10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2007
OR
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o |
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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)
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Maryland
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52-1532952 |
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(State of incorporation)
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(I.R.S. Employer Identification Number) |
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17801 Georgia Avenue, Olney, Maryland
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20832
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301-774-6400 |
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(Address of principal office)
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(Zip Code)
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(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 þ NO o
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 o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act)
YES o NO þ
The number of shares of common stock outstanding as of April 23, 2007 is 15,735,864 shares.
SANDY SPRING BANCORP, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
|
|
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|
|
|
|
|
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|
|
March 31, |
|
|
December 31, |
|
(Dollars in thousands, except per share data) |
|
2007 |
|
|
2006 |
|
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
61,145 |
|
|
$ |
54,945 |
|
Federal funds sold |
|
|
48,138 |
|
|
|
48,978 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
109,283 |
|
|
|
103,923 |
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits with banks |
|
|
28,192 |
|
|
|
2,974 |
|
Residential mortgage loans held for sale |
|
|
9,660 |
|
|
|
10,595 |
|
Investments available-for-sale (at fair value) |
|
|
282,023 |
|
|
|
256,845 |
|
|
|
|
|
|
|
|
|
|
Investments held-to-maturity fair value of $266,937 (2007) and
$273,206 (2006) |
|
|
261,208 |
|
|
|
267,344 |
|
Other equity securities |
|
|
17,709 |
|
|
|
16,719 |
|
Total loans and leases |
|
|
2,036,182 |
|
|
|
1,805,579 |
|
Less: allowance for loan and lease losses |
|
|
(22,186 |
) |
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|
(19,492 |
) |
|
|
|
|
|
|
|
Net loans and leases |
|
|
2,013,996 |
|
|
|
1,786,087 |
|
Premises and equipment, net |
|
|
50,834 |
|
|
|
47,756 |
|
Accrued interest receivable |
|
|
16,485 |
|
|
|
15,200 |
|
Goodwill |
|
|
53,913 |
|
|
|
12,494 |
|
Other intangible assets, net |
|
|
15,244 |
|
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|
10,653 |
|
Other assets |
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|
86,930 |
|
|
|
79,867 |
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|
|
|
|
|
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Total assets |
|
$ |
2,945,477 |
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|
$ |
2,610,457 |
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LIABILITIES |
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Noninterest-bearing deposits |
|
$ |
449,604 |
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|
$ |
394,662 |
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Interest-bearing deposits |
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|
1,824,718 |
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|
1,599,561 |
|
|
|
|
|
|
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Total deposits |
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|
2,274,322 |
|
|
|
1,994,223 |
|
Short-term borrowings |
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|
325,657 |
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|
314,732 |
|
Other long-term borrowings |
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|
8,274 |
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|
1,808 |
|
Subordinated debentures |
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|
35,000 |
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|
35,000 |
|
Accrued interest payable and other liabilities |
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|
26,905 |
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26,917 |
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|
|
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES |
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2,670,158 |
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2,372,680 |
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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 15,724,895 (2007) and 14,826,805 (2006) |
|
|
15,725 |
|
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|
14,827 |
|
Additional paid in capital |
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|
60,520 |
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|
27,869 |
|
Retained earnings |
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|
203,044 |
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|
199,102 |
|
Accumulated other comprehensive loss |
|
|
(3,970 |
) |
|
|
(4,021 |
) |
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|
|
|
|
|
|
Total stockholders equity |
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|
275,319 |
|
|
|
237,777 |
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|
|
|
|
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|
Total liabilities and stockholders equity |
|
$ |
2,945,477 |
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|
$ |
2,610,457 |
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|
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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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|
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Three Months Ended |
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|
March 31, |
(In thousands, except per share data) |
|
2007 |
|
2006 |
|
|
|
Interest Income: |
|
|
|
|
|
|
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|
Interest and fees on loans and leases |
|
$ |
34,574 |
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|
$ |
28,858 |
|
Interest on loans held for sale |
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|
195 |
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|
150 |
|
Interest on deposits with banks |
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|
90 |
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|
10 |
|
Interest and dividends on securities: |
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Taxable |
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|
3,871 |
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|
3,031 |
|
Exempt from federal income taxes |
|
|
2,727 |
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|
3,016 |
|
Interest on federal funds sold |
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|
437 |
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|
112 |
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|
TOTAL INTEREST INCOME |
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|
41,894 |
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|
35,177 |
|
Interest Expense: |
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|
|
|
|
|
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|
Interest on deposits |
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|
13,788 |
|
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|
7,674 |
|
Interest on short-term borrowings |
|
|
3,481 |
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|
|
3,749 |
|
Interest on long-term borrowings |
|
|
610 |
|
|
|
577 |
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|
TOTAL INTEREST EXPENSE |
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|
17,879 |
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|
12,000 |
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|
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|
NET INTEREST INCOME |
|
|
24,015 |
|
|
|
23,177 |
|
Provision for loan and lease losses |
|
|
839 |
|
|
|
950 |
|
|
|
|
NET INTEREST INCOME AFTER PROVISION
FOR LOAN AND LEASE LOSSES |
|
|
23,176 |
|
|
|
22,227 |
|
Noninterest Income: |
|
|
|
|
|
|
|
|
Securities gains |
|
|
2 |
|
|
|
0 |
|
Service charges on deposit accounts |
|
|
2,308 |
|
|
|
1,848 |
|
Gains on sales of mortgage loans |
|
|
638 |
|
|
|
782 |
|
Fees on sales of investment products |
|
|
800 |
|
|
|
718 |
|
Trust and investment management fees |
|
|
2,281 |
|
|
|
2,116 |
|
Insurance agency commissions |
|
|
2,690 |
|
|
|
2,108 |
|
Income from bank owned life insurance |
|
|
684 |
|
|
|
553 |
|
Visa check fees |
|
|
590 |
|
|
|
535 |
|
Other income |
|
|
913 |
|
|
|
1,186 |
|
|
|
|
TOTAL NONINTEREST INCOME |
|
|
10,906 |
|
|
|
9,846 |
|
Noninterest Expenses: |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
13,434 |
|
|
|
12,471 |
|
Occupancy expense of premises |
|
|
2,417 |
|
|
|
2,126 |
|
Equipment expenses |
|
|
1,602 |
|
|
|
1,316 |
|
Marketing |
|
|
529 |
|
|
|
341 |
|
Outside data services |
|
|
926 |
|
|
|
781 |
|
Amortization of intangible assets |
|
|
802 |
|
|
|
742 |
|
Other expenses |
|
|
3,904 |
|
|
|
2,579 |
|
|
|
|
TOTAL NONINTEREST EXPENSES |
|
|
23,614 |
|
|
|
20,356 |
|
|
|
|
Income Before Income Taxes |
|
|
10,468 |
|
|
|
11,717 |
|
Income Tax Expense |
|
|
2,923 |
|
|
|
3,377 |
|
|
|
|
NET INCOME |
|
$ |
7,545 |
|
|
$ |
8,340 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
2
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(In thousands, except per share data) |
|
2007 |
|
2006 |
Basic Net Income Per Share |
|
$ |
0.49 |
|
|
$ |
0.56 |
|
Diluted Net Income Per Share |
|
|
0.49 |
|
|
|
0.56 |
|
Dividends Declared Per Share |
|
|
0.23 |
|
|
|
0.22 |
|
See Notes to Consolidated Financial Statements.
