SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: O-19065
Sandy Spring Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland (State of incorporation) |
52-1532952 (I.R.S. Employer Identification Number) |
17801 Georgia
Avenue, Olney, Maryland (Address of principal office) |
20832 (Zip Code) |
301-774-6400 (Telephone Number) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
YES |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
Accelerated
filer |
Non-accelerated
filer |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES |
The number of shares of common stock outstanding as of October 18, 2006 is 14,812,306 shares.
INDEX
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Page |
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PART I - FINANCIAL INFORMATION |
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ITEM 1. |
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FINANCIAL STATEMENTS |
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Consolidated Balance Sheets at September 30, 2006 and December 31, 2005 |
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Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2006 and 2005 |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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PART II - OTHER INFORMATION |
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) |
|
September 30, |
|
December 31, |
| ||
|
|
|
|
|
| ||
ASSETS |
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
42,558 |
|
$ |
47,294 |
|
Federal funds sold |
|
|
25,129 |
|
|
6,149 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
67,687 |
|
|
53,443 |
|
Interest-bearing deposits with banks |
|
|
317 |
|
|
751 |
|
Residential mortgage loans held for sale (at fair value) |
|
|
21,111 |
|
|
10,439 |
|
Investments available-for-sale (at fair value) |
|
|
261,645 |
|
|
256,571 |
|
Investments held-to-maturity fair value of $278,415 (2006) and $302,967 (2005) |
|
|
|
|
|
|
|
Other equity securities |
|
|
17,350 |
|
|
15,213 |
|
Total loans and leases |
|
|
1,815,490 |
|
|
1,684,379 |
|
Less: allowance for loan and lease losses |
|
|
(19,433 |
) |
|
(16,886 |
) |
|
|
|
|
|
|
|
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Net loans and leases |
|
|
1,796,057 |
|
|
1,667,493 |
|
Premises and equipment, net |
|
|
45,831 |
|
|
45,385 |
|
Accrued interest receivable |
|
|
15,399 |
|
|
13,144 |
|
Goodwill |
|
|
12,606 |
|
|
12,042 |
|
Other intangible assets |
|
|
11,431 |
|
|
12,218 |
|
Other assets |
|
|
76,881 |
|
|
77,269 |
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|
|
|
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Total assets |
|
$ |
2,598,458 |
|
$ |
2,459,616 |
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LIABILITIES |
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Noninterest-bearing deposits |
|
$ |
416,712 |
|
$ |
439,277 |
|
Interest-bearing deposits |
|
|
1,531,138 |
|
|
1,363,933 |
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|
|
|
|
|
|
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Total deposits |
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|
1,947,850 |
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|
1,803,210 |
|
Short-term borrowings |
|
|
356,563 |
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|
380,220 |
|
Other long-term borrowings |
|
|
1,896 |
|
|
2,158 |
|
Subordinated debentures |
|
|
35,000 |
|
|
35,000 |
|
Accrued interest payable and other liabilities |
|
|
23,456 |
|
|
21,145 |
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|
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|
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Total liabilities |
|
|
2,364,765 |
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|
2,241,733 |
|
COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Common stock par value $1.00; shares authorized 50,000,000; shares issued and outstanding 14,811,974 (2006) and 14,793,987 (2005) |
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Additional paid in capital |
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|
27,349 |
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|
26,599 |
|
Retained earnings |
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|
191,884 |
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177,084 |
|
Accumulated other comprehensive loss |
|
|
(352 |
) |
|
(594 |
) |
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|
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Total stockholders equity |
|
|
233,693 |
|
|
217,883 |
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|
|
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|
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Total liabilities and stockholders equity |
|
$ |
2,598,458 |
|
$ |
2,459,616 |
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See Notes to Consolidated Financial Statements.
1
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
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|
Three Months Ended |
|
Nine Months Ended |
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(In thousands, except per share data) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
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Interest Income: |
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|
|
|
|
|
|
|
|
|
|
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Interest and fees on loans and leases |
|
$ |
32,686 |
|
$ |
24,423 |
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$ |
92,831 |
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$ |
67,875 |
|
Interest on loans held for sale |
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|
222 |
|
|
422 |
|
|
514 |
|
|
812 |
|
Interest on deposits with banks |
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|
4 |
|
|
32 |
|
|
18 |
|
|
58 |
|
Interest and dividends on securities: |
|
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|
|
|
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|
|
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|
|
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Taxable |
|
|
4,090 |
|
|
2,925 |
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|
10,490 |
|
|
9,210 |
|
Exempt from federal income taxes |
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2,839 |
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|
3,275 |
|
|
8,783 |
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|
10,284 |
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Interest on federal funds sold |
|
|
177 |
|
|
314 |
|
|
432 |
|
|
571 |
|
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TOTAL INTEREST INCOME |
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|
40,018 |
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|
31,391 |
|
|
113,068 |
|
|
88,810 |
|
Interest Expense: |
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|
|
|
|
|
|
|
|
|
|
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Interest on deposits |
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|
10,378 |
|
|
5,700 |
|
|
26,846 |
|
|
14,743 |
|
Interest on short-term borrowings |
|
|
4,943 |
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|
2,413 |
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|
13,342 |
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|
6,530 |
|
Interest on long-term borrowings |
|
|
575 |
|
|
752 |
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1,729 |
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|
2,284 |
|
|
|
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TOTAL INTEREST EXPENSE |
|
|
15,896 |
|
|
8,865 |
|
|
41,917 |
|
|
23,557 |
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NET INTEREST INCOME |
|
|
24,122 |
|
|
22,526 |
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|
71,151 |
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|
65,253 |
|
Provision for loan and lease losses |
|
|
550 |
|
|
600 |
|
|
2,545 |
|
|
1,600 |
|
|
|
|
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|
|
|
|
|
|
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|
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES |
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Noninterest Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains |
