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SASR > SEC Filings for SASR > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for SANDY SPRING BANCORP INC

Form 10-Q for SANDY SPRING BANCORP INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company

Sandy Spring Bancorp, Inc. (the "Company") is the 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 46 community offices located in Anne Arundel, Carroll, Frederick, Howard, Montgomery and Prince George's counties in Maryland, and Arlington, 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.

Overview

Net income for the Company for the first quarter of 2014 totaled $10.9 million ($0.43 per diluted share) as compared to net income of $10.6 million ($0.42 per diluted share) for the first quarter of 2013. These results reflect the following events:

Average total loans for the first quarter of 2014 increased 8% compared to the first quarter of 2013 due primarily to organic growth in the residential mortgage and commercial investor real estate portfolios.

The net interest margin was 3.47% for the first quarter of 2014, compared to 3.59% for the first quarter of 2013 and 3.53% for the fourth quarter of 2013. The decline was the result of declining loan yields during the past twelve months, primarily in the commercial loan portfolio.

The provision for loan and lease losses was a credit of $1.0 million for the first quarter of 2014 compared to a charge of $0.1 million for the first quarter of 2013 and $0.6 million for the fourth quarter of 2013. The decrease in the provision for the first quarter of 2014 compared to the prior year quarter was due primarily to decreases in historical losses and improved credit metrics that more than offset the effect of loan growth during the quarter.

Non-interest income decreased $1.2 million or 9% for the first quarter of 2014 compared to the first quarter of 2013 due largely to a decrease in mortgage banking activities due to a lower volume of refinancing activity. This decrease was partially offset by a 10% increase in wealth management income due to higher assets under management and a 22% increase in insurance agency commissions.

Non-performing loans decreased to $38.7 million at March 31, 2014 compared to $49.5 million at March 31, 2013. The coverage ratio of the allowance for loan and lease losses to non-performing loans was 98% at March 31, 2014 compared to a coverage ratio of 83% at March 31, 2013.

In the first quarter of 2014, the Mid-Atlantic region continued to experience slow but steady economic improvement. Concerns over a sluggish national economy and the unemployment rate continued to impede both the regional and national economic outlook. While the housing markets have improved, this sector is still significantly below levels experienced in prior economic recoveries due in part to higher long-term interest rates. The positive trends in housing and consumer spending have been offset by concerns over the long-term effects of the Affordable Care Act and stubbornly high unemployment. This has caused uncertainty on the part of both large and small businesses and has thus limited economic expansion. The effect of geopolitical events in Europe and the Ukraine together with declining economic indicators in China continue to provide underlying volatility. Together with state and municipal budget challenges across the country, these factors have caused enough economic uncertainty, particularly among individual consumers and small and medium-sized businesses, to suppress confidence and thus constrain the pace of economic growth and lending. Despite this challenging business environment, the Company has emphasized the fundamentals of community banking as it has maintained strong levels of liquidity and capital while overall credit quality has continued to improve.

The net interest margin decreased to 3.47% in the first quarter of 2014 compared to 3.59% for the first quarter of 2013. During 2014, lower rates on average interest-earning assets and a slowing decline in funding costs served to offset the effect of loan growth. Average loans increased 8% for the first quarter of 2014 compared to the prior year quarter, while average total deposits increased 1% compared to 2013.

Liquidity remained strong due to the borrowing lines with the Federal Home Loan Bank of Atlanta and the Federal Reserve and the size and composition of the investment portfolio.

The Company's credit quality continued to improve as non-performing assets decreased to $40.3 million at March 31, 2014 from $54.7 million at March 31, 2013. This decrease was due primarily to a combination of the Company's continuing efforts at resolution of non-performing loans and reduced migration of existing loans into non-performing status, particularly in the commercial real estate portfolio. Non-performing assets represented 0.97% of total assets at March 31, 2014 compared to 1.39% at March 31, 2013. The ratio of net charge-offs to average loans and leases was (0.04)% for the first quarter of 2014, compared to 0.28% for the prior year quarter.

Non-interest income decreased 9% in the first quarter of 2014 compared to the first quarter of 2013. This decline was driven by a significant decrease in mortgage banking income due primarily to lower mortgage origination volumes. This was partially offset by a 10% increase in wealth management income due to growth in assets under management and a 22% increase in insurance agency commissions as a result of growth in revenue due primarily to higher annual contingency commissions based on annual policy performance. In addition, other non-interest income decreased 29% in the first quarter of 2014 compared to the prior year quarter. This decrease was due to sales and dispositions of loans and fixed assets together with a non-recurring legal settlement, all of which occurred in the first quarter of 2013. Service charges on deposits decreased 5% due to lower overdraft fees.