3
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,545 |
|
|
$ |
8,340 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
2,393 |
|
|
|
2,066 |
|
Provision for loan and lease losses |
|
|
839 |
|
|
|
950 |
|
Stock compensation expense |
|
|
226 |
|
|
|
142 |
|
Deferred income taxes (benefits) |
|
|
(960 |
) |
|
|
(16 |
) |
Origination of loans held for sale |
|
|
(73,782 |
) |
|
|
(55,018 |
) |
Proceeds from sales of loans held for sale |
|
|
75,356 |
|
|
|
58,585 |
|
Gains on sales of loans held for sale |
|
|
(638 |
) |
|
|
(662 |
) |
Securities gains |
|
|
(2 |
) |
|
|
0 |
|
Net (increase) in accrued interest receivable |
|
|
(108 |
) |
|
|
293 |
|
Net (increase) decrease in other assets |
|
|
(4,417 |
) |
|
|
702 |
|
Net decrease in accrued expenses and other liabilities |
|
|
(2,272 |
) |
|
|
(4,826 |
) |
Other net |
|
|
(654 |
) |
|
|
244 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,526 |
|
|
|
10,800 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Net (increase) decrease in interest-bearing deposits with banks |
|
|
(25,218 |
) |
|
|
67 |
|
Purchases of other equity securities |
|
|
(118 |
) |
|
|
(749 |
) |
Purchases of investments available-for-sale |
|
|
(4,967 |
) |
|
|
(10,000 |
) |
Proceeds from the sales of other real estate owned |
|
|
192 |
|
|
|
0 |
|
Proceeds from maturities, calls and principal payments of investments held-to-maturity |
|
|
9,613 |
|
|
|
4,840 |
|
Proceeds from maturities, calls and principal payments of investments available-for-sale |
|
|
12,382 |
|
|
|
30,531 |
|
Net increase in loans and leases |
|
|
(34,651 |
) |
|
|
(57,821 |
) |
Purchase of loans and leases |
|
|
0 |
|
|
|
(2,148 |
) |
Acquisition of business activity, net |
|
|
(28,039 |
) |
|
|
0 |
|
Expenditures for premises and equipment |
|
|
(660 |
) |
|
|
(1,245 |
) |
|
|
|
|
|
|
|
Net cash (used in) investing activities |
|
|
(71,466 |
) |
|
|
(36,525 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
83,134 |
|
|
|
36,145 |
|
Net increase (decrease) in short-term borrowings |
|
|
(6,513 |
) |
|
|
3,563 |
|
Retirement of long-term borrowings |
|
|
(64 |
) |
|
|
0 |
|
Proceeds from issuance of common stock |
|
|
346 |
|
|
|
245 |
|
Dividends paid |
|
|
(3,603 |
) |
|
|
(3,255 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
73,300 |
|
|
|
36,698 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
5,360 |
|
|
|
10,973 |
|
Cash and cash equivalents at beginning of period |
|
|
103,923 |
|
|
|
53,443 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
109,283 |
|
|
$ |
64,416 |
|
|
|
|
|
|
|
|
4
Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
Supplemental Disclosures: |
|
|
|
|
|
|
|
|
Interest payments |
|
$ |
17,196 |
|
|
$ |
11,511 |
|
Income tax payments |
|
|
5,910 |
|
|
|
317 |
|
Reclassification of borrowings from long-term to short-term |
|
|
87 |
|
|
|
87 |
|
Details of acquisition: |
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
252,487 |
|
|
|
0 |
|
Fair value of liabilities assumed |
|
|
(224,956 |
) |
|
|
0 |
|
Stock issued for acquisition |
|
|
(32,977 |
) |
|
|
0 |
|
Purchase price in excess of net assets acquired |
|
|
39,914 |
|
|
|
0 |
|
|
|
|
|
|
|
|
Cash paid for acquisition |
|
|
34,468 |
|
|
|
0 |
|
Cash acquired with acquisition |
|
|
(6,429 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
Acquisition of business activity, net |
|
|
28,039 |
|
|
|
0 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
5
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Common |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
(Dollars in thousands, except per share data) |
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Income (loss) |
|
|
Equity |
|
|
Balances at January 1, 2007 |
|
$ |
14,827 |
|
|
$ |
27,869 |
|
|
$ |
199,102 |
|
|
$ |
(4,021 |
) |
|
$ |
237,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
7,545 |
|
|
|
|
|
|
|
7,545 |
|
Other comprehensive income, net of tax
effects and reclassification
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends $0.23 per share |
|
|
|
|
|
|
|
|
|
|
(3,603 |
) |
|
|
|
|
|
|
(3,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense |
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued pursuant to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Potomac Bank- 886,989 shares |
|
|
887 |
|
|
|
32,090 |
|
|
|
|
|
|
|
|
|
|
|
32,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plan 6,200 shares |
|
|
6 |
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan 4,901 shares |
|
|
5 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2007 |
|
$ |
15,725 |
|
|
$ |
60,520 |
|
|
$ |
203,044 |
|
|
$ |
(3,970 |
) |
|
$ |
275,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2006 |
|
$ |
14,794 |
|
|
$ |
26,599 |
|
|
$ |
179,259 |
|
|
$ |
(594 |
) |
|
$ |
220,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
8,340 |
|
|
|
|
|
|
|
8,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(393 |
) |
|
|
(393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends $0.22 per share |
|
|
|
|
|
|
|
|
|
|
(3,255 |
) |
|
|
|
|
|
|
(3,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Compensation Expense |
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issuance pursuant to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option plan 2,950 shares |
|
|
3 |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock purchase plan 4,997 shares |
|
|
5 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at March 31, 2006 |
|
$ |
14,802 |
|
|
$ |
26,978 |
|
|
$ |
184,344 |
|
|
$ |
(987 |
) |
|
$ |
225,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
6
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 2006 Annual
Report on Form 10-K. There have been no significant changes to the Companys Accounting Policies
as disclosed in the 2006 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 2007.
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 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.
On February 15, 2007, the Company completed the acquisition of Potomac Bank of Virginia
(Potomac), a bank headquartered in Fairfax, Virginia. Potomac operated five branch offices in
the Northern Virginia metropolitan market at the time of the acquisition. The primary reason for
the merger with Potomac was to gain entry into the northern Virginia high growth market. The total
consideration paid to Potomac shareholders in connection with the acquisition was $64.4 million.
The results of Potomacs operations have been included in the Companys consolidated financial
results subsequent to February 15, 2007. The assets and liabilities of Potomac were recorded on the
Consolidated Balance Sheet at their respective fair values. The fair values were determined as of
February 15, 2007 and are subject to further refinement as further information becomes available.
The transaction resulted in total assets acquired as of February 15, 2007 of $252.5 million,
including approximately $196.0 million of loans and leases; liabilities assumed were $225.0
million, including $197.0 million of deposits. Additionally, the Company recorded $39.9 million of
goodwill, $5.1 million of core deposit intangible (CDI) and $0.3 million of other intangibles.
CDI are subject to amortization and are being amortized over seven years on a straight-line basis.
The acquisition of Potomac is considered immaterial for purposes of the disclosures required
by FAS No. 141, Business Combinations.
Pending Acquisitions
In December 2006, the Company entered into a merger agreement to acquire CN Bancorp Inc. (CNB)
and its wholly owned subsidiary, County National Bank (County National). CNB is the holding
company for County National and had consolidated total assets of $164 million at March 31, 2007.
County National, with assets of $158 million as of March 31, 2007, is a commercial bank
headquartered in Pasadena, Maryland, with four full-service branches located in Anne Arundel
County, Maryland.
7
Under the terms of the agreement, each outstanding share of CNBs common stock will be converted
into either $25.00 in cash or 0.6657 of a share of the Companys common stock. Each shareholder of
CNB 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 the Company
will pay cash for a minimum of 40% and a maximum of 50% of the outstanding shares of CNB common
stock and issue shares of the Companys common stock in exchange for a minimum of 50% and a maximum
of 60% of the outstanding shares of CNB common stock. The total purchase price is estimated to be
$46.2 million, including $22.6 million in stock issued and stock options assumed and $21.6 million
in stock purchased and options settled for cash, and approximately $2.0 million of estimated other
direct acquisition costs.
The acquisition is subject to approval by both the CNB shareholders and applicable bank regulatory
authorities and is expected to be completed during the second quarter of 2007. As a result of the
acquisition, County National will become a newly formed division of Sandy Spring Bank.
Note 3 New Accounting Pronouncements
Adopted Accounting Pronouncements
In February 2006, FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments,
which permits, but does not require, fair value accounting for any hybrid financial instrument that
contains an embedded derivative that would otherwise require bifurcation in accordance with SFAS
133, Accounting for Derivative Instruments and Hedging Activities. The statement also subjects
beneficial interests in securitized financial assets to the requirements of SFAS 133. This
statement is effective for all financial instruments acquired, issued, or subject to remeasurement
for fiscal years beginning after September 15, 2006. The Company does not expect that the adoption
of this Statement will have a material impact on its financial position, results of operations or
cash flows.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, and an
amendment of FASB Statement No. 140. The statement amends SFAS No. 140 by (1) requiring the
separate accounting for servicing assets and servicing liabilities, which arise from the sale of
financial assets; (2) requiring all separately recognized serving assets and servicing liabilities
to be initially measured at fair value, if practicable; and (3) permitting an entity to choose
between an amortization method or a fair value method for subsequent measurement for each class of
separately recognized servicing assets and servicing liabilities. This statement is effective for
fiscal years beginning after September 15, 2006, with earlier adoption permitted. The Company does
not expect that the adoption of this Statement will have a material impact on its financial
position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. This interpretation applies to all tax positions accounted for in accordance with
SFAS No. 109, Accounting for Income Taxes. FIN 48 clarifies the application of SFAS No. 109 by
defining the criteria that an individual tax position must meet in order for the position to be
recognized within the financial statements and provides guidance on measurement, de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition
for tax positions. This interpretation is effective for fiscal years beginning after December 15,
2006, with earlier adoption permitted. The Company has evaluated the impact of the adoption of
this interpretation and has determined that it will not have a material impact on its financial
position, results of operations or cash flows.