|
|
0 |
|
|
1,761 |
|
|
1 |
|
|
2,601 |
|
Service charges on deposit accounts |
|
|
1,904 |
|
|
2,050 |
|
|
5,702 |
|
|
5,705 |
|
Gains on sales of mortgage loans |
|
|
718 |
|
|
1,205 |
|
|
2,049 |
|
|
2,825 |
|
Fees on sales of investment products |
|
|
783 |
|
|
473 |
|
|
2,264 |
|
|
1,558 |
|
Trust and investment management fees |
|
|
2,164 |
|
|
1,116 |
|
|
6,476 |
|
|
2,932 |
|
Insurance agency commissions |
|
|
1,406 |
|
|
1,114 |
|
|
5,132 |
|
|
4,149 |
|
Income from bank owned life insurance |
|
|
591 |
|
|
570 |
|
|
1,711 |
|
|
1,684 |
|
Visa check fees |
|
|
603 |
|
|
556 |
|
|
1,750 |
|
|
1,597 |
|
Other income |
|
|
1,421 |
|
|
1,267 |
|
|
3,746 |
|
|
3,954 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST INCOME |
|
|
9,590 |
|
|
10,112 |
|
|
28,831 |
|
|
27,005 |
|
Noninterest Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
12,622 |
|
|
11,373 |
|
|
37,823 |
|
|
34,116 |
|
Occupancy expense of premises |
|
|
2,175 |
|
|
2,099 |
|
|
6,340 |
|
|
5,987 |
|
Equipment expenses |
|
|
1,384 |
|
|
1,415 |
|
|
4,112 |
|
|
4,031 |
|
Marketing |
|
|
1,160 |
|
|
253 |
|
|
1,973 |
|
|
947 |
|
Outside data services |
|
|
872 |
|
|
718 |
|
|
2,486 |
|
|
2,159 |
|
Amortization of intangible assets |
|
|
743 |
|
|
501 |
|
|
2,227 |
|
|
1,502 |
|
Other expenses |
|
|
2,738 |
|
|
2,385 |
|
|
7,917 |
|
|
7,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL NONINTEREST EXPENSES |
|
|
21,694 |
|
|
18,744 |
|
|
62,878 |
|
|
56,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes |
|
|
11,468 |
|
|
13,294 |
|
|
34,559 |
|
|
34,324 |
|
Income Tax Expense |
|
|
3,346 |
|
|
3,827 |
|
|
10,002 |
|
|
9,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
8,122 |
|
$ |
9,467 |
|
$ |
24,557 |
|
$ |
25,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income Per Share |
|
$ |
0.55 |
|
$ |
0.65 |
|
$ |
1.66 |
|
$ |
1.72 |
|
Diluted Net Income Per Share |
|
|
0.55 |
|
|
0.64 |
|
|
1.65 |
|
|
1.70 |
|
Dividends Declared Per Share |
|
|
0.22 |
|
|
0.21 |
|
|
0.66 |
|
|
0.62 |
|
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
Nine Months Ended |
| ||||
|
|
|
| ||||
|
|
2006 |
|
2005 |
| ||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
24,557 |
|
$ |
25,120 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
6,488 |
|
|
5,025 |
|
Provision for loan and lease losses |
|
|
2,545 |
|
|
1,600 |
|
Stock compensation expense |
|
|
461 |
|
|
0 |
|
Deferred income taxes (benefits) |
|
|
1,360 |
|
|
(1,402 |
) |
Origination of loans held for sale |
|
|
(210,617 |
) |
|
(251,021 |
) |
Proceeds from sales of loans held for sale |
|
|
202,062 |
|
|
244,231 |
|
Gains on sales of loans held for sale |
|
|
(2,117 |
) |
|
(2,825 |
) |
Gains on sales of premises and equipment |
|
|
0 |
|
|
(21 |
) |
Securities gains |
|
|
(1 |
) |
|
(2,601 |
) |
Net (increase) in accrued interest receivable |
|
|
(2,255 |
) |
|
(11 |
) |
Net (increase) decrease in other assets |
|
|
(3,919 |
) |
|
2,693 |
|
Net increase in accrued expenses and other liabilities |
|
|
2,054 |
|
|
6,486 |
|
Other net |
|
|
443 |
|
|
803 |
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
21,061 |
|
|
28,077 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Net (increase) decrease in interest-bearing deposits with banks |
|
|
434 |
|
|
(192 |
) |
Proceeds from sale (purchases) of other equity securities |
|
|
(2,137 |
) |
|
1,845 |
|
Purchases of investments available-for-sale |
|
|
(94,984 |
) |
|
(82,245 |
) |
Proceeds from sales of investments available-for-sale |
|
|
0 |
|
|
85,491 |
|
Proceeds from the sales of other real estate owned |
|
|
0 |
|
|
108 |
|
Proceeds from maturities, calls and principal payments of investments held-to-maturity |
|
|
23,206 |
|
|
3,627 |
|
Proceeds from maturities, calls and principal payments of investments available-for-sale |
|
|
90,358 |
|
|
70,887 |
|
Net increase in loans and leases |
|
|
(197,050 |
) |
|
(133,683 |
) |
Purchase of loans and leases |
|
|
(2,148 |
) |
|
0 |
|
Proceeds from sale of loans and leases |
|
|
68,087 |
|
|
0 |
|
Expenditures for premises and equipment |
|
|
(3,854 |
) |
|
(7,010 |
) |
|
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(118,088 |
) |
|
(61,172 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
Net increase in deposits |
|
|
144,640 |
|
|
72,387 |
|
Net increase (decrease) in short-term borrowings |
|
|
(23,919 |
) |
|
7,138 |
|
Retirement of long-term borrowings |
|
|
0 |
|
|
(25,000 |
) |
Common stock purchased and retired |
|
|
(866 |
) |
|
(1,437 |
) |
Proceeds from issuance of common stock |
|
|
1,173 |
|
|
929 |
|
Dividends paid |
|
|
(9,757 |
) |
|
(9,066 |
) |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
111,271 |
|
|
44,951 |
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
14,244 |
|
|
11,856 |
|
Cash and cash equivalents at beginning of period |
|
|
53,443 |
|
|
49,195 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
67,687 |
|
$ |
61,051 |
|
|
|
|
|
|
|
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
Interest payments |
|
$ |
40,866 |
|
$ |
23,434 |
|
Income tax payments |
|
|
7,042 |
|
|
9,185 |
|
Noncash Investing Activities: |
|
|
|
|
|
|
|
Transfers from loans to other real estate owned |
|
|
0 |
|
|
73 |
|
Reclassification of borrowings from long-term to short-term |
|
|
262 |
|
|
40,362 |
|
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(Dollars in thousands, except per share data) |
|
Common |
|
Additional |
|
Retained |
|
Accumulated |
|
Total |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Balances at January 1, 2006 |
|
$ |
14,794 |
|
$ |
26,599 |
|
$ |
177,084 |
|
$ |
(594 |
) |
$ |
217,883 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
24,557 |
|
|
|
|
|
24,557 |
|
Other comprehensive income, net of tax effects and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
242 |
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,799 |
|
Cash dividends - $0.66 per share |
|
|
|
|
|
|
|
|
(9,757 |
) |
|
|
|
|
(9,757 |
) |
Stock compensation expense |
|
|
0 |
|
|
461 |
|
|
|
|
|
|
|
|
461 |
|
Common stock issued pursuant to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director stock purchase plan 2,381 shares |
|
|
3 |
|
|
81 |
|
|
|
|
|
|
|
|
84 |
|
Stock option plan 26,226 shares |
|
|
26 |
|
|
622 |
|
|
|
|
|
|
|
|
648 |
|
Employee stock purchase plan 14,380 shares |
|
|
14 |
|
|
427 |
|
|
|
|
|
|
|
|
441 |
|
Stock repurchases 25,000 shares |
|
|
(25 |
) |
|
(841 |
) |
|
|
|
|
|
|
|
(866 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2006 |
|
$ |
14,812 |
|
$ |
27,349 |
|
$ |
191,884 |
|
$ |
(352 |
) |
$ |
233,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2005 |
|
$ |
14,629 |
|
$ |
21,522 |
|
$ |
156,315 |
|
$ |
2,617 |
|
$ |
195,083 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
25,120 |
|
|
|
|
|
25,120 |
|
Other comprehensive loss, net of tax effects and reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
(2,539 |
) |
|
(2,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,581 |
|
Cash dividends - $0.62 per share |
|
|
|
|
|
|
|
|
(9,066 |
) |
|
|
|
|
(9,066 |
) |
Common stock issued pursuant to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director stock purchase plan- 1,693 shares |
|
|
2 |
|
|
54 |
|
|
|
|
|
|
|
|
56 |
|
Stock option plan 23,486 shares |
|
|
23 |
|
|
437 |
|
|
|
|
|
|
|
|
460 |
|
Employee stock purchase plan 15,507 shares |
|
|
16 |
|
|
397 |
|
|
|
|
|
|
|
|
413 |
|
Stock repurchases- 45,500 shares |
|
|
(46 |
) |
|
(1,391 |
) |
|
|
|
|
|
|
|
(1,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2005 |
|
$ |
14,624 |
|
$ |
21,019 |
|
$ |
172,369 |
|
$ |
78 |
|
$ |
208,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 General
The foregoing financial statements are unaudited. In the opinion of Management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. These statements should be read in conjunction with the financial statements and accompanying notes included in Sandy Spring Bancorps 2005 Annual Report on Form 10-K. There have been no significant changes to the Companys Accounting Policies as disclosed in the 2005 Annual Report on Form 10-K. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2006.