Non-interest expenses decreased 1% in the first quarter of 2014 compared to the first quarter of 2013 as legal fees associated with loan workouts declined significantly compared to the prior year period. This decrease was offset by higher occupancy expenses due to weather-related costs.

Total assets at March 31, 2014 increased 2% compared to December 31, 2013 primarily due to organic loan growth in the first quarter which was funded by a 3% increase in deposits. Loan balances increased 2% compared to the prior year end due primarily to increases of 5% in residential mortgage and construction loans and 2% in consumer loans. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 3% compared to balances at December 31, 2013. The increase in customer funding sources was driven primarily by a combined increase of 5% in interest-bearing and noninterest-bearing checking accounts together with increases of 5% in regular savings accounts and 25% in retail repurchase agreements. The Company continued to manage its net interest margin, primarily by managing rates on certificates of deposit and by utilizing short-term FHLB borrowings during this extended period of historically low interest rates. During the same period, stockholders' equity increased $11 million due to net income in the first quarter of 2014.

Consolidated Average Balances, Yields and Rates



                                                                                  Three Months Ended March 31,
                                                                       2014                                          2013
                                                                                   Annualized                                    Annualized
                                                       Average          (1)          Average         Average          (1)          Average
(Dollars in thousands and tax-equivalent)             Balances       Interest      Yield/Rate       Balances       Interest      Yield/Rate
Assets
Residential mortgage loans (2)                       $   633,160     $   5,506            3.48 %   $   575,889     $   5,376            3.73 %
Residential construction loans                           134,261         1,254            3.79         120,283         1,004            3.38
Commercial ADC loans                                     162,544         2,073            5.17         148,749         1,996            5.44
Commercial investor real estate loans                    557,168         6,733            4.90         474,062         6,135            5.25
Commercial owner occupied real estate loans              584,155         7,067            5.08         567,723         7,801            5.71
Commercial business loans                                349,734         4,037            4.64         347,569         4,586            5.21
Leasing                                                      567             6            4.53           2,510            38            6.07
Consumer loans                                           377,822         3,117            3.37         357,366         3,063            3.51
Total loans and leases (3)                             2,799,411        29,793            4.34       2,594,151        29,999            4.71
Taxable securities                                       710,246         4,452            2.51         754,112         4,305            2.28
Tax-exempt securities (4)                                302,455         3,267            4.32         297,657         3,267            4.39
Interest-bearing deposits with banks                      32,925            20            0.25          31,050            19            0.25
Federal funds sold                                           476             -            0.22             474             -            0.22
Total interest-earning assets                          3,845,513        37,532            3.96       3,677,444        37,590            4.13

Less: allowance for loan and lease losses                (39,393 )                                     (43,705 )
Cash and due from banks                                   45,553                                        46,888
Premises and equipment, net                               45,879                                        48,167
Other assets                                             207,662                                       217,784
Total assets                                         $ 4,105,214                                   $ 3,946,578

Liabilities and Stockholders' Equity
Interest-bearing demand deposits                     $   460,245            92            0.08 %   $   423,485            92            0.09 %
Regular savings deposits                                 249,185            48            0.08         234,492            48            0.08
Money market savings deposits                            877,864           273            0.13         892,343           411            0.19
Time deposits                                            463,379           771            0.67         512,205           904            0.72
Total interest-bearing deposits                        2,050,673         1,184            0.23       2,062,525         1,455            0.29
Other borrowings                                          62,864            38            0.24          65,601            49            0.30
Advances from FHLB                                       600,922         3,218            2.17         468,072         3,223            2.79
Subordinated debentures                                   35,000           218            2.49          35,000           226            2.58
Total interest-bearing liabilities                     2,749,459         4,658            0.69       2,631,198         4,953            0.76

Noninterest-bearing demand deposits                      825,968                                       797,926
Other liabilities                                         25,936                                        33,790
Stockholders' equity                                     503,851                                       483,664
Total liabilities and stockholders' equity           $ 4,105,214                                   $ 3,946,578

Net interest income and spread                                       $  32,874            3.27 %                   $  32,637            3.37 %
Less: tax-equivalent adjustment                                          1,282                                         1,311
Net interest income                                                  $  31,592                                     $  31,326

Interest income/earning assets                                                            3.96 %                                        4.13 %
Interest expense/earning assets                                                           0.49                                          0.54
Net interest margin                                                                       3.47 %                                        3.59 %

(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 39.88% for 2014 and 2013. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.3 million and $1.3 million in 2014 and 2013, respectively.

(2) Includes residential mortgage loans held for sale. Home equity loans and lines are classified as consumer loans.