In June 2006, the EITF released Issue 06-05, Accounting for Purchases of Life
Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance. On September 7, 2006, the EITF concluded
that a policyholder should consider any additional amounts included in the contractual terms of the
policy in determining the amount that could be realized under the insurance contract. Amounts that
are recoverable by the policyholder at the discretion of the insurance company should be excluded
from the amount that could be realized. Amounts that are recoverable by the policyholder in periods
beyond one year from the surrender of the policy should be discounted utilizing an appropriate rate
of interest. The effective date of EITF 06-05 is for fiscal years beginning after December 15,
2006. The Company does not expect that the adoption of this Statement will have a material impact
on its financial position, results of operations or cash flows.
8
Pending Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. It clarifies that fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants in the
market in which the reporting entity operates. This Statement does not require any new fair value
measurements, but rather, it provides enhanced guidance to other pronouncements that require or
permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal
years beginning after November 15, 2007, with earlier adoption permitted. The Company does not
expect that the adoption of this Statement will have a material impact on its financial position,
results of operations or cash flows.
At its September 2006 meeting, the Emerging Issues Task Force (EITF) reached a final consensus on
Issue 06-04, Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. The consensus stipulates that an agreement
by an employer to share a portion of the proceeds of a life insurance policy with an employee
during the postretirement period is a postretirement benefit arrangement required to be accounted
for under SFAS No. 106 or Accounting Principles Board Opinion (APB) No. 12, Omnibus Opinion -
1967. The consensus concludes that the purchase of a split-dollar life insurance policy does not
constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement
obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement
that constitutes a plan or under APB No. 12, if it is not part of a plan. Issue 06-04 is effective
for annual or interim reporting periods beginning after December 15, 2007. The Company has
endorsement split-dollar life insurance policies totaling $19.0 million as of December 31, 2006 and
is currently assessing the financial statement impact of implementing EITF 06-04.
In November 2006, the EITF released Issue 06-10, Accounting for Deferred compensation and
Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.
On November 29, 2006 the FASB ratified the tentative conclusions reached by the EITF on this Issue
and approved the issuance of a draft abstract for a public comment period. This Issue addresses
questions raised about whether the consensus reached in Issue 06-4 should apply to collateral
assignment split-dollar life insurance arrangements and the recognition and measurement of the
employers asset in such arrangements. The EITF concluded that an employer should recognize a
liability for the postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement in accordance with either SFAS No. 106 or APB No. 12 based on the substantive
agreement with the employee. In addition the EITF reached a conclusion that an employer should
recognize and measure an asset based on the nature and substance of the collateral assignment
split-dollar arrangement based on what future cash flows the employer is entitled to, if any, as
well as the employees obligation and ability to repay the employer. The effective date of EITF
06-10 is for fiscal years beginning after December 15, 2007. The Company had no collateral
assignment split dollar life insurance policies as of March 31, 2006 and does not expect that the
implementation of EITF 06-10 will have a material impact on its financial position, results of
operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. This statement permits entities to choose, at specified dates, to measure
eligible items at fair value. This election is referred to as the fair value option and must
generally be applied on an instrument by instrument basis; is irrevocable, unless a new election
occurs; and is applied only to an entire instrument, not to only specified risks, specific cash
flows, or portions of an instrument. A business entity that elects the fair value option, must
report any unrealized gains and losses on the items involved, in earnings at each subsequent
reporting date. The statement also establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement attributes for similar
types of assets and liabilities. The effective date of SFAS No. 159 is for fiscal years beginning
after November 15, 2007. The Company does not expect that the adoption of this Statement will have
a material impact on its financial position, results of operations or cash flows.
Note 4 Stock Based Compensation
At December 31, 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.
9
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 1,464,263 are available for issuance at March 31, 2007, 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.
Effective December 13, 2006, the Board of Directors approved the granting of approximately 105,623
stock options, subject to a three year vesting schedule with one third of the options vesting each
year as of December 13, 2007, 2008, and 2009, respectively. In addition, on December 13, 2006, the
Board of Directors granted 31,483 restricted shares subject to a five year vesting schedule with
one fifth of the shares vesting each year as of December 13, 2007, 2008, 2009, 2010, and 2011,
respectively. Compensation expense is recognized on a straight-line basis over the stock option
vesting period. The fair value based method for expense recognition of employee awards resulted in
expense of approximately $0.2 million, net of a tax benefit of approximately $15 thousand, for the
three month period ended March 31, 2007, and $0.1 million, net of tax benefit of $22 thousand, for
the three month period ended March 31, 2006.
The fair values of all of the options granted during the last three years have been estimated using
a binomial option-pricing model.
The total intrinsic value of options exercised during the quarters ended March 31, 2007 and
2006 was $35,000 and $9,000.
No options were granted for the three month periods ended March 31, 2007 and 2006.
A summary of share option activity for the three month period ended March 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
of |
|
|
Exercised |
|
|
Contractual |
|
|
Intrinsic |
|
(Dollars in thousands, except per share data): |
|
Shares |
|
|
Share Price |
|
|
Life(Years) |
|
|
Value |
|
|
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Balance at January 1, 2007 |
|
|
1,032,585 |
|
|
$ |
33.77 |
|
|
|
6.1 |
|
|
$ |
3,762 |
|
Options (at fair value)
related to option plan of
acquired Bank |
|
|
60,503 |
|
|
|
18.10 |
|
|
|
5.6 |
|
|
|
|
|
Exercised |
|
|
(6,200 |
) |
|
|
31.73 |
|
|
|
5.5 |
|
|
|
|
|
Forfeited or expired |
|
|
(4,837 |
) |
|
|
38.31 |
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2007 |
|
|
1,082,051 |
|
|
$ |
33.55 |
|
|
|
5.9 |
|
|
$ |
5,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2007 |
|
|
899,247 |
|
|
$ |
31.18 |
|
|
|
|
|
|
$ |
5,237 |
|
10
A summary of the status of the Companys nonvested options as of March 31, 2007, and changes
during the three month period then ended, is presented below (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant-Date |
|
|
|
Of Shares |
|
|
Fair Value |
|
|
Nonvested at January 1, 2007 |
|
|
183,075 |
|
|
$ |
7.54 |
|
Granted |
|
|
0 |
|
|
|
0 |
|
Vested |
|
|
0 |
|
|
|
0 |
|
Forfeited |
|
|
(271 |
) |
|
|
8.14 |
|
|
|
|
|
|
|
|
Nonvested at March 31, 2007 |
|
|
182,804 |
|
|
|
7.54 |
|
|
|
|
|
|
|
|
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 $1.2 million as of March 31, 2007. That cost is
expected to be recognized over a weighted average period of approximately 2 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 month periods ended March 31,
2007 and 2006 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 |
|
Three Months Ended |
per share data) |
|
March 31, |
|
|
2007 |
|
2006 |
Basic: |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
7,545 |
|
|
$ |
8,340 |
|
Average common shares outstanding |
|
|
15,269 |
|
|
|
14,798 |
|
Basic net income per share |
|
$ |
0.49 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
7,545 |
|
|
$ |
8,340 |
|
Average common shares outstanding |
|
|
15,269 |
|
|
|
14,798 |
|
Stock option adjustment |
|
|
132 |
|
|
|
127 |
|
|
|
|
Average common shares outstanding-diluted |
|
|
15,401 |
|
|
|
14,925 |
|
Diluted net income per share |
|
$ |
0.49 |
|
|
$ |
0.56 |
|
|
|
|
Options for 674,922 shares and 587,571 shares of common stock were not included in computing
diluted net income per share for the three month periods ended March 31, 2007 and 2006,
respectively, because their effects are antidilutive.
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
11
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 2007 contribution will be approximately $1.3 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 was recorded as an adjustment to the beginning balances of
retained earnings and/or other comprehensive income. At December 31, 2006 the projected benefit
obligation of the plan exceeded the fair value of plan assets by $1.9 million. This amount may
change significantly by December 31, 2007 due to a management decision to change the amount of the
2007 contribution.
Net periodic benefit cost for the three month periods ended March 31 includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(In thousands) |
|
2007 |
|
2006 |
|
|
|
Service cost for benefits earned |
|
$ |
320 |
|
|
$ |
276 |
|
Interest cost on projected benefit obligation |
|
|
341 |
|
|
|
308 |
|
Expected return on plan assets |
|
|
(379 |
) |
|
|
(344 |
) |
Amortization of prior service cost |
|
|
(44 |
) |
|
|
(44 |
) |
Recognized net actuarial loss |
|
|
136 |
|
|
|
111 |
|
|
|
|
Net periodic benefit cost |
|
$ |
374 |
|
|
$ |
307 |
|
|
|
|
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 $0.4 million for both of the three month periods ended March 31, 2007 and
2006, respectively.
