,534 |
|
Investment
in subsidiary
|
|
|
19,346 |
|
|
|
- |
|
|
|
(41,176 |
) |
Common
stock issued pursuant to West Financial Services
acquisition
|
|
|
628 |
|
|
|
|
|
|
|
|
|
Securities
gains
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Share-based
compensation expense
|
|
|
762 |
|
|
|
772 |
|
|
|
1,128 |
|
Net
change in other liabilities
|
|
|
(337 |
) |
|
|
448 |
|
|
|
(142 |
) |
Other-net
|
|
|
421 |
|
|
|
(183 |
) |
|
|
(295 |
) |
Net
cash provided by operating activities
|
|
|
5,965 |
|
|
|
8,579 |
|
|
|
27,311 |
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease (increase) in loans receivable
|
|
|
429 |
|
|
|
2,811 |
|
|
|
(6,171 |
) |
Proceeds
from sales of loans
|
|
|
2,839 |
|
|
|
- |
|
|
|
- |
|
Contribution
to Bank subsidiary
|
|
|
- |
|
|
|
(83,094 |
) |
|
|
- |
|
Net
cash (used) provided by investing activities
|
|
|
3,268 |
|
|
|
(80,283 |
) |
|
|
(6,171 |
) |
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of preferred stock
|
|
|
- |
|
|
|
83,094 |
|
|
|
- |
|
Common
stock purchased and retired
|
|
|
- |
|
|
|
- |
|
|
|
(4,354 |
) |
Proceeds
from issuance of common stock
|
|
|
521 |
|
|
|
743 |
|
|
|
1,823 |
|
Tax
benefit from stock options exercised
|
|
|
26 |
|
|
|
51 |
|
|
|
110 |
|
Dividends
paid
|
|
|
(10,047 |
) |
|
|
(15,764 |
) |
|
|
(14,988 |
) |
Net
cash used by financing activities
|
|
|
(9,500 |
) |
|
|
68,124 |
|
|
|
(17,409 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(267 |
) |
|
|
(3,580 |
) |
|
|
3,731 |
|
Cash
and cash equivalents at beginning of year
|
|
|
3,021 |
|
|
|
6,601 |
|
|
|
2,870 |
|
Cash
and cash equivalents at end of year
|
|
$ |
2,754 |
|
|
$ |
3,021 |
|
|
$ |
6,601 |
|
NOTE
23 – REGULATORY MATTERS
The
Company (on a consolidated basis) and the Bank are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The Company and
the Bank's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 2009 and 2008, the capital levels of the
Company and the Bank substantially exceeded all capital adequacy requirements to
which they are subject.
As of
December 31, 2009, the most recent notification from the Bank’s primary
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.
The
Company's and the Bank's actual capital amounts and ratios are also presented in
the table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
Prompt Corrective
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Action Provisions
|
|
(Dollars in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
360,450 |
|
|
|
13.27
|
% |
|
$ |
217,302 |
|
|
|
8.00
|
% |
|
$ |
271,628 |
|
|
|
10.00
|
% |
Sandy
Spring Bank
|
|
|
357,509 |
|
|
|
13.17 |
|
|
|
217,159 |
|
|
|
8.00 |
|
|
|
271,449 |
|
|
|
10.00 |
|
Tier
1 Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
326,119 |
|
|
|
12.01 |
|
|
$ |
108,651 |
|
|
|
4.00 |
|
|
$ |
162,977 |
|
|
|
6.00 |
|
Sandy
Spring Bank
|
|
|
288,200 |
|
|
|
10.62 |
|
|
|
108,580 |
|
|
|
4.00 |
|
|
|
162,869 |
|
|
|
6.00 |
|
Tier
1 Leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
326,119 |
|
|
|
9.09 |
|
|
$ |
107,618 |
|
|
|
3.00 |
|
|
$ |
179,363 |
|
|
|
5.00 |
|
Sandy
Spring Bank
|
|
|
288,200 |
|
|
|
8.04 |
|
|
|
107,558 |
|
|
|
3.00 |
|
|
|
179,263 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
380,947 |
|
|
|
13.82
|
% |
|
$ |
220,540 |
|
|
|
8.00
|
% |
|
$ |
275,676 |
|
|
|
10.00
|
% |
Sandy
Spring Bank
|
|
|
374,136 |
|
|
|
13.60 |
|
|
|
220,127 |
|
|
|
8.00 |
|
|
|
275,159 |
|
|
|
10.00 |
|
Tier
1 Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
346,289 |
|
|
|
12.56 |
|
|
$ |
110,270 |
|
|
|
4.00 |
|
|
$ |
165,405 |
|
|
|
6.00 |
|
Sandy
Spring Bank
|
|
|
304,542 |
|
|
|
11.07 |
|
|
|
110,064 |
|
|
|
4.00 |
|
|
|
165,095 |
|
|
|
6.00 |
|
Tier
1 Leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$ |
346,289 |
|
|
|
11.00 |
|
|
$ |
94,466 |
|
|
|
3.00 |
|
|
$ |
157,443 |
|
|
|
5.00 |
|
Sandy
Spring Bank
|
|
|
304,542 |
|
|
|
9.69 |
|
|
|
94,310 |
|
|
|
3.00 |
|
|
|
157,183 |
|
|
|
5.00 |
|
NOTE
24 - SEGMENT REPORTING
The
Company operates in four operating segments—Community Banking, Insurance,