The accounting and reporting policies of Sandy Spring Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Sandy Spring Bank (the Bank), together with its subsidiaries, Sandy Spring Insurance Corporation, The Equipment Leasing Company, and West Financial Services, Inc., conform to accounting principles generally accepted in the United States of America and to general practices within the financial services industry. Certain reclassifications have been made to amounts previously reported to conform to current classifications.
Consolidation has resulted in the elimination of all significant intercompany accounts and transactions.
Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold (which have original maturities of three months or less).
Note 2 Acquisitions
In October 2005, the Company completed the acquisition of West Financial Services, Inc. (WFS) located in McLean, Virginia, an asset management and financial planning company with approximately $621 million in assets under management. Under the terms of the acquisition agreement, the Company purchased WFS with a combination of stock and cash totaling approximately $5.9 million. Additional contingent payments may be made and recorded in 2006, 2007 and 2008 based on the financial results attained by WFS during those periods.
In the transaction, $0.9 million of assets were acquired, primarily accounts receivable, and $1.3 million of liabilities were assumed, primarily operating payables. The acquisition resulted in the recognition of $3.6 million of goodwill, which will not be amortized, and $4.6 million of identified intangible assets which will be amortized on a straight-line basis over periods ranging from 4 to 10 years. This acquisition was considered immaterial and, accordingly, no pro forma results of operations are provided for the pre-acquisition periods.
On September 30, 2006, the Company corrected and restated its purchase price allocation to reflect the deferred tax liability associated principally with the identified intangible assets. This correction and restatement resulted in an increase in goodwill and a reduction in other assets of $1.8 million at September 30, 2006 and December 31, 2005, respectively.
In January 2006, the Company completed the acquisition of Neff & Associates (Neff), an insurance agency located in Ocean City, Maryland. Under the terms of the acquisition agreement, the Company purchased Neff for cash totaling approximately $1.9 million. Additional contingent payments may be made and recorded in 2008 based on the financial results attained by Neff in that year.
In the transaction, $0.3 million of assets were acquired, primarily accounts receivable, and $0.3 million of liabilities were assumed, primarily operating payables. The acquisition resulted in the recognition of $0.5 million of goodwill, which will not be amortized, and $1.4 million of identified intangible assets which will be amortized on a straight-line basis over a period of 5 to 10 years. This acquisition is considered immaterial and, accordingly, no pro forma results of operations are provided for the pre-acquisition periods.
Note 3 - New Accounting Pronouncements
In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods as defined in SFAS No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. The EITF reached a consensus that Bank Owned Life Insurance policies purchased for this purpose do not effectively settle the entitys obligation to the employee in this regard and thus the entity must record compensation cost and a related liability. Entities should recognize the effects of applying this Issue through either, (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or net assets in the balance sheet as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. Management is currently evaluating the impact of adopting this Issue on the Companys financial statements. This Issue is effective for fiscal years beginning after December 15, 2007.
5
In September 2006, the FASB published FASB Statement No. 157, Fair Value Measurements (SFAS No.157 or the Statement). SFAS 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. While the Statement applies under other accounting pronouncements that require or permit fair value measurements, it does not require any new fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In addition, the Statement establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Lastly, SFAS No. 157 requires additional disclosures for each interim and annual period separately for each major category of assets and liabilities. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management does not expect the adoption of this Statement to have a material impact on the Companys consolidated financial statements.
In September 2006, the FASB published FASB Statement No.158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans (SFAS No. 158 or the Statement). The Statement requires an employer that is a business entity and sponsors one or more single-employer defined benefit plans to recognize the funded status of a benefit plan in its balance sheet. The funded status is measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation. For defined benefit pension plans, the benefit obligation is defined as the projected benefit obligation. The statement also requires recognition, as a component of other comprehensive income, net of tax, of the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to FASB Statement No. 87, Employers Accounting for Pensions, or FASB Statement No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions. Amounts recognized in accumulated other comprehensive income, including the gains or losses, prior service costs or credits, and the transition asset or obligation remaining from the initial application of Statements 87 or 106, are adjusted as they are subsequently recognized as components of net periodic benefit cost pursuant to the recognition and amortization provisions of those Statements. Further, SFAS No. 158 requires that an entity measure defined benefit plan assets and obligations as of the date of the employers fiscal year-end statement of financial position (with limited exceptions.)
The Statement also requires disclosure, in the notes to the financial statements, of additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Management is currently evaluating the impact of adopting this Statement on the Companys consolidated financial statements. See Note 6 for additional information concerning this new pronouncement.
In September 2006, the Securities and Exchange Commission (the SEC) released Staff Accounting Bulletin No. 108 (SAB 108), which provides detail in the quantification and correction of financial statement misstatements. SAB 108 specifies that companies should apply a combination of the rollover and iron curtain methodologies when making determinations of materiality. The rollover method quantifies a misstatement based on the amount of the error originating in the current year income statement. The iron curtain approach quantifies misstatements based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, regardless of the year(s) of origination. SAB 108 instructs companies to quantify the misstatement under both methodologies and if either method results in the determination of a material error, then the company must adjust its financial statements to correct the error. SAB 108 also reminds preparers that a change from an accounting principle that is not generally accepted to a principle that is generally accepted is a correction of an error. The Bulletin is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Management does not expect the adoption of this Bulletin to have a material impact on the Companys consolidated financial statements.
Note 4 Stock Based Compensation
In December 2004, the FASB issued SFAS No. 123 (revised), Share-Based Payment (SFAS 123(R)). SFAS 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides services in exchange for the award. Public companies are required to adopt, and the Company has adopted effective January 1, 2006, the new standard using the modified prospective method. Under the modified prospective method, companies are allowed to record compensation cost for new and modified awards over the related vesting period of such awards prospectively, and to record compensation cost prospectively on the nonvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method.
6
Effective January 1, 2006, the Company adopted the provisions of SFAS 123(R) thereby expensing employee stock-based compensation using the fair value method prospectively for all awards granted, modified, settled, or vesting on or after January 1, 2006. The fair value at date of grant of the stock option is estimated using a binomial pricing model based on assumptions noted in the table below. 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 stock option vesting period. The impact of adoption of the fair value based method for expense recognition of employee awards resulted in expense of approximately $0.3 million, net of a tax benefit of approximately $0.1 million, for the nine month period ended September 30, 2006, and $0.1 million, net of a tax benefit of $33 thousand, for the three month period ended September 30, 2006.
At September 30, 2006, the Company had three stock-based compensation plans in existence, the 1992 and 1999 stock option plans (both expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below. Prior to January 1, 2006, the Company, as permitted under SFAS 123, applied the intrinsic value recognition and measurement principles of APB 25, and related interpretations in accounting for its stock-based compensation plans. Therefore, no stock-based employee compensation cost was reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.