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 $0 and $0.5 for
the three month periods ended March 31, 2007 and 2006, 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 $0.3 million and $0.2 million for the three month
periods ended March 31, 2007 and 2006, respectively.
12
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 $28 thousand and $21 thousand for the three month periods
ended March 31, 2007 and 2006, 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 March 31, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous unrealized losses |
|
|
|
|
(In thousands) |
|
|
|
|
|
existing for: |
|
|
|
|
|
|
|
|
|
|
Less than 12 |
|
|
More than 12 |
|
|
Total Unrealized |
|
Available for sale as of March 31, 2007 |
|
Fair Value |
|
|
months |
|
|
months |
|
|
Losses |
|
U.S. Agency |
|
$ |
175,997 |
|
|
$ |
30 |
|
|
$ |
1,011 |
|
|
$ |
1,041 |
|
U.S. Treasury Notes |
|
|
599 |
|
|
|
0 |
|
|
|
1 |
|
|
|
1 |
|
Mortgage-backed |
|
|
2,190 |
|
|
|
3 |
|
|
|
5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
178,786 |
|
|
$ |
33 |
|
|
$ |
1,017 |
|
|
$ |
1,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous unrealized losses |
|
|
|
|
(In thousands) |
|
|
|
|
|
existing for: |
|
|
|
|
|
|
|
|
|
|
Less than 12 |
|
|
More than 12 |
|
|
Total Unrealized |
|
Available for sale as of March 31, 2006 |
|
Fair Value |
|
|
months |
|
|
months |
|
|
Losses |
|
U.S. Agency |
|
$ |
200,022 |
|
|
$ |
1,576 |
|
|
$ |
1,385 |
|
|
$ |
2,961 |
|
U.S. Treasury Notes |
|
|
592 |
|
|
|
8 |
|
|
|
0 |
|
|
|
8 |
|
Mortgage-backed |
|
|
328 |
|
|
|
4 |
|
|
|
3 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
200,942 |
|
|
$ |
1,588 |
|
|
$ |
1,388 |
|
|
$ |
2,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 100% of the bonds carried in the available-for-sale investment portfolio
experiencing continuous losses as of March 31, 2007 and 2006 are rated AAA. The securities
representing the unrealized losses in the available-for-sale portfolio as of March 31, 2007 and
2006 all have minimal duration risk (1.05 years in 2007 and 1.66 years in 2006), low credit risk,
and minimal loss (approximately 0.58% in 2007 and 1.46% in 2006) 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.
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 March 31, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous unrealized losses |
|
|
|
|
(In thousands) |
|
|
|
|
|
existing for: |
|
|
|
|
|
|
|
|
|
|
Less than 12 |
|
|
More than 12 |
|
|
Total Unrealized |
|
Held to Maturity as of March 31, 2006 |
|
Fair Value |
|
|
months |
|
|
months |
|
|
Losses |
|
U.S. Agency |
|
$ |
33,853 |
|
|
$ |
0 |
|
|
$ |
558 |
|
|
$ |
558 |
|
State and municipal |
|
|
13,803 |
|
|
|
7 |
|
|
|
62 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
47,656 |
|
|
$ |
7 |
|
|
$ |
620 |
|
|
$ |
627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous unrealized losses |
|
|
|
|
(In thousands) |
|
|
|
|
|
existing for: |
|
|
|
|
|
|
|
|
|
|
Less than 12 |
|
|
More than 12 |
|
|
Total Unrealized |
|
Held to Maturity as of March 31, 2006 |
|
Fair Value |
|
|
months |
|
|
months |
|
|
Losses |
|
U.S. Agency |
|
$ |
33,236 |
|
|
$ |
1,164 |
|
|
$ |
0 |
|
|
$ |
1,164 |
|
State and municipal |
|
|
38,930 |
|
|
|
86 |
|
|
|
202 |
|
|
|
288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72,166 |
|
|
$ |
1,250 |
|
|
$ |
202 |
|
|
$ |
1,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 84% and 86% of the bonds carried in the held-to-maturity investment portfolio
with continuous unrealized losses as of March 31, 2007 and 2006, respectively, are rated AAA and
16% and 14% as of March 31, 2007 and 2006, respectively, are rated AA1. The securities
representing the unrealized losses in the held-to-maturity portfolio all have modest duration risk
(4.34 years in 2007 and 4.89 years in 2006), low credit risk, and minimal losses (approximately
1.30% in 2007 and 1.97% in 2006) 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 included in the 2006 Annual Report on Form 10-K. However, the segment data
reflect intersegment transactions and balances.
The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a
broad range of financial products and services, including various loan and deposit products to both
individuals and businesses. Parent company income is included in the Community Banking segment, as
the majority of parent company activities are related to this segment. Major revenue sources
include net interest income, gains on sales of mortgage loans, trust income, fees on sales of
investment products and service charges on deposit accounts. Expenses include personnel,
occupancy, marketing, equipment and other expenses. Included in Community Banking expenses are
noncash charges associated with amortization of intangibles related to acquired entities totaling
$0.5 million and $0.4 million for the three month periods ended March 31, 2007 and 2006,
respectively.
The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of
the Bank, and offers annuities as an alternative to traditional deposit accounts. In addition,
Sandy Spring Insurance Corporation operates the Chesapeake Insurance Group and Wolfe and Reichelt
Insurance Agency, general insurance agencies located in Annapolis, Maryland, and Neff & Associates,
located in Ocean City, Maryland. Major sources of revenue are insurance commissions from
commercial lines and personal lines. Expenses include personnel and support charges. Included in
insurance expenses are non-cash charges associated with amortization of intangibles totaling $0.1
million for both of the three month periods ended March 31, 2007 and 2006.
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,
14
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 $676.0 million in assets under management as of March
31, 2007. Major revenue sources include noninterest income earned on the above services. Expenses
include personnel and support charges. Included in investment management expenses are non-cash
charges associated with amortization of intangibles totaling $0.2 million for both of the three
month periods ended March 31, 2007 and 2006.
Information about operating segments and reconciliation of such information to the
consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community |
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
Inter-Segment |
|
|
|
|
(In thousands) |
|
Banking |
|
|
Insurance |
|
|
Leasing |
|
|
Mgmt. |
|
|
Elimination |
|
|
Total |
|
|
Quarter ended
March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
41,509 |
|
|
$ |
15 |
|
|
$ |
644 |
|
|
$ |
15 |
|
|
$ |
(289 |
) |
|
$ |
41,894 |
|
Interest expense |
|
|
17,910 |
|
|
|
0 |
|
|
|
258 |
|
|
|
0 |
|
|
|
(289 |
) |
|
|
17,879 |
|
Provision for loan and
lease losses |
|
|
839 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
839 |
|
Noninterest income |
|
|
6,953 |
|
|
|
2,877 |
|
|
|
149 |
|
|
|
1,083 |
|
|
|
(156 |
) |
|
|
10,906 |
|
Noninterest expenses |
|
|
21,306 |
|
|
|
1,290 |
|
|
|
270 |
|
|
|
904 |
|
|
|
(156 |
) |
|
|
23,614 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,407 |
|
|
|
1,602 |
|
|
|
265 |
|
|
|
194 |
|
|
|
0 |
|
|
|
10,468 |
|
Income tax expense |
|
|
2,108 |
|
|
|
634 |
|
|
|
105 |
|
|
|
76 |
|
|
|
0 |
|
|
|
2,923 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,299 |
|
|
$ |
968 |
|
|
$ |
160 |
|
|
$ |
118 |
|
|
$ |
0 |
|
|
$ |
7,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,946,888 |
|
|
$ |
11,611 |
|
|
$ |
33,200 |
|
|
$ |
8,937 |
|
|
$ |
(55,159 |
) |
|
$ |
2,945,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
34,826 |
|
|
$ |
21 |
|
|
$ |
508 |
|
|
$ |
3 |
|
|
$ |
(181 |
) |
|
$ |
35,177 |
|
Interest expense |
|
|
12,023 |
|
|
|
0 |
|
|
|
157 |
|
|
|
1 |
|
|
|
(181 |
) |
|
|
12,000 |
|
Provision for loan and
lease losses |
|
|
950 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
950 |
|
Noninterest income |
|
|
6,485 |
|
|
|
2,294 |
|
|
|
275 |
|
|
|
1,001 |
|
|
|
(209 |
) |
|
|
9,846 |
|
Noninterest expenses |
|
|
18,110 |
|
|
|
1,386 |
|
|
|
220 |
|
|
|
849 |
|
|
|
(209 |
) |
|
|
20,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
10,228 |
|
|
|
929 |
|
|
|
406 |
|
|
|
154 |
|
|
|
0 |
|
|
|
11,717 |
|
Income tax expense |
|
|
2,778 |
|
|
|
368 |
|
|
|
170 |
|
|
|
61 |
|
|
|
0 |
|
|
|
3,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,450 |
|
|
$ |
561 |
|
|
$ |
236 |
|
|
$ |
93 |
|
|
$ |
0 |
|
|
$ |
8,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,498,948 |
|
|
$ |
10,022 |
|
|
$ |
26,971 |
|
|
$ |
6,940 |
|
|
$ |
(43,304 |
) |
|
$ |
2,499,577 |
|
15
Note 9 Comprehensive Income
The components of total comprehensive income for the three month periods ended March 31, 2007
and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
|
|
|
|
Tax |
|
|
|
|
|
|
Pretax |
|
|
Benefit/ |
|
|
Net |
|
|
Pretax |
|
|
Benefit/ |
|
|
Net |
|
(In thousands) |
|
Amount |
|
|
(Expense) |
|
|
Amount |
|
|
Amount |
|
|
(Expense) |
|
|
Amount |
|
|
Net Income |
|
|
|
|
|
|
|
|
|
$ |
7,545 |
|
|
|
|
|
|
|
|
|
|
$ |
8,340 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains
arising during the period |
|
|
733 |
|
|
|
(290 |
) |
|
|
443 |
|
|
|
(650 |
) |
|
|
257 |
|
|
|
(393 |
) |
Reclassification adjustment for
(gains) losses included in
net income |
|
|
(2 |
) |
|
|
1 |
|
|
|
(1 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Adjustment for pensions (FAS 158) |
|
|
(643 |
) |
|
|
252 |
|
|
|
(391 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in other
comprehensive income |
|
|
88 |
|
|
|
(37 |
) |
|
|
51 |
|
|
|
(650 |
) |
|
|
257 |
|
|
|
(393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
$ |
7,596 |
|
|
|
|
|
|
|
|
|
|
$ |
7,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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-eight community offices in Anne
Arundel, Carroll, Frederick, Howard, Montgomery, and Prince Georges Counties in Maryland and
Fairfax and Loudoun counties in Virginia, 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 March 31, 2007, year-to-date average commercial loans and leases and
commercial real estate loans accounted for approximately 53% of the Companys loan and lease
portfolio, and year-to-date average consumer and residential real estate loans accounted for
approximately 47%. 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.