Leasing and Investment Management. Only Community Banking presently
meets the threshold for reportable segment reporting; however, the Company is
disclosing separate information for all four operating segments. Each
of the operating segments is a strategic business unit that offers different
products and services. The Insurance, Leasing and Investment Management segments
were businesses that were acquired in separate transactions where management at
the time of acquisition was retained. The accounting policies of the
segments are the same as those described in Note 1 to the consolidated financial
statements. However, the segment data reflect inter-segment
transactions and balances.
The
Community Banking segment is conducted through Sandy Spring Bank and involves
delivering a broad range of financial products and services, including various
loan and deposit products to both individuals and businesses. Parent
company income is included in the Community Banking segment, as the majority of
effort of these functions is related to this segment. The Community
Banking segment also includes Sandy Spring Bancorp. Major revenue sources
include net interest income, gains on sales of mortgage loans, trust income,
fees on sales of investment products and service charges on deposit
accounts. Expenses include personnel, occupancy, marketing, equipment
and other expenses. Included in Community Banking expenses are
non-cash charges associated with amortization of intangibles related to acquired
entities totaling $2.7 million in 2009, $3.3 million in 2008 and $2.9 million in
2007.
The
Insurance segment is conducted through Sandy Spring Insurance Company, a
subsidiary of the Bank, and offers annuities as an alternative to traditional
deposit accounts. Sandy Spring Insurance Company operates the
Chesapeake Insurance Group, a general insurance agency located in Annapolis,
Maryland, and Neff and Associates, located in Ocean City,
Maryland. Major sources of revenue are insurance commissions from
commercial lines, personal lines, and medical liability
lines. Expenses include personnel and support
charges. Included in insurance expenses are non-cash charges
associated with amortization of intangibles related to acquired entities
totaling $0.3 million in 2009 and $0.4 million in 2008 and
2007.
The
Leasing segment is conducted through The Equipment Leasing Company, a subsidiary
of the Bank that provides leases for essential commercial equipment used by
small to medium sized businesses. Equipment leasing is conducted
through vendor relations and direct solicitation to end-users located primarily
in states along the east coast from New Jersey to Florida. The
typical lease is categorized as a financing lease and is characterized as a
“small ticket” by industry standards, averaging less than $100 thousand, with
individual leases generally not exceeding $500 thousand. Major
revenue sources include interest income. Expenses include personnel
and support charges. In 2008, leasing expenses include additional noncash
charges of $4.2 million for impairment of goodwill related to the acquisition of
The Equipment Leasing Company.
The
Investment Management segment is conducted through West Financial Services,
Inc., a subsidiary of the Bank. This asset management and financial
planning firm, located in McLean, Virginia, provides comprehensive investment
management and financial planning to individuals, families, small businesses and
associations including cash flow analysis, investment review, tax planning,
retirement planning, insurance analysis and estate planning. West
Financial currently has approximately $722 million in assets under
management. Major revenue sources include non-interest income earned
on the above services. Expenses include personnel and support
charges. Included in investment management expenses are non-cash
charges associated with amortization of intangibles related to acquired entities
totaling $0.7 million in 2009 and $0.8 million 2008 and 2007.