The Companys 2005 Omnibus Stock Plan (Omnibus Plan) provides for the granting of non-qualifying stock options to the Companys 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 1,562,762 are available for issuance at September 30, 2006, 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 ten years from the date of grant. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The Stock Option Committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased in exercise of such options. Outstanding options granted under the expired 1992 and 1999 Stock Option Plans will continue until exercise or expiration.
Options awarded prior to December 15, 2005 vest ratably over a two-year period, with one third vesting immediately upon grant. Effective October 19, 2005, the Board of Directors approved the acceleration, by one year, of the vesting of the then outstanding options to purchase approximately 66,000 shares of the Companys common stock granted in December 2004. These included options held by certain members of senior management. This effectively reduced the two-year vesting period on these options to one year. The amount that would have been expensed for such unvested options in 2006 had the Company not accelerated the vesting would have been approximately $0.4 million. Additionally, stock options granted in 2004 have a ten year life. The other terms of the option grants remain unchanged. In December 2005, the Company granted options to employees, officers and directors of approximately 249,061 shares, scheduled to vest over a two-year period. These options expire seven years after the date of grant.
7
Had the compensation cost for the Companys stock-based compensation plan been determined under the fair value-based method, the Companys net income and earnings per share would have been adjusted to the pro forma amounts below for the nine month periods ended September 30, 2006 and 2005 (unaudited):
(In thousands, except per share data) |
|
2006 |
|
2005 |
|
||
|
|
|
|
|
|
||
Net income, as reported |
|
$ |
24,557 |
|
$ |
25,120 |
|
Basic earnings per share |
|
|
1.66 |
|
|
1.72 |
|
Diluted earnings per share |
|
|
1.65 |
|
|
1.70 |
|
Stock-based compensation cost, net of related tax effects |
|
|
373 |
|
|
0 |
|
|
|
|
|
|
|
|
|
Information calculated as if fair value method had been applied to all awards: |
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
24,557 |
|
$ |
25,120 |
|
Add: Stock-based compensation expense recognized during the period, net of related tax effects |
|
|
373 |
|
|
0 |
|
Less: Stock-based compensation expense determined under the fair value-based method, net of tax effects |
|
|
(373 |
) |
|
(849 |
) |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
24,557 |
|
$ |
24,271 |
|
|
|
|
|
|
|
|
|
Pro forma basic earnings per share |
|
$ |
1.66 |
|
$ |
1.66 |
|
|
|
|
|
|
|
|
|
Pro forma diluted earnings per share |
|
$ |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
Had the compensation cost for the Companys stock-based compensation plan been determined under the fair value-based method, the Companys net income and earnings per share would have been adjusted to the pro forma amounts below for the three month periods ended September 30, 2006 and 2005 (unaudited):
(In thousands, except per share data) |
|
2006 |
|
2005 |
| ||
|
|
|
|
|
| ||
Net income, as reported |
|
$ |
8,122 |
|
$ |
9,467 |
|
Basic earnings per share |
|
|
0.55 |
|
|
0.65 |
|
Diluted earnings per share |
|
|
0.55 |
|
|
0.64 |
|
Stock-based compensation cost, net of related tax effects |
|
|
129 |
|
|
0 |
|
|
|
|
|
|
|
|
|
Information calculated as if fair value method had been applied to all awards: |
|
|
|
|
|
|
|
Net income, as reported |
|
$ |
8,122 |
|
$ |
9,467 |
|
Add: Stock-based compensation expense recognized during the period, net of related tax effects |
|
|
129 |
|
|
0 |
|
Less: Stock-based compensation expense determined under the fair value-based method, net of tax effects |
|
|
(129 |
) |
|
(304 |
) |
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
8,122 |
|
$ |
9,163 |
|
|
|
|
|
|
|
|
|
Pro forma basic earnings per share |
|
$ |
0.55 |
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
Pro forma diluted earnings per share |
|
$ |
0.55 |
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
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 (unaudited) as of December 31:
|
|
2005 |
|
2004 |
|
2003 |
|
|
|
|
|
|
|
|
|
Dividend Yield |
|
2.48 |
% |
2.14 |
% |
2.12 |
% |
Weighted average expected volatility |
|
21.27 |
% |
23.70 |
% |
27.93 |
% |
Weighted average risk-free interest rate |
|
4.34 |
% |
4.03 |
% |
3.66 |
% |
Weighted average expected lives (in years) |
|
5 |
|
8 |
|
8 |
|
Weighted average grant-date fair value |
|
6.72 |
|
9.87 |
|
11.95 |
|
The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $0.3 million and $0.3 million, respectively.
No options were granted for the nine month periods ended September 30, 2006 and 2005.
A summary of share option activity for the nine month period ended September 30, 2006 follows:
8
(Dollars in thousands, except per share data): |
|
Number |
|
Weighted |
|
Weighted |
|
Aggregate |
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
(Unaudited) |
|
|
|
|
| ||
Balance at January 1, 2006 |
|
1,004,473 |
|
$ |
33.08 |
|
6.9 |
|
$ |
3,635 |
|
Granted |
|
0 |
|
|
0 |
|
0 |
|
|
|
|
Exercised |
|
(22,476 |
) |
|
23.54 |
|
4.6 |
|
|
|
|
Forfeited or expired |
|
(32,173 |
) |
|
37.43 |
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2006 |
|
949,824 |
|
$ |
33.15 |
|
6.2 |
|
$ |
3,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
792,611 |
|
$ |
32.16 |
|
|
|
$ |
3,812 |
|
A summary of the status of the Companys nonvested options as of September 30, 2006, and changes during the nine month period then ended, is presented below (unaudited):
|
|
Number |
|
Weighted |
| |
|
|
|
|
|
| |
Nonvested at January 1, 2006 |
|
166,017 |
|
$ |
6.72 |
|
Granted |
|
0 |
|
|
0 |
|
Vested |
|
0 |
|
|
0 |
|
Forfeited |
|
(8,804 |
) |
|
6.72 |
|
|
|
|
|
|
|
|
Nonvested at September 30, 2006 |
|
157,213 |
|
|
6.72 |
|
|
|
|
|
|
|
|
The number of options, exercise prices, and fair values has been retroactively restated for all stock dividends occurring since the date the options were granted.
The total of unrecognized compensation cost related to nonvested share-based compensation arrangements was approximately $1.1 million as of December 31, 2005 and $0.7 million as of September 30, 2006. That cost is expected to be recognized over a weighted average period of approximately 1.25 years.
The Company generally issues authorized but previously unissued shares to satisfy option exercises.
Note 5 - Per Share Data
The calculations of net income per common share for the three and nine month periods ended September 30, 2006 and 2005 are as shown in the following table. Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is derived by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of outstanding stock options, the unamortized compensation cost of stock options, and the accumulated tax benefit or shortfall that would be credited or charged to additional paid in capital.