16
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.
17
Table 1 GAAP based and traditional efficiency ratios
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands) |
|
2007 |
|
|
2006 |
|
|
|
|
Noninterest expenses-GAAP based |
|
$ |
23,614 |
|
|
$ |
20,356 |
|
Net interest income plus noninterest income-
GAAP based |
|
|
34,921 |
|
|
|
33,023 |
|
|
|
|
|
|
|
|
|
|
Efficiency ratio-GAAP based |
|
|
67.62 |
% |
|
|
61.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses-GAAP based |
|
$ |
23,614 |
|
|
$ |
20,356 |
|
Less non-GAAP adjustment: |
|
|
|
|
|
|
|
|
Amortization of intangible assets |
|
|
802 |
|
|
|
742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expenses-traditional ratio |
|
|
22,812 |
|
|
|
19,614 |
|
Net interest income plus noninterest income-
GAAP based |
|
|
34,921 |
|
|
|
33,023 |
|
Plus non-GAAP adjustment: |
|
|
|
|
|
|
|
|
Tax-equivalency |
|
|
1,285 |
|
|
|
1,442 |
|
Less non-GAAP adjustments: |
|
|
|
|
|
|
|
|
Securities gains (losses) |
|
|
2 |
|
|
|
0 |
|
|
|
|
Net interest income plus noninterest
Income traditional ratio |
|
|
36,204 |
|
|
|
34,465 |
|
Efficiency ratio traditional |
|
|
63.01 |
% |
|
|
56.91 |
% |
|
|
|
|
|
|
|
A. FINANCIAL CONDITION
The Companys total assets were $2.9 billion at March 31, 2007, increasing $335.0 million or
13% during the first three months of 2007. Earning assets increased by 11% or $274.1 million in
the first three months of 2007 to $2.7 billion at March 31, 2007. These increases were mainly the
result of the acquisition of Potomac Bank in February, 2007.
Total loans and leases, excluding loans held for sale, increased 13% or $230.6 million during
the first three months of 2007, to $2.0 billion. This increase was mainly the result of the
acquisition of Potomac Bank. During this period, commercial loans and leases increased by $211.1
million or 23%, attributable primarily to commercial loans (up 35%) and commercial mortgage loans
(up 22%.) Consumer loans increased by $12.8 million or 4%, primarily due to an increase in home
equity loans. Residential real estate loans grew by $6.7 million or 1% due to an increase in
residential mortgage loans. Residential mortgage loans held for sale decreased by $0.9 million
from December 31, 2006, to $9.7 million at March 31, 2007. Virtually all of the above increases
were due to the acquisition of Potomac Bank of Virginia during the first quarter of 2007. Excluding
the Potomac acquisition, the loan portfolio increased 1% over December 31, 2006. This was comprised
of a 4% increase in commercial loans which was somewhat offset by small declines in consumer and
residential real estate loans.
18
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) |
|
March 31, 2007 |
|
|
% |
|
|
December 31, |
|
2006 |
|
% |
|
|
Residential real estate |
|
$ |
548,921 |
|
|
|
27 |
% |
|
$ |
542,251 |
|
|
|
30 |
% |
Commercial loans and leases |
|
|
1,129,654 |
|
|
|
55 |
|
|
|
918,511 |
|
|
|
51 |
|
Consumer |
|
|
357,607 |
|
|
|
18 |
|
|
|
344,817 |
|
|
|
19 |
|
|
|
|
Total Loans and Leases |
|
|
2,036,182 |
|
|
|
100 |
% |
|
|
1,805,579 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance for credit losses |
|
|
(22,186 |
) |
|
|
|
|
|
|
(19,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans and leases |
|
$ |
2,013,996 |
|
|
|
|
|
|
$ |
1,786,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2007, the Company had a total of $42.8
million in residential real estate loans and $1.8 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
$33.8 million at March 31, 2007. Interest only loans at March 31, 2007 include almost all of the
$200.9 million outstanding under the Companys equity lines of credit, (included in the consumer
loan portfolio) and $72.2 million in other loans. The aggregate of these loan concentrations was
$351.5 million at March 31, 2007, which represented 17% 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.
The total investment portfolio increased by 4% or $20.0 million from December 31, 2006, to
$560.9 million at March 31, 2007. The increase was driven by an increase of $25.2 million or 10%
in available-for-sale securities and $1.0 million or 6% in other equity securities, offset by a
decline of $6.1 million or 2% in held-to-maturity securities. The aggregate of federal funds sold
and interest-bearing deposits with banks increased by $24.4 million during the first three months
of 2007, reaching $76.3 million at March 31, 2007.
Table 3 Analysis of Deposits
The following table presents the trends in the composition of deposits at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
March 31, 2007 |
|
% |
|
December 31, |
2006 |
% |
|
Noninterest-bearing deposits |
|
$ |
449,604 |
|
|
|
20 |
% |
|
$ |
394,662 |
|
|
|
20 |
% |
|
|
|
Interest-bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
|
241,148 |
|
|
|
11 |
|
|
|
233,841 |
|
|
|
12 |
|
Money market savings |
|
|
588,704 |
|
|
|
26 |
|
|
|
518,146 |
|
|
|
26 |
|
Regular savings |
|
|
164,293 |
|
|
|
7 |
|
|
|
160,035 |
|
|
|
8 |
|
Time deposits less than $100,000 |
|
|
472,799 |
|
|
|
21 |
|
|
|
406,910 |
|
|
|
20 |
|
Time deposits $100,000 or more |
|
|
357,774 |
|
|
|
15 |
|
|
|
280,629 |
|
|
|
14 |
|
|
|
|
Total interest-bearing |
|
|
1,824,718 |
|
|
|
80 |
|
|
|
1,599,561 |
|
|
|
80 |
|
|
|
|
Total deposits |
|
$ |
2,274,322 |
|
|
|
100 |
% |
|
$ |
1,994,223 |
|
|
|
100 |
% |
|
|
|
Total deposits were $2.3 billion at March 31, 2007, increasing $280.1 million or 14% from
December 31, 2006. During the first three months of 2007, growth rates of 16% were achieved for
time deposits of less than $100,000 (up $65.9 million), 27% for time deposits of $100,000 or more
(up $77.1 million),14% for money market deposits (up $70.6 million.), 14% for non-interest bearing
demand deposits (up $54.9 million), 3% for interest-bearing demand deposits (up $7.3 million) and
3% for interest-bearing regular savings (up $4.3 million). These increases were mainly the
result of the Potomac Bank acquisition. Excluding the Potomac acquisition, deposits increased 4%
compared to December 31, 2006, due primarily to increases in time and money market deposits.