Information
about operating segments and reconciliation of such information to the
consolidated financial statements follows:
|
|
Year Ended December 31, 2009
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
153,734 |
|
|
$ |
6 |
|
|
$ |
2,281 |
|
|
$ |
4 |
|
|
$ |
(795 |
) |
|
$ |
155,230 |
|
Interest
expense
|
|
|
51,532 |
|
|
|
- |
|
|
|
785 |
|
|
|
- |
|
|
|
(795 |
) |
|
|
51,522 |
|
Provision
for loan and lease losses
|
|
|
76,762 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
76,762 |
|
Noninterest
income
|
|
|
34,930 |
|
|
|
5,980 |
|
|
|
289 |
|
|
|
4,654 |
|
|
|
(612 |
) |
|
|
45,241 |
|
Noninterest
expenses
|
|
|
94,884 |
|
|
|
4,796 |
|
|
|
515 |
|
|
|
3,456 |
|
|
|
(612 |
) |
|
|
103,039 |
|
Income
(loss) before income taxes
|
|
|
(34,514 |
) |
|
|
1,190 |
|
|
|
1,270 |
|
|
|
1,202 |
|
|
|
0 |
|
|
|
(30,852 |
) |
Income
tax expense (benefit)
|
|
|
(17,447 |
) |
|
|
481 |
|
|
|
500 |
|
|
|
469 |
|
|
|
- |
|
|
|
(15,997 |
) |
Net
income (loss)
|
|
$ |
(17,067 |
) |
|
$ |
709 |
|
|
$ |
770 |
|
|
$ |
733 |
|
|
$ |
0 |
|
|
$ |
(14,855 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,644,446 |
|
|
$ |
12,693 |
|
|
$ |
26,075 |
|
|
$ |
12,207 |
|
|
$ |
(64,943 |
) |
|
$ |
3,630,478 |
|
|
|
Year Ended December 31, 2008
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
167,128 |
|
|
$ |
46 |
|
|
$ |
2,875 |
|
|
$ |
30 |
|
|
$ |
(1,234 |
) |
|
$ |
168,845 |
|
Interest
expense
|
|
|
60,461 |
|
|
|
- |
|
|
|
1,159 |
|
|
|
- |
|
|
|
(1,234 |
) |
|
|
60,386 |
|
Provision
for loan and lease losses
|
|
|
32,583 |
|
|
|
- |
|
|
|
609 |
|
|
|
- |
|
|
|
- |
|
|
|
33,192 |
|
Noninterest
income
|
|
|
34,425 |
|
|
|
6,675 |
|
|
|
493 |
|
|
|
4,542 |
|
|
|
108 |
|
|
|
46,243 |
|
Noninterest
expenses
|
|
|
88,585 |
|
|
|
5,469 |
|
|
|
5,082 |
|
|
|
3,562 |
|
|
|
(609 |
) |
|
|
102,089 |
|
Income
(loss) before income taxes
|
|
|
19,924 |
|
|
|
1,252 |
|
|
|
(3,482 |
) |
|
|
1,010 |
|
|
|
717 |
|
|
|
19,421 |
|
Income
tax expense (benefit)
|
|
|
4,145 |
|
|
|
510 |
|
|
|
(1,407 |
) |
|
|
394 |
|
|
|
- |
|
|
|
3,642 |
|
Net
income (loss)
|
|
$ |
15,779 |
|
|
$ |
742 |
|
|
$ |
(2,075 |
) |
|
$ |
616 |
|
|
$ |
717 |
|
|
$ |
15,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,317,715 |
|
|
$ |
12,032 |
|
|
$ |
33,585 |
|
|
$ |
13,905 |
|
|
$ |
(63,599 |
) |
|
$ |
3,313,638 |
|
|
|
Year Ended December 31, 2007
|
|
|
|
Community
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Inter-Segment
|
|
|
|
|
(In thousands)
|
|
Banking
|
|
|
Insurance
|
|
|
Leasing
|
|
|
Mgmt.