(Dollars and amounts in thousands, except per share data) |
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
8,122 |
|
$ |
9,467 |
|
$ |
24,557 |
|
$ |
25,120 |
|
Average common shares outstanding |
|
|
14,793 |
|
|
14,620 |
|
|
14,795 |
|
|
14,626 |
|
Basic net income per share |
|
$ |
0.55 |
|
$ |
0.65 |
|
$ |
1.66 |
|
$ |
1.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
8,122 |
|
$ |
9,467 |
|
$ |
24,557 |
|
$ |
25,120 |
|
Average common shares outstanding |
|
|
14,793 |
|
|
14,620 |
|
|
14,795 |
|
|
14,626 |
|
Stock option adjustment |
|
|
122 |
|
|
115 |
|
|
125 |
|
|
113 |
|
Average common shares outstandingdiluted |
|
|
14,915 |
|
|
14,735 |
|
|
14,920 |
|
|
14,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.55 |
|
$ |
0.64 |
|
$ |
1.65 |
|
$ |
1.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Options for 581,724 shares and 370,047 shares of common stock were not included in computing diluted net income per share for the nine month periods ended September 30, 2006 and 2005, respectively, because their effects are antidilutive. For the three months ended September 30, 2006 and 2005, options for 573,423 and 365,118 shares of common stock were not included, respectively, for the same reason.
Note 6 - 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 equal the sum of three parts: (a) the benefit accrued as of December 31, 2000, based on the formula of 1.50% of the highest five year average salary as of that date times years of service as of that date, plus (b) 1.75% of each years earnings after December 31, 2000 through December 31, 2005, plus (c) 1.00% of each years earnings after December 31, 2005. In addition, if the participants age plus years of service as of January 1, 2001, equal at least 60 and the participant had at least 15 years of service at that date, he or she will receive an additional benefit of 1.00% of year 2000 earnings for each of the first 10 years of service completed after December 31, 2000. Early retirement is also permitted by the Plan at age 55 after 10 years of service. The plan invests primarily in a diversified portfolio of managed fixed income and equity funds. Contributions provide not only for benefits attributed to service to date, but also for the benefit expected to be earned in the coming years. The Companys funding policy is to contribute at least the minimum amount necessary to keep the plan fully funded when comparing the fair value of plan assets to the accumulated benefit obligation. The Company, with input from its actuaries, estimates that the 2006 contribution will be approximately $1.0 million which will maintain the pension plans fully funded status based on its accumulated benefit obligation.
FASB Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, requires changes to the existing reporting for defined benefit postretirement plans that, among other changes, requires the Company to recognize on its balance sheet the overfunded or underfunded status of the above described defined benefit pension plan measured as the difference between the fair value of plan assets and the projected benefit obligation. Such funding difference would be recorded as an adjustment to the beginning balances of retained earnings and/or other comprehensive income. At December 31, 2005 the projected benefit obligation of the plan exceeded the fair value of plan assets by $2.8 million. This amount may change significantly by December 31, 2006 due to a management decision to change the amount of the 2006 contribution. Management is currently evaluating the impact of adopting this Statement on the Companys consolidated financial statements. See Note 3 for a description of this new accounting pronouncement.
Net periodic benefit cost for the three and nine month periods ended September 30 includes the following components:
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
|
|
| ||||||||
(In thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Service cost for benefits earned |
|
$ |
276 |
|
$ |
406 |
|
$ |
828 |
|
$ |
1,217 |
|
Interest cost on projected benefit obligation |
|
|
307 |
|
|
273 |
|
|
922 |
|
|
819 |
|
Expected return on plan assets |
|
|
(344 |
) |
|
(288 |
) |
|
(1,032 |
) |
|
(862 |
) |
Amortization of prior service cost |
|
|
(43 |
) |
|
(15 |
) |
|
(131 |
) |
|
(47 |
) |
Recognized net actuarial loss |
|
|
112 |
|
|
83 |
|
|
334 |
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
308 |
|
$ |
459 |
|
$ |
921 |
|
$ |
1,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Deferred Profit Sharing Plan
The Company has a qualified Cash and Deferred Profit Sharing Plan that includes a 401(k) provision with a Company match. The profit sharing component is non-contributory and covers all employees after ninety days of service. The 401(k) plan provision is voluntary and also covers all employees after ninety days of service. Employees contributing under the 401(k) provision receive a matching contribution up to 4% of compensation. The Plan permits employees to purchase shares of Sandy Spring Bancorp common stock with their 401(k) contributions, Company match, and other contributions under the Plan. The Company had expenses related to the qualified Cash and Deferred Profit Sharing Plan of $1.1 million and $1.8 million for the nine month periods ended September 30, 2006 and 2005, respectively and $0.3 million and $0.5 million for the three month periods ended September 30, 2006 and 2005, respectively.
10
The Company also has a performance based compensation benefit which is integrated with the Cash and Deferred Profit Sharing Plan and which provides incentives to employees based on the Companys financial results as measured against key performance indicator goals set by management. The Company had expenses related to the performance based compensation benefit of $1.6 million and $1.9 million for the nine month periods ended September 30, 2006 and 2005, respectively and $0.5 million and $0.5 million for the three month periods ended September 30, 2006 and 2005, respectively.
Supplemental Executive Retirement Agreements
The Company has 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 SERAs, if any, are integrated with other pension plan and Social Security retirement benefits expected to be received by the executives. The Company is accruing the present value of these benefits over the remaining years to the executives retirement dates. The Company had expenses related to the SERAs of $0.8 million and $0.4 million for the nine month periods ended September 30, 2006 and 2005, respectively and $0.3 million and $0.1 million for the three month periods ended September 30, 2006 and 2005, respectively.
Executive Health Insurance Plan
The Company has an Executive Health Insurance Plan that provides for payment of defined medical, vision and dental insurance costs and out of pocket expenses for selected executives and their families. Benefits, which are paid during both employment and retirement, are subject to a $6,500 limitation for each executive per year. The Company had expenses related to the Executive Health Insurance Plan of $0.1 million and $0.1 million for the nine month periods ended September 30, 2006 and 2005, respectively and $21 thousand and $0 for the three month periods ended September 30, 2006 and 2005, respectively.
Note 7 Unrealized Losses on Investments
Shown below is information that summarizes the gross unrealized losses and fair value for the Companys available-for-sale and held-to-maturity investment portfolios.
Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position at September 30, 2006 and 2005 are as follows:
(In
thousands) |
|
|
|
Continuous unrealized losses existing for: |
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
Fair Value |
|
Less than 12 |
|
More than 12 |
|
Total Unrealized |
| |||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Agency |
|
$ |
189,163 |
|
$ |
180 |
|
$ |
1,802 |
|
$ |
1,982 |
|
U.S. Treasury Notes |
|
|
595 |
|
|
0 |
|
|
4 |
|
|
4 |
|
Mortgage-backed |
|
|
332 |
|
|
0 |
|
|
5 |
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
190,090 |
|
$ |
180 |
|
$ |
1,811 |
|
$ |
1,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
|
|
Continuous unrealized losses existing for: |
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
Fair Value |
|
Less than 12 |
|
More than 12 |
|
Total Unrealized |
| |||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Agency |
|
$ |
209,765 |
|
$ |
953 |
|
$ |
1,351 |
|
$ |
2,304 |
|
State and municipal |
|
|
595 |
|
|
5 |
|
|
0 |
|
|
5 |
|
Mortgage-backed |
|
|
364 |
|
|
2 |
|
|
4 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
210,724 |
|
$ |
960 |
|
$ |
1,355 |
|
$ |
2,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 100% of the bonds carried in the available-for-sale investment portfolio experiencing continuous losses as of September 30, 2006 and 2005 are rated AAA. The securities representing the unrealized losses in the available-for-sale portfolio as of September 30, 2006 and 2005 all have minimal duration risk (1.37 years in 2006 and 1.41 years in 2005), low credit risk, and minimal loss (approximately 1.04% in 2006 and 1.09% in 2005) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the fact that the Company has both the intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the available-for-sale portfolio are temporary.