Total borrowings were $368.9 million at March 31, 2007, which represented an increase of $17.4
million or 5% from December 31, 2006. This increase was mainly due to an increase of $15.3
million, or 15%, in customer repurchase agreements resulting from the acquisition of Potomac during
the first quarter of 2007.
19
Market Risk and Interest Rate Sensitivity
Overview
The Companys net income is largely dependent on its net interest income. Net interest income
is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or
reprice on a different basis than interest-earning assets. When interest-bearing liabilities mature
or reprice more quickly than interest-earning assets in a given period, a
significant increase in market rates of interest could adversely affect net interest income.
Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest income. Net interest
income is also affected by changes in the portion of interest-earning assets that are funded by
interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing
deposits and stockholders equity.
The Companys Board of Directors has established a comprehensive interest rate risk management
policy, which is administered by Managements Asset Liability Management Committee (ALCO). The
policy establishes limits of risk, which are quantitative measures of the percentage change in net
interest income (a measure of net interest income at risk) and the fair value of equity capital (a
measure of economic value of equity (EVE) at risk) resulting from a hypothetical change in U.S.
Treasury interest rates for maturities from one day to thirty years. The Company measures the
potential adverse impacts that changing interest rates may have on its short-term earnings,
long-term value, and liquidity by employing simulation analysis through the use of computer
modeling. The simulation model captures optionality factors such as call features and interest rate
caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging
interest rate risk, there are certain shortcomings inherent in the interest rate modeling
methodology used by the Company. When interest rates change, actual movements in different
categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and
withdrawals of time and other deposits, may deviate significantly from assumptions used in the
model. Finally, the methodology does not measure or reflect the impact that higher rates may have
on adjustable-rate loan customers ability to service their debts, or the impact of rate changes on
demand for loan, lease, and deposit products.
The Company prepares a current base case and eight alternative simulations, at least once a
quarter, and reports the analysis to the Board of Directors. In addition, more frequent forecasts
are produced when interest rates are particularly uncertain or when other business conditions so
dictate.
If a measure of risk produced by the alternative simulations of the entire balance sheet
violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a
level that complies with policy limits within two quarters.
The Companys interest rate risk management goals are (1) to increase net interest income at a
growth rate consistent with the growth rate of total assets and, (2) to minimize fluctuations in
net interest margin as a percentage of earning assets. Management attempts to achieve these goals
by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume
of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability
contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting
pricing rates to market conditions on a continuing basis.
The balance sheet is subject to quarterly testing for eight alternative interest rate shock
possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by
+/- 100, 200, 300, and 400 basis points (bp), although the Company may elect not to use
particular scenarios that it determines are impractical in a current rate environment. It is
managements goal to structure the balance sheet so that net interest earnings at risk over a
twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the
various interest rate shock levels.
The Company augments its quarterly interest rate shock analysis with alternative external
interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include
non-parallel rate ramps and non-parallel yield curve twists.
Analysis
Measures of net interest income at risk produced by simulation analysis are indicators of an
institutions short-term performance in alternative rate environments. These measures are
typically based upon a relatively brief period, usually one year. They do not necessarily indicate
the long-term prospects or economic value of the institution.
20
ESTIMATED CHANGES IN NET INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST RATES: |
|
+ 400 bp |
|
+ 300 bp |
|
+ 200 bp |
|
+ 100 bp |
|
- 100 bp |
|
- 200 bp |
|
-300 bp |
|
-400 bp |
|
POLICY LIMIT |
|
|
-25 |
% |
|
|
-20 |
% |
|
|
-17.5 |
% |
|
|
-12.5 |
% |
|
|
-12.5 |
% |
|
|
-17.5 |
% |
|
|
-20 |
% |
|
|
-25 |
% |
March 2007 |
|
|
-8.59 |
|
|
|
-6.31 |
|
|
|
-4.12 |
|
|
|
-1.27 |
|
|
|
0.71 |
|
|
|
-0.67 |
|
|
|
-2.89 |
|
|
|
-5.82 |
|
December 2006 |
|
|
-13.67 |
|
|
|
-10.94 |
|
|
|
-7.68 |
|
|
|
-3.12 |
|
|
|
0.37 |
|
|
|
-2.27 |
|
|
|
-5.37 |
|
|
|
-9.87 |
|
The Net Interest Income at Risk position decreased since the 4th quarter of 2006 in
all rate scenarios. All of the above measures of net interest income at risk remained well within
prescribed policy limits. Although assumed to be unlikely, our largest exposure is at the +400bp
level, with a measure of -8.59%. This is also well within our prescribed policy limit of 25%.
The measures of equity value at risk indicate the ongoing economic value of the Company by
considering the effects of changes in interest rates on all of the Companys cash flows, and
discounting the cash flows to estimate the present value of assets and liabilities. The difference
between these discounted values of the assets and liabilities is the economic value of equity,
which, in theory, approximates the fair value of the Companys net assets.
ESTIMATED CHANGES IN ECONOMIC VALUE OF EQUITY (EVE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INTEREST RATES: |
|
+ 400 bp |
|
+ 300 bp |
|
+ 200 bp |
|
+ 100 bp |
|
- 100 bp |
|
-200 bp |
|
-300 bp |
|
-400 bp |
|
POLICY LIMIT |
|
|
-40 |
% |
|
|
-30 |
% |
|
|
-22.5 |
% |
|
|
-10.0 |
% |
|
|
-12.5 |
% |
|
|
-22.5 |
% |
|
|
-30 |
% |
|
|
-40 |
% |
March 2007 |
|
|
-14.05 |
|
|
|
-9.66 |
|
|
|
-4.49 |
|
|
|
-0.24 |
|
|
|
-2.46 |
|
|
|
-8.23 |
|
|
|
-15.31 |
|
|
|
-22.57 |
|
December 2006 |
|
|
-17.78 |
|
|
|
-13.07 |
|
|
|
-7.18 |
|
|
|
-1.67 |
|
|
|
-6.09 |
|
|
|
-14.95 |
|
|
|
-24.51 |
|
|
|
-35.53 |
|
Measures of the economic value of equity (EVE) at risk position decreased over year-end 2006
in all rising rate shock bands as well as all falling rate bands. The risk position improved
substantially due to additional core deposits from the PBOV acquisition in February. Although
assumed to be unlikely, our largest exposure is at the -400bp level, with a measure of -22.57%.
This is also well within our prescribed policy limit of 40%.
Liquidity
Liquidity is measured using an approach designed to take into account loan and lease payments,
maturities, calls and pay-downs of securities, earnings, balance sheet growth, mortgage banking
activities, investment portfolio liquidity, and other factors. Through this approach, implemented
by the funds management subcommittee of ALCO under formal policy guidelines, the Companys
liquidity position is measured weekly, looking forward at thirty-day intervals out to 180 days. The
measurement is based upon the asset-liability management models projection of a funds sold or
purchased position, along with ratios and trends developed to measure dependence on purchased funds
and core growth. Resulting projections as of March 31, 2007 showed short-term investments exceeding
short-term borrowings over the subsequent 180 days by $93.1 million, which increased from an excess
of $72.5 million at December 31, 2006. This excess of liquidity over projected requirements for
funds indicates that the Company can increase its loans and other earning assets without incurring
additional borrowing.
The Company also has external sources of funds, which can be drawn upon when required. The
main source of external liquidity is a line of credit for $782.7 million from the Federal Home Loan
Bank of Atlanta, of which $585.1 million was available based on pledged collateral with $219.2
million outstanding at March 31, 2007. Other external sources of liquidity available to the
Company in the form of lines of credit granted by the Federal Reserve, correspondent banks and
other institutions totaled $153.1 million at March 31, 2007, against which there were no
outstandings. Based upon its liquidity analysis, including external sources of liquidity
available, management believes the liquidity position is appropriate at March 31, 2007.
21
The following is a schedule of significant commitments at March 31, 2007:
|
|
|
|
|
|
|
(In thousands) |
|
Commitments to extend credit: |
|
|
|
|
Unused lines of credit (home equity and business) |
|
$ |
423,797 |
|
Other commitments to extend credit |
|
|
170,114 |
|
Standby letters of credit |
|
|
44,853 |
|
|
|
|
|
|
|
$ |
638,764 |
|
|
|
|
|
Capital Management
The Company recorded a total risk-based capital ratio of 11.50% at March 31, 2007, compared to
13.62% at December 31, 2006; a tier 1 risk-based capital ratio of 10.54%, compared to 12.64%; and a
capital leverage ratio of 9.16%, compared to 9.81%. Capital adequacy, as measured by these ratios,
was well above regulatory requirements. Management believes the level of capital at March 31,
2006, is appropriate.