|
|
|
Elimination
|
|
|
Total
|
|
Interest
income
|
|
$ |
179,364 |
|
|
$ |
104 |
|
|
$ |
2,759 |
|
|
$ |
70 |
|
|
$ |
(1,322 |
) |
|
$ |
180,975 |
|
Interest
expense
|
|
|
76,319 |
|
|
|
- |
|
|
|
1,152 |
|
|
|
- |
|
|
|
(1,322 |
) |
|
|
76,149 |
|
Provision
for loan and lease losses
|
|
|
4,094 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,094 |
|
Noninterest
income
|
|
|
34,680 |
|
|
|
7,097 |
|
|
|
818 |
|
|
|
4,588 |
|
|
|
(2,894 |
) |
|
|
44,289 |
|
Noninterest
expenses
|
|
|
89,930 |
|
|
|
5,515 |
|
|
|
1,068 |
|
|
|
3,848 |
|
|
|
(573 |
) |
|
|
99,788 |
|
Income
(loss) before income taxes
|
|
|
43,701 |
|
|
|
1,686 |
|
|
|
1,357 |
|
|
|
810 |
|
|
|
(2,321 |
) |
|
|
45,233 |
|
Income
tax expense (benefit)
|
|
|
11,439 |
|
|
|
676 |
|
|
|
539 |
|
|
|
317 |
|
|
|
- |
|
|
|
12,971 |
|
Net
income (loss)
|
|
$ |
32,262 |
|
|
$ |
1,010 |
|
|
$ |
818 |
|
|
$ |
493 |
|
|
$ |
(2,321 |
) |
|
$ |
32,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$ |
3,045,055 |
|
|
$ |
12,073 |
|
|
$ |
36,151 |
|
|
$ |
10,037 |
|
|
$ |
(59,363 |
) |
|
$ |
3,043,953 |
|
NOTE
25 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary
of selected consolidated quarterly financial data for the two years ended
December 31, 2009 and December 31, 2008 is reported in the following
table.
|
|
2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
(In thousands, except per share data)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,728 |
|
|
$ |
38,668 |
|
|
$ |
39,185 |
|
|
$ |
38,649 |
|
Interest
expense
|
|
|
13,703 |
|
|
|
14,220 |
|
|
|
12,783 |
|
|
|
10,816 |
|
Net
interest income
|
|
|
25,025 |
|
|
|
24,448 |
|
|
|
26,402 |
|
|
|
27,833 |
|
Provision
for loan and lease losses
|
|
|
10,613 |
|
|
|
10,615 |
|
|
|
34,450 |
|
|
|
21,084 |
|
Noninterest
income
|
|
|
11,974 |
|
|
|
11,030 |
|
|
|
10,662 |
|
|
|
11,575 |
|
Noninterest
expense
|
|
|
24,250 |
|
|
|
26,858 |
|
|
|
26,567 |
|
|
|
25,364 |
|
Income
(loss) before income taxes
|
|
|
2,136 |
|
|
|
(1,995 |
) |
|
|
(23,953 |
) |
|
|
(7,040 |
) |
Income
tax expense (benefit)
|
|
|
(81 |
) |
|
|
(1,715 |
) |
|
|
(10,379 |
) |
|
|
(3,822 |
) |
Net
income (loss)
|
|
$ |
2,217 |
|
|
$ |
(280 |
) |
|
$ |
(13,574 |
) |
|
$ |
(3,218 |
) |
Net
income (loss) available to common shareholders
|
|
$ |
1,017 |
|
|
$ |
(1,482 |
) |
|
$ |
(14,779 |
) |
|
$ |
(4,421 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$ |
0.14 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.83 |
) |
|
$ |
(0.20 |
) |
Basic
net income (loss) per common share
|
|
|
0.06 |
|
|
|
(0.09 |
) |
|
|
(0.90 |
) |
|
|
(0.27 |
) |
Diluted
net income (loss) per share
|
|
$ |
0.13 |
|
|
$ |
(0.02 |
) |
|
$ |
(0.83 |
) |
|
$ |
(0.20 |
) |
Diluted
net income (loss) per common share
|
|
|
0.06 |
|
|
|
(0.09 |
) |
|
|
(0.90 |
) |
|
|
(0.27 |
) |
|
|
2008
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
Interest
income
|
|
$ |
43,922 |
|
|
$ |
41,845 |
|
|
$ |
42,048 |
|
|
$ |
41,030 |
|
Interest
expense
|
|
|
17,343 |
|
|
|
14,726 |
|
|
|
13,961 |
|
|
|
14,356 |
|
Net
interest income
|
|
|
26,579 |
|
|
|
27,119 |
|
|
|
28,087 |
|
|
|
26,674 |
|
Provision
for loan and lease losses
|
|
|
2,667 |
|
|
|
6,189 |
|
|
|
6,545 |
|
|
|
17,791 |
|
Noninterest
income
|
|
|
12,696 |
|
|
|
11,695 |
|
|
|
10,879 |
|
|
|
10,973 |
|
Noninterest
expense
|
|
|
24,703 |
|
|
|
24,886 |
|
|
|
25,267 |
|
|
|
27,233 |
|
Income
before income taxes
|
|
|
11,905 |
|
|
|
7,739 |
|
|
|
7,154 |
|
|
|
(7,377 |
) |
Income
tax expense (benefit)
|
|
|
3,700 |
|
|
|
2,088 |
|
|
|
1,795 |
|
|
|
(3,941 |
) |
Net
income
|
|
$ |
8,205 |
|
|
$ |