(3) Non-accrual loans are included in the average balances.

(4) Includes only investments that are exempt from federal taxes.

Results of Operations

For the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Net income for the Company for the first three months of 2014 totaled $10.9 million ($0.43 per diluted share) compared to net income of $10.6 million ($0.42 per diluted share) for the first three months of 2013.

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. 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. The following discussion of net interest income should be considered in conjunction with the review of the information provided in the preceding table.

Net interest income for the first three months of 2014 was $31.6 million compared to $31.3 million for the first three months of 2013. On a tax-equivalent basis, net interest income for the first quarter of 2014 was $32.9 million compared to $32.6 million for the first quarter of 2013, an increase of 1%. The preceding table provides an analysis of net interest income performance that reflects a net interest margin that decreased to 3.47% for the first three months of 2014 compared to 3.59% for the first three months of 2013. Average interest-earning assets increased by 5% while average interest-bearing liabilities increased 4% in the first quarter of 2014. Average noninterest-bearing deposits increased 4% in the first three months of 2014 while the percentage of average noninterest-bearing deposits to total deposits remained essentially stable at 29% for the first three months of 2014 compared to 28% for the first three months of 2013.The decrease in the net interest margin was caused by the effect of lower rates on interest-earning assets that exceeded the benefit of lower rates on interest-bearing deposits and borrowings.

Effect of Volume and Rate Changes on Net Interest Income

The following table analyzes the reasons for the changes from year-to-year in
the principal elements that comprise net interest income:



                                                                       2014 vs. 2013                                          2013 vs. 2012
                                                       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                                     $       (206 )   $      2,300       $       (2,506 )   $      2,721     $      3,475       $         (754 )
Securities                                                    147             (283 )                430           (1,120 )           (270 )               (850 )
Other earning assets                                            1                1                    -               (2 )             (1 )                 (1 )
Total interest income                                         (58 )          2,018               (2,076 )          1,599            3,204               (1,605 )

Interest expense on funding of earning assets:
Interest-bearing demand deposits                                -                8                   (8 )              5               13                   (8 )
Regular savings deposits                                        -                3                   (3 )              2                7                   (5 )
Money market savings deposits                                (138 )             (7 )               (131 )           (101 )             18                 (119 )
Time deposits                                                (133 )            (84 )                (49 )           (464 )           (147 )               (317 )
Total borrowings                                              (24 )            717                 (741 )           (399 )            313                 (712 )
Total interest expense                                       (295 )            637                 (932 )           (957 )            204               (1,161 )
Net interest income                                  $        237     $      1,381       $       (1,144 )   $      2,556     $      3,000       $         (444 )

* 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 total tax-equivalent interest income for the first quarter of 2014 remained level compared to the prior year quarter. The previous table shows that, in 2014, the increase in average loans and leases was offset by a continued decline in earning asset yields with respect to the loan portfolio.

In the first three months of 2014, the average balance of the loan portfolio increased 8% compared to the prior year period. This growth was primarily in the commercial investor real estate, residential mortgage and consumer loan portfolios. These increases were driven by organic loan growth as the regional economy improved. The yield on average loans and leases decreased by 37 basis points due to the continued prevailing low interest rate environment as relatively higher rate loans were paid off and new loans were originated at comparatively lower rates. The decline in the portfolio yield was driven primarily by a decrease of 25 basis points in the yield in the residential mortgage portfolio, a decrease of 49 basis points in the commercial loan portfolio and a decrease of 14 basis points in the yield on the overall consumer loan portfolio. The decrease in the yield on the mortgage loan portfolio was due to declining rates on both new and existing adjustable rate mortgage loans, which the Company does not sell but maintains in the portfolio, while the decline in the yield on the commercial loan portfolio was due to the continuing low interest rate environment and competition for quality loans.

The average yield on total investment securities decreased 18 basis points while the average balance of the portfolio declined 4% for the first three months of 2014 compared to the first three months of 2013. The decrease in the yield on investments was due primarily to calls and maturities of securities that were replaced by lower yielding investments as a result of lower overall market rates.

Interest Expense

Interest expense decreased by $0.3 million or 6% in the first three months of 2014 compared to the first three months of 2013, primarily as a result of a 7 basis point decrease in the average rate paid on interest-bearing liabilities. Deposit activity during the first three months of 2014 remained virtually level compared to the first three months of 2013. Average noninterest-bearing and interest-bearing checking accounts increased $65 million or 5% and regular savings accounts increased $15 million or 6% as clients kept funds in short-term instruments to preserve liquidity. This growth was partially offset by a decrease in average certificates of deposit of $49 million or 10% in the first three months of 2014 compared to the prior year period. This decrease was primarily due to the Company's management of rates offered on certificates in an effort to preserve the Company's net interest margin during this extended period of historically low interest rates. Average balances of money market accounts decreased $14 million or 2% in the first three months of 2014 compared to the first three months of 2013. In addition, the average rate paid on advances from the Federal Home Loan Bank of Atlanta decreased 62 basis points for the first quarter of 2014 compared to the first quarter of 2013 due to an increase in short-term advances to take advantage of current low interest rates.