Stockholders equity for March 31, 2007, totaled $275.3 million, representing an increase of
$37.5 million or 16% from $237.8 million at December 31, 2006.
Internal capital generation (net income less dividends) added $3.9 million to total
stockholders equity during the first three months of 2007. When internally formed capital is
annualized and expressed as a percentage of average total stockholders equity, the resulting rate
was 6% compared to 9% reported for the full-year 2006.
External capital formation (equity created through the issuance of stock under the employee
stock purchase plan, stock option plan and for the acquisition of Potomac Bank) totaled $33.3
million during the three month period ended March 31, 2007.
Dividends for the first three months of the year were $0.23 per share in 2007, compared to
$0.22 per share in 2005, for respective dividend payout ratios (dividends declared per share to
diluted net income per share) of 47% versus 39% for the first three months of 2006.
B. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2007 AND MARCH 31, 2006
Net income for the first three months of the year decreased $0.8 million or 10% to $7.5
million in 2007 from $8.3 million in 2006, representing annualized returns on average equity of
11.96% in 2007 and 15.26% in 2006, respectively. Diluted earnings per share (EPS) for the first
three months of the year were $0.49 in 2007, compared to $0.56 in 2006.
Net interest income grew by $0.8 million, or 4%, to $24.0 million for the first three months
of 2007, while total noninterest income grew by $1.1 million, or 11% for the period. However, this
growth was more than offset by a $3.3 million, or 16%, increase in noninterest expenses.
The increase in net interest income was the result of continued growth in the loan portfolio
and higher loan yields which were largely offset by increased rates on interest-bearing deposits
and an increased use of time deposits, as noninterest bearing deposits continued to decrease.
These factors produced a net interest margin decrease of 28 basis points to 4.07% for the three
months ended March 31, 2007, from 4.35% for the same period of 2006, and the net interest spread
decreasing by 39 basis points.
22
Table 4 - Consolidated Average Balances, Yields and Rates
(Dollars in thousands and tax equivalent)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
|
|
|
|
|
|
|
Annualized |
|
|
|
Average |
|
|
Interest |
|
|
Average |
|
|
Average |
|
|
Interest |
|
|
Average |
|
|
|
Balance |
|
|
(1) |
|
|
Yield/Rate |
|
|
Balance |
|
|
(1) |
|
|
Yield/Rate |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and leases (2) |
|
$ |
1,926,614 |
|
|
$ |
34,769 |
|
|
|
7.30 |
% |
|
$ |
1,728,377 |
|
|
$ |
29,008 |
|
|
|
6.79 |
% |
Total securities |
|
|
551,566 |
|
|
|
7,883 |
|
|
|
5.86 |
|
|
|
555,061 |
|
|
|
7,489 |
|
|
|
5.51 |
|
Other earning assets |
|
|
40,617 |
|
|
|
527 |
|
|
|
5.26 |
|
|
|
11,227 |
|
|
|
122 |
|
|
|
4.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL EARNING ASSETS |
|
|
2,518,797 |
|
|
|
43,179 |
|
|
|
6.95 |
% |
|
|
2,294,665 |
|
|
|
36,619 |
|
|
|
6.46 |
% |
Nonearning assets |
|
|
226,416 |
|
|
|
|
|
|
|
|
|
|
|
190,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,745,213 |
|
|
|
|
|
|
|
|
|
|
$ |
2,484,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
$ |
231,152 |
|
|
|
189 |
|
|
|
0.33 |
% |
|
$ |
236,570 |
|
|
|
165 |
|
|
|
0.28 |
% |
Money market savings deposits |
|
|
547,135 |
|
|
|
4,974 |
|
|
|
3.69 |
|
|
|
371,686 |
|
|
|
2,349 |
|
|
|
2.56 |
|
Regular savings deposits |
|
|
163,037 |
|
|
|
156 |
|
|
|
0.39 |
|
|
|
199,281 |
|
|
|
215 |
|
|
|
0.44 |
|
Time deposits |
|
|
749,131 |
|
|
|
8,469 |
|
|
|
4.58 |
|
|
|
573,462 |
|
|
|
4,945 |
|
|
|
3.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits |
|
|
1,690,455 |
|
|
|
13,788 |
|
|
|
3.31 |
|
|
|
1,380,999 |
|
|
|
7,674 |
|
|
|
2.25 |
|
Short-term borrowings |
|
|
316,929 |
|
|
|
3,481 |
|
|
|
4.45 |
|
|
|
403,422 |
|
|
|
3,749 |
|
|
|
3.74 |
|
Long-term borrowings |
|
|
40,939 |
|
|
|
610 |
|
|
|
5.97 |
|
|
|
37,109 |
|
|
|
577 |
|
|
|
6.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,048,323 |
|
|
|
17,879 |
|
|
|
3.54 |
|
|
|
1,821,530 |
|
|
|
12,000 |
|
|
|
2.66 |
|
|
|
|
Noninterest-bearing demand deposits |
|
|
408,954 |
|
|
|
|
|
|
|
|
|
|
|
418,214 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
|
32,155 |
|
|
|
|
|
|
|
|
|
|
|
23,344 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
255,781 |
|
|
|
|
|
|
|
|
|
|
|
221,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
2,745,213 |
|
|
|
|
|
|
|
|
|
|
$ |
2,484,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and spread |
|
|
|
|
|
$ |
25,300 |
|
|
|
3.41 |
% |
|
|
|
|
|
$ |
24,619 |
|
|
|
3.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: tax equivalent adjustment |
|
|
|
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
1,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
|
24,015 |
|
|
|
|
|
|
|
|
|
|
|
23,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
4.07 |
% |
|
|
|
|
|
|
|
|
|
|
4.35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average earning assets to
Average interest-bearing liabilities |
|
|
122.97 |
% |
|
|
|
|
|
|
|
|
|
|
125.97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income includes the effects of taxable-equivalent adjustments (reduced by the nondeductible portion of interest expense) using the appropriate federal
income tax rate of 35.00% and, where applicable, the marginal state income tax rate of 7.00% (or a combined marginal federal and state rate of 39.55%), to increase
tax-exempt interest income to a taxable-equivalent basis. The net taxable-equivalent adjustment amounts utilized in the above table to compute yields were $1.3 million
and $1.4 million for the three months ended March 31, 2007 and 2006, respectively. |
|
(2) |
|
Non-accrual loans are included in the average balances. |
|
(3) |
|
Net interest margin = annualized net interest income on a tax-equivalent basis divided by total interest-earning assets. |
Net Interest Income
Net interest income for the first three months of the year was $24.0 million in 2007, an
increase of 4% from $23.2 million in 2006, due primarily to an 11% increase in average loans and
leases and a 51 basis point increase in tax-equivalent yield on loans when compared to the first
three months of 2006. Non-GAAP tax-equivalent net interest income, which takes into account the
benefit of tax advantaged investment securities, increased by 3%, to $25.3 million in 2007 from
$24.6 million in 2006. The effects of changes in average balances, yields and rates are presented
in Table 5.
For the first three months, total interest income increased by $6.7 million or 19% in 2007,
compared to 2006. On a non-GAAP tax-equivalent basis, interest income increased by 18%. Average
earning assets increased by 10% versus the prior period to $2.5 billion from $2.3 billion; while
the average yield earned on those assets increased by 49 basis points to 6.95%. Comparing the
first three months of 2007 versus the same period in 2006, average total loans and leases grew by
11% to $1.9 billion (76% of average earning assets, versus 75% a year ago), while recording a 51
basis point increase in average yield to 7.30%. Average commercial loans and leases increased by
27% (due to increases in all categories of commercial loans and leases); average consumer loans
increased by 4% (attributable primarily to home equity loan growth); and residential real estate
loans decreased by 5% (reflecting decreases in both mortgage and construction lending).
23
Over the same period, average total securities decreased by 1% to $551.6 million (22% of average
earning assets, versus 24% a year ago), while the average yield earned on those assets increased by
35 basis points to 5.86%.
Interest expense for the first three months of the year increased by $5.9 million or 49% in
2007 compared to 2006. Average total interest-bearing liabilities increased by 12% over the prior
year period, while the average rate paid on these funds increased by 88 basis points to 3.54%. As
shown in Table 4, all categories of interest-bearing liabilities, except regular savings deposits,
showed increases in the average rate as market interest rates continued to rise.