5,651 |
|
|
$ |
5,359 |
|
|
$ |
(3,436 |
) |
Net
income available to common shareholders
|
|
$ |
8,205 |
|
|
$ |
5,651 |
|
|
$ |
5,359 |
|
|
$ |
(3,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per share
|
|
$ |
0.50 |
|
|
$ |
0.35 |
|
|
$ |
0.33 |
|
|
$ |
(0.21 |
) |
Basic
net income per common share
|
|
|
0.50 |
|
|
|
0.35 |
|
|
|
0.33 |
|
|
|
(0.23 |
) |
Diluted
net income per share
|
|
$ |
0.50 |
|
|
$ |
0.34 |
|
|
$ |
0.33 |
|
|
$ |
(0.21 |
) |
Diluted
net income per common share
|
|
|
0.50 |
|
|
|
0.34 |
|
|
|
0.33 |
|
|
|
(0.23 |
) |
Item
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
Item
9A. CONTROLS AND PROCEDURES
Disclosure
Controls and Procedures
As
required by SEC rules, the Company’s management evaluated the effectiveness of
the Company’s disclosure controls and procedures as of December 31,
2009. The Company’s chief executive officer and chief financial
officer participated in the evaluation. Based on this evaluation, the
Company’s chief executive officer and chief financial officer concluded that the
Company’s disclosure controls and procedures were effective as of December 31,
2009.
Management's report on internal control over financial reporting
appears in Item 8 and is incorporated herein by reference.
Item
9B. OTHER INFORMATION
None.
PART
III
Item
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
The
material labeled “Information as to Nominees and Incumbent Directors,”
“Corporate Governance,” “Code of Business Conduct,” “Compliance with Section
16(a) of the Securities Exchange Act of 1934,” “Shareholder Proposals and
Communications,” and “Report of the Audit Committee” in the Proxy
Statement is incorporated in this Report by reference. Information regarding
executive officers is included under the caption “Executive Officers” on page 14
of this Report.
Item
11.
|
EXECUTIVE
COMPENSATION
|
The
material labeled "Corporate Governance and Other Matters," "Executive
Compensation," and "Compensation Committee Report" in the Proxy Statement is
incorporated in this Report by reference.
Item
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
material labeled “Owners of More than 5% of Bancorp’s Common Stock” and, "Stock
Ownership of Directors and Executive Officers" in the Proxy Statement is
incorporated in this Report by reference. Information regarding securities
authorized for issuance under equity compensation plans is included under
“Equity Compensation Plans” on page 21.
Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
|
The
material labeled “Director Independence” and "Transactions and Relationships
with Management" in the Proxy Statement is incorporated in this Report by
reference.
Item
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The
material labeled Audit and Non-Audit Fees in the Proxy Statement is incorporated
in this Report by reference.
PART
IV.
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
The
following financial statements are filed as a part of this
report:
Consolidated
Statements of Condition at December 31, 2009 and 2008
Consolidated
Statements of Income for the years ended December 31, 2009, 2008, and
2007
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008, and
2007
Consolidated
Statements of Changes in Stockholders' Equity for the years ended December 31,
2009, 2008, and 2007
Notes to
the Consolidated Financial Statements
Reports
of Registered Public Accounting Firm
All
financial statement schedules have been omitted, as the required information is
either not applicable or included in the Consolidated Financial Statements or
related Notes.