Non-interest Income



Non-interest income amounts and trends are presented in the following table for
the periods indicated:



                                           Three Months Ended March 31,          2014/2013       2014/2013
(Dollars in thousands)                       2014                 2013           $ Change        % Change
Securities gains                        $            -       $           56     $       (56 )        (100.0 )%
Service charges on deposit accounts              1,972                2,069             (97 )          (4.7 )
Mortgage banking activities                        316                1,527          (1,211 )         (79.3 )
Wealth management income                         4,466                4,042             424            10.5
Insurance agency commissions                     1,640                1,349             291            21.6
Income from bank owned life insurance              598                  612             (14 )          (2.3 )
Visa check fees                                    978                  957              21             2.2
Other income                                     1,279                1,807            (528 )         (29.2 )
Total non-interest income               $       11,249       $       12,419     $    (1,170 )          (9.4 )

Total non-interest income was $11.2 million for the first quarter of 2014 compared to $12.4 million for the first quarter of 2013. The primary drivers of non-interest income for the first quarter of 2014 were declines in mortgage banking income and other non-interest income which were largely offset by increases in wealth management income and income from insurance agency commissions. Further detail by type of non-interest income follows:

Income from mortgage banking activities decreased in 2014 compared to 2013 due primarily to significantly reduced loan origination volumes from refinancing activity.

Other non-interest income decreased during the first quarter of 2014 compared to the prior year period due mainly to gains on sales and dispositions of loans and fixed assets and a non-recurring legal settlement, all of which occurred in the first quarter of 2013.

Wealth management income is comprised of income from trust and estate services, investment management fees earned by West Financial Services, the Company's investment management subsidiary, and fees on sales on investment products and services. Trust services fees increased 13% compared to the prior year period, due to an increase in assets under management. Investment management fees in West Financial Services increased 11% for the first quarter of 2014 compared to the first quarter of 2013, also due to higher assets under management. Fees on sales of investment products and services increased 3% for the quarter, also due to an increase in assets under management. Overall total assets under management increased to $2.7 billion at March 31, 2014 compared to $2.3 billion at March 31, 2013 as a result of positive market movements and additions from new and existing clients.

Insurance agency commissions increased in 2014 compared to 2013 due primarily to higher annual contingency commissions based on annual policy performance.

Service charges on deposits decreased in 2014 compared to 2013 due primarily to a decline in overdraft fees.

Income from bank owned life insurance decreased in the first three months of 2014 compared to the first three months of 2013 due to the decline in the interest rates paid on these policies. The Company invests in bank owned life insurance products in order to manage the cost of employee benefit plans. Investments totaled $86.8 million at March 31, 2014 and $84.3 million at March 31, 2013 and were well diversified by carrier in accordance with defined policies and practices. The average tax-equivalent yield on these insurance contract assets was 4.65% for the first quarter of 2014 compared to 4.92% for the prior year period.

No net OTTI losses were recognized in earnings in either the first quarter of 2014 or 2013. .

Non-interest Expense

Non-interest expense amounts and trends are presented in the following table for
the years indicated:



                                           Three Months Ended March 31,          2014/2013       2014/2013
(Dollars in thousands)                       2014                 2013           $ Change        % Change
Salaries and employee benefits          $       16,355       $       16,346     $         9             0.1 %
Occupancy expense of premises                    3,472                3,182             290             9.1
Equipment expenses                               1,256                1,249               7             0.6
Marketing                                          542                  515              27             5.2
Outside data services                            1,216                1,152              64             5.6
FDIC insurance                                     520                  596             (76 )         (12.8 )
Amortization of intangible assets                  370                  461             (91 )         (19.7 )
Professional fees                                  914                1,250            (336 )         (26.9 )
Other real estate owned                              -                   37             (37 )        (100.0 )
Other expenses                                   2,904                3,035            (131 )          (4.3 )
Total non-interest expense              $       27,549       $       27,823     $      (274 )          (1.0 )

Non-interest expenses totaled $27.5 million in 2014 compared to $27.8 million in 2013. This decrease in expenses was driven primarily by improved credit quality as legal fees associated with loan workouts declined significantly during the . . .

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