11
Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at September 30, 2006 and 2005 are as follows:
(In
thousands) |
|
|
|
Continuous unrealized losses existing for: |
|
|
| ||||||
|
|
|
|
|
|
| |||||||
|
Fair Value |
|
Less than 12 |
|
More than 12 |
|
Total Unrealized |
| |||||
|
|
|
|
|
|
|
|
|
| ||||
U.S. Agency |
|
$ |
33,656 |
|
$ |
0 |
|
$ |
750 |
|
$ |
750 |
|
State and municipal |
|
|
14,490 |
|
|
5 |
|
|
101 |
|
|
106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
48,146 |
|
$ |
5 |
|
$ |
851 |
|
$ |
856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In
thousands) |
|
|
|
Continuous unrealized losses existing for: |
|
|
|
||||||
|
|
|
|
|
|
|
|||||||
|
Fair Value |
|
Less
than 12 |
|
More
than 12 |
|
Total
Unrealized |
|
|||||
|
|
|
|
|
|
|
|
|
|
||||
U.S. Agency |
|
$ |
34,021 |
|
$ |
375 |
|
$ |
0 |
|
$ |
375 |
|
State and municipal |
|
|
16,376 |
|
|
17 |
|
|
121 |
|
|
138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
50,397 |
|
$ |
392 |
|
$ |
121 |
|
$ |
513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 87% and 97% of the bonds carried in the held-to-maturity investment portfolio experiencing continuous unrealized losses as of September 30, 2006 and 2005, respectively, are rated AAA and 13% and 3% as of September 30, 2006 and 2005, respectively, are rated AA1. The securities representing the unrealized losses in the held-to-maturity portfolio all have modest duration risk (4.53 years in 2006 and 3.98 years in 2005), low credit risk, and minimal losses (approximately 1.75% in 2006 and 1.01% in 2005) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the Companys intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the held-to-maturity portfolio are temporary.
Note 8 - Segment Reporting
The Company operates in four operating segmentsCommunity Banking, Insurance, Leasing, and Investment Management. Only Community Banking currently 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 are businesses that were acquired in separate transactions where management at the time of acquisition was retained. The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements. However, the segment data reflect intersegment transactions and balances.
The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products to both individuals and businesses. Parent company income is included in the Community Banking segment, as the majority of parent company activities are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income, fees on sales of investment products and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment and other expenses. Included in Community Banking expenses are noncash charges associated with amortization of intangibles related to acquired entities totaling $0.4 million and $0.4 million for the three month periods ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, the amortization related to acquired entities totaled $1.3 million and $1.3 million, respectively.
The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank, and offers annuities as an alternative to traditional deposit accounts. In addition, Sandy Spring Insurance Corporation operates the Chesapeake Insurance Group and Wolfe and Reichelt Insurance Agency, general insurance agencies located in Annapolis, Maryland, and Neff & Associates, located in Ocean City, Maryland. Major sources of revenue are insurance commissions from commercial lines and personal lines. Expenses include personnel and support charges. Included in insurance expenses are non-cash charges associated with amortization of intangibles totaling $0.1 million and $54 thousand for the three month periods ended September 30, 2006 and 2005, respectively. For the nine month periods ending September 30, 2006 and 2005, the expense related to the amortization of intangibles totaled $0.3 million and $0.1 million, respectively.
12
The Leasing segment is conducted through The Equipment Leasing Company, located in Sparks, Maryland, a subsidiary of the Bank that provides leases for such items as computers, telecommunications systems and equipment, medical equipment and point-of-sale systems for retail businesses. Equipment leasing is conducted through vendors located primarily in states along the east coast from New Jersey to Florida and in Illinois. The typical lease is a small ticket by industry standards, averaging less than $30,000, with individual leases generally not exceeding $500,000. Major revenue sources include interest income. Expenses include personnel and support charges.
The Investment Management segment is conducted through West Financial Services, Inc., a subsidiary of the Bank that was acquired in October 2005. This asset management and financial planning firm, located in McLean, Virginia, provides comprehensive financial planning to individuals, families, small businesses and associations including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial has approximately $621.0 million in assets under management as of September 30, 2006. Major revenue sources include noninterest income earned on the above services. Expenses include personnel and support charges. Included in investment management expenses are non-cash charges associated with amortization of intangibles totaling $0.2 million for the three months ended September 30, 2006 and $0.6 million for the nine months ended September 30, 2006.
Information about operating segments and reconciliation of such information to the consolidated financial statements follows:
(In thousands) |
|
Community |
|
Insurance |
|
Leasing |
|
Investment |
|
Inter-Segment |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Quarter ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
39,651 |
|
$ |
18 |
|
$ |
592 |
|
$ |
8 |
|
$ |
(251 |
) |
$ |
40,018 |
|
Interest expense |
|
|
15,922 |
|
|
0 |
|
|
225 |
|
|
0 |
|
|
(251 |
) |
|
15,896 |
|
Provision for loan and lease losses |
|
|
550 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
550 |
|
Noninterest income |
|
|
6,878 |
|
|
1,715 |
|
|
156 |
|
|
1,047 |
|
|
(206 |
) |
|
9,590 |
|
Noninterest expenses |
|
|
19,374 |
|
|
1,417 |
|
|
252 |
|
|
857 |
|
|
(206 |
) |
|
21,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,683 |
|
|
316 |
|
|
271 |
|
|
198 |
|
|
0 |
|
|
11,468 |
|
Income tax expense |
|
|
3,036 |
|
|
125 |
|
|
108 |
|
|
77 |
|
|
0 |
|
|
3,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,647 |
|
$ |
191 |
|
$ |
163 |
|
$ |
121 |
|
$ |
0 |
|
$ |
8,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,595,057 |
|
$ |
12,777 |
|
$ |
31,943 |
|
$ |
7,625 |
|
$ |
(48,944 |
) |
$ |
2,598,458 |
|
Quarter ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
31,062 |
|
$ |
12 |
|
$ |
472 |
|
$ |
0 |
|
$ |
(155 |
) |
$ |
31,391 |
|
Interest expense |
|
|
8,877 |
|
|
0 |
|
|
143 |
|
|
0 |
|
|
(155 |
) |
|
8,865 |
|
Provision for loan and lease losses |
|
|
600 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
600 |
|
Noninterest income |
|
|
8,819 |
|
|
1,220 |
|
|
233 |
|
|
0 |
|
|
(160 |
) |
|
10,112 |
|
Noninterest expenses |
|
|
17,503 |
|
|
1,151 |
|
|
250 |
|
|
0 |
|
|
(160 |
) |
|
18,744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
12,901 |
|
|
81 |
|
|
312 |
|
|
0 |
|
|
0 |
|
|
13,294 |
|
Income tax expense |
|
|
3,671 |
|
|
32 |
|
|
124 |
|
|
0 |
|
|
0 |
|
|
3,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,230 |
|
$ |
49 |
|
$ |
188 |
|
$ |
0 |
|
$ |
0 |
|
$ |
9,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,382,801 |
|
$ |
9,669 |
|
$ |
25,051 |
|
$ |
0 |
|
$ |
(34,161 |
) |
$ |
2,383,360 |
|
13
(In thousands) |
|
Community |
|
Insurance |
|