The
following exhibits are filed as a part of this report:
Exhibit No.
|
|
Description
|
|
Incorporated by Reference
to:
|
|
|
|
|
|
3(a)
|
|
Articles
of Incorporation of Sandy Spring Bancorp, Inc., as Amended
|
|
Exhibit
3.1 to Form 10-Q for the quarter ended June 30, 1996, SEC File No.
0-19065.
|
|
|
|
|
|
3(b)
|
|
Bylaws
of Sandy Spring Bancorp, Inc.
|
|
Exhibit
3.2 to Form 8-K dated May 13, 1992, SEC File No.
0-19065.
|
|
|
|
|
|
3(c)
|
|
Articles
Supplementary establishing Fixed Rate Cumulative Perpetual Preferred
Stock, Series A, of Sandy Spring Bancorp, Inc.
|
|
Exhibit
4.1 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
4(a)
|
|
No
long-term debt instrument issued by the Company exceeds 10% of
consolidated assets or is registered. In accordance with
paragraph 4(iii) of Item 601(b) of Regulation S-K, the Company will
furnish the SEC copies of all long-term debt instruments and related
agreements upon request.
|
|
|
|
|
|
|
|
4(b)
|
|
Warrant
to Purchase 651,547 Shares of Common
Stock of Sandy Spring Bancorp, Inc.
|
|
Exhibit
4.3 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
10(a)*
|
|
Amended
and Restated Sandy Spring Bancorp, Inc., Cash and Deferred Profit Sharing
Plan and Trust
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 1997, SEC File No.
0-19065.
|
|
|
|
|
|
10(b)*
|
|
Sandy
Spring Bancorp, Inc. 2005 Omnibus Stock Plan
|
|
Exhibit
10.1 to Form 8-K dated June 27, 2005, Commission File No.
0-19065.
|
|
|
|
|
|
10(c)*
|
|
Sandy
Spring Bancorp, Inc. Amended and Restated Stock Option Plan for Employees
of Annapolis Bancshares, Inc.
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement No.
333-11049.
|
|
|
|
|
|
10(d)*
|
|
Sandy
Spring Bancorp, Inc. 1999 Stock Option Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement No.
333-81249.
|
|
|
|
|
|
10(e)*
|
|
Sandy
Spring National Bank of Maryland Executive Health Insurance
Plan
|
|
Exhibit
10 to Form 10-Q for the quarter ended March 31, 2002, SEC File No.
0-19065.
|
|
|
|
|
|
10(f)*
|
|
Form
of Director Fee Deferral Agreement, August 26, 1997, as
amended
|
|
Exhibit
10(h) to Form 10-K for the year ended December 31, 2003, SEC File No.
0-19065.
|
|
|
|
|
|
10(g)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
Philip J. Mantua
|
|
Exhibit
10(l) to Form 10-K for the year ended December 31, 2004, SEC File No.
0-19065.
|
|
|
|
|
|
10(h)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
Daniel J. Schrider
|
|
Exhibit
10(h) to Form 10-K for the year ended December 31, 2009, SEC File No.
0-19065.
|
|
|
|
|
|
10(i)*
|
|
Employment
Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and
R. Louis Caceres
|
|
Exhibit
10(a) to Form 10-Q for the quarter ended September 30, 2004, SEC File No.
0-19065.
|
|
|
|
|
|
10(j)*
|
|
Form
of Sandy Spring National Bank of Maryland Officer Group Term Replacement
Plan
|
|
Exhibit
10(r) to Form 10-K for the year ended December 31, 2001, SEC File No.
0-19065.
|
|
|
|
|
|
10(k)*
|
|
Sandy
Spring Bancorp, Inc. Directors’ Stock Purchase Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, File No.
333-117330.
|
|
|
|
|
|
10(l)*
|
|
Amended
and Restated Potomac Bank of Virginia 1999 Stock Option
Plan
|
|
Exhibit
4.1 to Registration Statement on Form S-8, File No.
333-141052
|
|
|
|
|
|
10(m)*
|
|
Sandy
Spring Bank Executive Incentive Retirement Plan
|
|
Exhibit
10(v) to Form 10-K for the year ended December 31, 2007, SEC File No.
0-19065.
|
|
|
|
|
|
10(n)*
|
|
Form
of Amendment to Directors’ Fee Deferral Agreement
|
|
Exhibit
10(o) to Form 10-K for the year ended December 31, 2009, SEC File No.
0-19065.
|
|
|
|
|
|
10(o)*
|
|
Form
of Amendment to Employment Agreement for executive
officers
|
|
Exhibit
10(p) to Form 10-K for the year ended December 31, 2009, SEC File No.
0-19065.
|
|
|
|
|
|
10(p)*
|
|
Form
of Amendment to Employment Agreement for executive
officers
|
|
Exhibit
10(q) to Form 10-K for the year ended December 31, 2009, SEC File No.
0-19065.
|
Exhibit
No.
|
|
Description
|
|
Incorporated
by Reference to:
|
|
|
|
|
|
10(q)
|
|
Letter
Agreement and related Securities Purchase Agreement – Standard Terms,
dated December 5, 2008, between Sandy Spring Bancorp, Inc. and United
States Department of the Treasury
|
|
Exhibit
10.1 to Form 8-K filed on December 5, 2008, SEC File No.
0-19065.
|
|
|
|
|
|
10(r)*
|
|
Sandy
Spring Bancorp, Inc. 2001 Employee Stock Purchase Plan
|
|
Exhibit
4 to Registration Statement on Form S-8, Registration Statement No.
333-63126
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10(s)*
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Change
in Control Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank and Frank H. Small
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10(t)*
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Form
of letter agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring
Bank and certain executive officers
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12
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Statement
of computation of ratio of earnings to combined fixed charges and
preferred stock dividends
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21
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Subsidiaries
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23(a)
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Consent
of McGladrey & Pullen, LLP
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23(b)
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Consent
of Grant Thornton LLP
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31(a)
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Rule
13a-14(a)/15d-14(a) Certification
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31(b)
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Rule
13a-14(a)/15d-14(a) Certification
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32(a)
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18
U.S.C. Section 1350 Certification
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32(b)
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18
U.S.C. Section 1350 Certification
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99(a) |
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Principal
Executive Officer Certification Regarding TARP |
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99(b) |
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Principal
Financial Officer Certification Regarding TARP |
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*
Management Contract or Compensatory Plan or Arrangement filed pursuant to Item
15(c) of this Report.
Shareholders
may obtain, upon payment of a reasonable fee, a copy of the exhibits to this
Report on Form 10-K by writing Ronald E. Kuykendall, General Counsel and
Secretary, at Sandy Spring Bancorp, Inc., 17801 Georgia Avenue, Olney, Maryland
20832. Shareholders also may access a copy of the Form 10-K including exhibits
on the SEC Web site at www.sec.gov or through the Company’s Investor Relations
Web site maintained at www.sandyspringbank.com.
SIGNATURES
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SANDY
SPRING BANCORP, INC.
(Registrant)
By:
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/s/ Daniel J. Schrider
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Daniel
J. Schrider
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President
and Chief Executive Officer
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated as of March 12, 2010.
Principal
Executive Officer and Director:
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Principal
Financial and Accounting Officer:
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/s/ Daniel J. Schrider
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/s/ Philip J. Mantua
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Daniel
J. Schrider
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Philip
J. Mantua
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President
and Chief Executive Officer
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Executive
Vice President and Chief Financial Officer
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Signature
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Title
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/s/ Mark E. Friis
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Director
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Mark
E. Friis
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/s/ Susan D. Goff
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Director
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Susan
D. Goff
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/s/ Solomon Graham
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Director
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Solomon
Graham
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/s/ Gilbert L. Hardesty
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Director
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Gilbert
L. Hardesty
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/s/ Pamela A. Little
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Director
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Pamela
A. Little
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/s/ Robert L. Orndorff
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Director
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Robert
L. Orndorff
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/s/ David E. Rippeon
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Director
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David
E. Rippeon
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/s/ Craig A. Ruppert
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Director
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Craig
A. Ruppert
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/s/ Lewis R. Schumann
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Director
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Lewis
R. Schumann
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/s/ Daniel J.
Schrider
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Director
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Daniel
J. Schrider
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Director
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Dennis
A. Starliper
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