Leasing |
|
Investment |
|
Inter-Segment |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Year to Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
111,983 |
|
$ |
48 |
|
$ |
1,649 |
|
$ |
15 |
|
$ |
(627 |
) |
$ |
113,068 |
|
Interest expense |
|
|
41,978 |
|
|
0 |
|
|
565 |
|
|
1 |
|
|
(627 |
) |
|
41,917 |
|
Provision for loan and lease losses |
|
|
2,545 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
2,545 |
|
Noninterest income |
|
|
19,871 |
|
|
5,839 |
|
|
670 |
|
|
3,062 |
|
|
(611 |
) |
|
28,831 |
|
Noninterest expenses |
|
|
55,870 |
|
|
4,255 |
|
|
727 |
|
|
2,637 |
|
|
(611 |
) |
|
62,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
31,461 |
|
|
1,632 |
|
|
1,027 |
|
|
439 |
|
|
0 |
|
|
34,559 |
|
Income tax expense |
|
|
8,777 |
|
|
646 |
|
|
406 |
|
|
173 |
|
|
0 |
|
|
10,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
22,684 |
|
$ |
986 |
|
$ |
621 |
|
$ |
266 |
|
$ |
0 |
|
$ |
24,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,595,057 |
|
$ |
12,777 |
|
$ |
31,943 |
|
$ |
7,625 |
|
$ |
(48,944 |
) |
$ |
2,598,458 |
|
Year to Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
87,844 |
|
$ |
25 |
|
$ |
1,324 |
|
$ |
0 |
|
$ |
(383 |
) |
$ |
88,810 |
|
Interest expense |
|
|
23,582 |
|
|
0 |
|
|
358 |
|
|
0 |
|
|
(383 |
) |
|
23,557 |
|
Provision for loan and lease losses |
|
|
1,600 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
1,600 |
|
Noninterest income |
|
|
22,152 |
|
|
4,564 |
|
|
817 |
|
|
0 |
|
|
(528 |
) |
|
27,005 |
|
Noninterest expenses |
|
|
52,793 |
|
|
3,405 |
|
|
664 |
|
|
0 |
|
|
(528 |
) |
|
56,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
32,021 |
|
|
1,184 |
|
|
1,119 |
|
|
0 |
|
|
0 |
|
|
34,324 |
|
Income tax expense |
|
|
8,292 |
|
|
469 |
|
|
443 |
|
|
0 |
|
|
0 |
|
|
9,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,729 |
|
$ |
715 |
|
$ |
676 |
|
$ |
0 |
|
$ |
0 |
|
$ |
25,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,382,801 |
|
$ |
9,669 |
|
$ |
25,051 |
|
$ |
0 |
|
$ |
(34,161 |
) |
$ |
2,383,360 |
|
Note 9 Comprehensive Income
The components of total comprehensive income for the three and nine month periods ended September 30, 2006 and 2005 are as follows:
|
|
For the three months ended September 30, |
| ||||||||||||
|
|
|
| ||||||||||||
|
|
2006 |
|
2005 |
| ||||||||||
|
|
|
|
|
| ||||||||||
(In thousands) |
|
Pretax |
|
Tax |
|
Net |
|
Pretax |
|
Tax |
|
Net |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net Income |
|
|
|
|
|
$ |
8,122 |
|
|
|
|
|
$ |
9,467 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains arising during the period |
|
2,111 |
|
(834 |
) |
|
1,277 |
|
(1,243 |
) |
492 |
|
|
(751 |
) |
Reclassification adjustment for (gains) losses included in net income |
|
0 |
|
0 |
|
|
0 |
|
(1,761 |
) |
696 |
|
|
(1,065 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in other comprehensive income |
|
2,111 |
|
(834 |
) |
|
1,277 |
|
(3,004 |
) |
1,188 |
|
|
(1,816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
$ |
9,399 |
|
|
|
|
|
$ |
7,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
For the nine months ended September 30, |
| ||||||||||||
|
|
|
| ||||||||||||
|
|
2006 |
|
2005 |
| ||||||||||
|
|
|
|
|
| ||||||||||
(In thousands) |
|
Pretax |
|
Tax |
|
Net |
|
Pretax |
|
Tax |
|
Net |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net Income |
|
|
|
|
|
$ |
24,557 |
|
|
|
|
|
$ |
25,120 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains arising during the period |
|
402 |
|
(159 |
) |
|
243 |
|
(1,599 |
) |
632 |
|
|
(967 |
) |
Reclassification adjustment for (gains) losses included in net income |
|
(1 |
) |
0 |
|
|
(1 |
) |
(2,601 |
) |
1,029 |
|
|
(1,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in other comprehensive income |
|
401 |
|
(159 |
) |
|
242 |
|
(4,200 |
) |
1,661 |
|
|
(2,539 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
$ |
24,799 |
|
|
|
|
|
$ |
22,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10 Subsequent Event
On October 10, 2006, the Company entered into a merger agreement to acquire Potomac Bank of Virginia (Potomac). Potomac, with assets of $254 million as of September 30, 2006, is a commercial bank headquartered in Fairfax, Virginia with four full-service branches located in Fairfax, Vienna, and Chantilly, Virginia.
Under the terms of the agreement, each outstanding share of Potomacs common stock will be converted into either $21.75 in cash or 0.6143 of a share of the Companys common stock. Each shareholder of Potomac will be entitled to elect the number of shares of Potomac common stock to be exchanged for cash or shares of the Companys common stock, subject to a proration which will provide that 50% of the outstanding shares of Potomac common stock will receive cash and 50% will receive shares of the Companys common stock.
The acquisition is subject to approval by both the Potomac shareholders and applicable bank regulatory authorities and is expected to be completed during the first quarter of 2007. As a result of the acquisition, Potomac will become a newly-formed division of Sandy Spring Bank.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Sandy Spring Bancorp makes forward-looking statements in the Managements Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements include: statements of goals, intentions, earnings expectations, and other expectations; estimates of risks and of future costs and benefits; assessments of probable loan and lease losses; assessments of market risk; and statements of the ability to achieve financial and other goals. These forward-looking statements are subject to significant uncertainties because they are based upon or are affected by: managements estimates and projections of future interest rates, market behavior, and other economic conditions; future laws and regulations; and a variety of other matters which, by their nature, are subject to significant uncertainties. Because of these uncertainties, the Companys actual future results may differ materially from those indicated. In addition, the Companys past results of operations do not necessarily indicate its future results.
THE COMPANY
The Company is the registered bank holding company for Sandy Spring Bank (the Bank), headquartered in Olney, Maryland. The Bank operates thirty-two community offices in Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince Georges Counties in Maryland, together with an insurance subsidiary, an equipment leasing company and an investment management company in McLean, Virginia.
The Company offers a broad range of financial services to consumers and businesses in this market area. Through September 30, 2006, year-to-date average commercial loans and leases and commercial real estate loans accounted for approximately 47% of the Companys loan and lease portfolio, and year-to-date average consumer and residential real estate loans accounted for approximately 53%. The Company has established a strategy of independence, and intends to establish or acquire additional offices, banking organizations, and non-banking organizations as appropriate opportunities may arise.
15
CRITICAL ACCOUNTING POLICIES
The Companys 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 could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The estimates used in managements assessment of the adequacy of the allowance for loan and lease losses require that management make assumptions about matters that are uncertain at the time of estimation. Differences in these assumptions and differences between the estimated and actual losses could have a material effect.
Non-GAAP Financial Measure
The Company has for many years used a traditional efficiency ratio that is a non-GAAP financial measure as defined in Securities and Exchange Commission Regulation G and Item 10 of Commission Regulation S-K. This traditional efficiency ratio is used as a measure of operating expense control and efficiency of operations. Management believes that its traditional ratio better focuses attention on the operating performance of the Company over time than does a GAAP-based ratio, and that it is highly useful in comparing period-to-period operating performance of the Companys core business operations. It is used by management as part of its assessment of its performance in managing noninterest expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the traditional efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.
In general, the efficiency ratio is noninterest expenses as a percentage of net interest income plus total noninterest income. This is a GAAP financial measure. Noninterest expenses used in the calculation of the traditional, non-GAAP efficiency ratio exclude intangible asset amortization. Income for the traditional ratio is increased for the favorable effect of tax-exempt income, and excludes securities gains and losses, which can vary widely from period to period without appreciably affecting operating expenses. The traditional measure is different from the GAAP-based efficiency ratio. The GAAP-based measure is calculated using noninterest expense and income amounts as shown on the face of the Consolidated Statements of Income. The traditional and GAAP-based efficiency ratios are presented and reconciled in Table 1.
Table 1 GAAP based and traditional efficiency ratios
|
|
Three
Months Ended |
|
Nine
Months Ended |
|
||||||||
|
|
|
|
|
|
||||||||
(Dollars in thousands) |
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Noninterest expensesGAAP based |
|
$ |
21,694 |
|
$ |
18,744 |
|
$ |
62,878 |
|
$ |
56,334 |
|
Net interest income plus noninterest incomeGAAP based |
|
|
33,712 |
|
|
32,638 |
|
|
99,982 |
|
|
92,258 |
|
Efficiency ratioGAAP based |
|
|
64.35 |
% |
|
57.43 |
% |
|
62.89 |
% |
|
61.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expensesGAAP based |
|
$ |
21,694 |
|
$ |
18,744 |
|
$ |
62,878 |
|
$ |
56,334 |
|
Less non-GAAP adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
743 |
|
|
501 |
|
|
2,227 |
|
|
1,502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expensestraditional ratio |
|
|
20,951 |
|
|
18,243 |
|
|
60,651 |
|
|
54,832 |
|
Net interest income plus noninterest incomeGAAP based |
|
|
33,712 |
|
|
32,638 |
|
|
99,982 |
|
|
92,258 |
|
Plus non-GAAP adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-equivalency |
|
|
1,677 |
|
|
1,853 |
|
|
4,618 |
|
|
5,328 |
|
Less non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
|
0 |
|
|
1,761 |
|
|
1 |
|
|
2,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income plus noninterest Income traditional ratio |
|
|
35,389 |
|
|
32,730 |
|
|
104,599 |
|
|
94,985 |
|
Efficiency ratio traditional |
|
|
59.20 |
% |
|
55.74 |
% |
|
57.98 |
% |
|
57.73 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
A. FINANCIAL CONDITION
The Companys total assets were $2.6 billion at September 30, 2006, increasing $138.8 million or 6% during the first nine months of 2006. Earning assets increased by 6% or $144.0 million in the first nine months of 2006 to $2.4 billion at September 30, 2006.
Total loans and leases, excluding loans held for sale, increased 8% or $131.1 million during the first nine months of 2006, to $1.8 billion despite the sale of $68.6 million in mortgage loans. The Company sold lower yielding residential mortgage loans to fund commercial loan growth. During this period, commercial loans and leases increased by $114.4 million or 15%, attributable primarily to commercial loans and leases (up 10%) and commercial mortgage loans (up 21%.) Consumer loans increased by $13.5 million or 4%, primarily due to a 51% increase in home equity loans. Residential real estate loans grew by $3.2 million or 1% despite the loan sale mentioned above. Residential mortgage loans held for sale increased by $10.7 million from December 31, 2005, to $21.1 million at September 30, 2006.
Table 2 Analysis of Loans and Leases
The following table presents the trends in the composition of the loan and lease portfolio at the dates indicated:
(In thousands) |
|
September 30, 2006 |
|
% |
|
December 31, 2005 |
|
% |
| ||
|
|
|
|
|
|
|
|
|
| ||
Residential real estate |
|
$ |
571,878 |
|
32 |
% |
$ |
568,703 |
|
34 |
% |
Commercial loans and leases |
|
|
894,819 |
|
49 |
|
|
780,427 |
|
46 |
|
Consumer |
|
|
348,793 |
|
19 |
|
|
335,249 |
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans and Leases |
|
|
1,815,490 |
|
100 |
% |
|
1,684,379 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for credit losses |
|
|
(19,433 |
) |
|
|
|
(16,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
$ |
1,796,057 |
|
|
|
$ |
1,667,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain loan terms may create concentrations of credit risk and increase the lenders 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 (LTV); loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans. The Company does not make loans that provide for negative amortization. The Company originates option adjustable-rate mortgages infrequently and sells all of them in the secondary market. At September 30, 2006, the Company had a total of $51.1 million in residential real estate loans and $2.3 million in consumer loans with a LTV greater than 90%. Commercial loans, with a LTV greater than 75% to 85% depending on the type of loan, totaled $25.7 million at September 30, 2006. Interest only loans at September 30, 2006 include almost all of the $198.9 million outstanding under the Companys equity lines of credit, (included in the consumer loan portfolio) and $66.5 million in other loans. The aggregate of these loan concentrations was $344.5 million at September 30, 2006, which represented 19% of total loans and leases outstanding at that date. The Company is of the opinion that its loan underwriting procedures are structured to adequately assess any additional risk that the above types of loans might present.
17
The total investment portfolio decreased by 3% or $16.3 million from December 31, 2005, to $551.1 million at September 30, 2006. The decrease was driven by a decline of $23.5 million or 8% in held-to-maturity securities, offset by an increase of $5.1 million or 2% in available-for-sale securities and $2.1 million or 14% in other equity securities. The aggregate of federal funds sold and interest-bearing deposits with banks increased by $18.5 million during the first nine months of 2006, reaching $25.4 million at September 30, 2006.
Table 3 Analysis of Deposits
The following table presents the trends in the composition of deposits at the dates indicated:
(In thousands) |
|
September 30, 2006 |
|
% |
|
December 31, 2005 |
|
% |
| ||
|
|
|
|
|
|
|
|
|
| ||
Noninterest-bearing deposits |
|
$ |
416,712 |
|
21 |
% |
$ |
439,277 |
|
24 |
% |
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
|
213,180 |
|
11 |
|
|
245,428 |
|
14 |
|
Money market savings |
|
|
479,426 |
|
25 |
|
|
369,555 |
|
20 |
|
Regular savings |
|
|
168,332 |
|
9 |
|
|
208,496 |
|
12 |
|
Time deposits less than $100,000 |
|
|
393,811 |
|
20 |
|
|
299,854 |
|
17 |
|
Time deposits $100,000 or more |
|
|
276,389 |
|
14 |
|
|
240,600 |
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing |
|
|
1,531,138 |
|
79 |
|
|
1,363,933 |
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,947,850 |
|
100 |
% |
$ |
1,803,210 |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits were $1.9 billion at September 30, 2006, increasing $144.6 million or 8% from December 31, 2005. During the first nine months of 2006, growth rates of 31% were achieved for time deposits of less than $100,000 (up $94.0 million), 15% for time deposits of $100,000 or more (up $35.8 million), and 30% for money market deposits (up $109.9 million.) This increase in money market deposits was