Table 5 Effect of Volume and Rate Changes on Net Interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006 |
|
|
|
|
|
|
2006 vs. 2005 |
|
|
|
Increase |
|
|
Due to Change |
|
|
Increase |
|
|
Due to Change |
|
|
|
Or |
|
|
In Average:* |
|
|
Or |
|
|
In Average:* |
|
(In thousands and tax equivalent) |
|
(Decrease) |
|
|
Volume |
|
|
Rate |
|
|
(Decrease) |
|
|
Volume |
|
|
Rate |
|
Interest income from earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and leases |
|
$ |
5,761 |
|
|
$ |
3,481 |
|
|
$ |
2,280 |
|
|
$ |
7,800 |
|
|
$ |
4,161 |
|
|
$ |
3,639 |
|
Securities |
|
|
394 |
|
|
|
(51 |
) |
|
|
445 |
|
|
|
(1,142 |
) |
|
|
(1,173 |
) |
|
|
31 |
|
Other earning assets |
|
|
405 |
|
|
|
377 |
|
|
|
28 |
|
|
|
65 |
|
|
|
9 |
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
|
6,560 |
|
|
|
3,807 |
|
|
|
2,753 |
|
|
|
6,723 |
|
|
|
2,997 |
|
|
|
3,726 |
|
Interest expense on funding of
earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
24 |
|
|
|
(4 |
) |
|
|
28 |
|
|
|
18 |
|
|
|
(1 |
) |
|
|
19 |
|
Regular savings deposits |
|
|
(59 |
) |
|
|
(36 |
) |
|
|
(23 |
) |
|
|
35 |
|
|
|
(18 |
) |
|
|
53 |
|
Money market savings deposits |
|
|
2,625 |
|
|
|
1,357 |
|
|
|
1,268 |
|
|
|
1,267 |
|
|
|
(11 |
) |
|
|
1,278 |
|
Time deposits |
|
|
3,524 |
|
|
|
1,755 |
|
|
|
1,769 |
|
|
|
2,166 |
|
|
|
725 |
|
|
|
1,441 |
|
Total borrowings |
|
|
(235 |
) |
|
|
(893 |
) |
|
|
658 |
|
|
|
1,527 |
|
|
|
778 |
|
|
|
749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
|
5,879 |
|
|
|
2,179 |
|
|
|
3,700 |
|
|
|
5,013 |
|
|
|
1,473 |
|
|
|
3,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
681 |
|
|
$ |
1,628 |
|
|
$ |
(947 |
) |
|
$ |
1,710 |
|
|
$ |
1,524 |
|
|
$ |
186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Where volume and rate have a combined effect that cannot be separately identified with either, the variance is allocated to volume and rate based on the
relative size of the variance that can be separately identified with each. |
Credit Risk Management
The Companys loan and lease portfolio (the credit portfolio) is subject to varying degrees
of credit risk. Credit risk is mitigated through portfolio diversification, limiting exposure to
any single customer, industry or collateral type. The Company maintains an allowance for loan and
lease losses (the allowance) to absorb possible losses in the loan and lease portfolio. The
allowance is based on careful, continuous review and evaluation of the loan and lease portfolio,
along with ongoing, quarterly assessments of the probable losses inherent in that portfolio. The
allowance represents an estimation made pursuant to Statement of Financial Accounting Standards
(SFAS) No. 5, Accounting for Contingencies, or SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The adequacy of the allowance is determined through careful and continuous
evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined
below, to establish a prudent level. Determination of the allowance is inherently subjective and
requires significant estimates, including estimated losses on pools of homogeneous loans and leases
based on historical loss experience and consideration of current economic trends, which may be
susceptible to significant change. Loans and leases deemed uncollectible are charged against the
allowance, while recoveries are credited to the allowance. Management adjusts the level of the
allowance through the provision for loan and lease losses, which is recorded as a current period
operating expense. The Companys systematic methodology for assessing the appropriateness of the
allowance includes: (1) the formula allowance reflecting historical losses, as adjusted, by credit
category, and (2) the specific allowance for risk-rated credits on an individual or portfolio
basis.
The formula allowance, which is based upon historical loss factors, as adjusted, establishes
allowances for the major loan and lease categories based upon adjusted historical loss experience
over the prior eight quarters, weighted so that losses in the most recent quarters have the
greatest effect. The factors used to adjust the historical loss experience address various risk
characteristics of the Companys loan and lease portfolio including: (1) trends in delinquencies
and other non-performing loans, (2) changes in the risk profile related to large loans in the
portfolio, (3) changes in the
24
categories of loans comprising the loan portfolio, (4) concentrations of loans to specific industry
segments, (5) changes in economic conditions on both a local and national level, (6) changes in the
Companys credit administration and loan and lease portfolio management processes, and (7) quality
of the Companys credit risk identification processes.
The specific allowance is used to allocate an allowance for internally risk rated commercial
loans where significant conditions or circumstances indicate that a loss may be imminent. Analysis
resulting in specific allowances, including those on loans identified for evaluation of impairment,
includes consideration of the borrowers overall financial condition, resources and payment record,
support available from financial guarantors and the sufficiency of collateral. These factors are
combined to estimate the probability and severity of inherent losses. Then a specific allowance is
established based on the Companys calculation of the potential loss imbedded in the individual
loan. Allowances are also established by application of credit risk factors to other internally
risk rated loans, individual consumer and residential loans and commercial leases having reached
nonaccrual or 90-day past due status. Each risk rating category is assigned a credit risk factor
based on managements estimate of the associated risk, complexity, and size of the individual loans
within the category. Additional allowances may also be established in special circumstances
involving a particular group of credits or portfolio within a risk category when management becomes
aware that losses incurred may exceed those determined by application of the risk factor alone.
The amount of the allowance is reviewed monthly by the Senior Loan Committee, and reviewed and
approved quarterly by the Board of Directors.
The provision for loan and lease losses totaled $.8 million for the first three months of 2007
compared to $1.0 million in the same period of 2006. The Company experienced net recoveries during
the first three months of 2007 of $3 thousand compared to net charge-offs of $189 thousand for the
first three months of 2006.
Management believes that the allowance is adequate. However, its determination requires
significant judgment, and estimates of probable losses inherent in the credit portfolio can vary
significantly from the amounts actually observed. While management uses available information to
recognize probable losses, future additions to the allowance may be necessary based on changes in
the credits comprising the portfolio and changes in the financial condition of borrowers, such as
may result from changes in economic conditions. In addition, regulatory agencies, as an integral
part of their examination process, and independent consultants engaged by Sandy Spring Bank,
periodically review the credit portfolio and the allowance. Such review may result in additional
provisions based on these third-party judgments of information available at the time of each
examination. During the first three months of 2007, there were no changes in estimation methods or
assumptions that affected the allowance methodology. The allowance for loan and lease losses was
1.09% of total loans and leases at March 31, 2007 and 1.08% at December 31, 2006. The allowance
increased during the first three months of 2007 by $2.7 million, to $22.2 million at March 31,
2007, from $19.5 million at December 31, 2006. The increase in the allowance during the first
three months of 2007 was due to the increased provision for loan and lease losses mentioned above
which was due primarily to growth in the size of the loan portfolio and the addition of a $1.9
million allowance associated with the acquisition of Potomac Bank.
Nonperforming loans and leases increased by $3.4 million to $7.1 million at March 31, 2007
from $3.7 million at December 31, 2006, while nonperforming assets increased by $3.2 million for
the same period to $7.1 million at March 31, 2007. Expressed as a percentage of total assets,
nonperforming assets increased to 0.24% at March 31, 2007 from 0.15% at December 31, 2006. The
allowance for loan and lease losses represented 314% of nonperforming loans and leases at March 31,
2007, compared to coverage of 498% at December 31, 2006. The increase in loans and leases 90 days
past due was mainly the result of two loans in the amount of $2.7 million. Both these loans have
more than adequate collateral. No losses are expected in either of these two loans. Significant
variation in this coverage ratio may occur from period to period because the amount of
nonperforming loans and leases depends largely on the condition of a small number of individual
credits and borrowers relative to the total loan and lease portfolio. Other real estate owned was
$0 at March 31, 2007 and $0.2 million at December 31, 2006. The balance of impaired loans and
leases was $1.4 million at March 31, 2007, with specific reserves against those loans of $332,000,
compared to $0.3 million at December 31, 2006, with specific reserves of $118,000.
25
Table 6 Analysis of Credit Risk
(Dollars in thousands)
Activity in the allowance for credit losses is shown below:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Twelve Months Ended |
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
Balance, January 1 |
|
$ |
19,492 |
|
|
$ |
16,886 |
|
Allowance acquired from acquisition |
|
|
1,858 |
|
|
|
0 |
|
Provision for loan and lease losses |
|
|
839 |
|
|
|
2,795 |
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
Residential real estate |
|
|
0 |
|
|
|
0 |
|
Commercial loans and leases |
|
|
(11 |
) |
|
|
(230 |
) |
Consumer |
|
|
(15 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
|
Total charge-offs |
|
|
(26 |
) |
|
|
(315 |
) |
Loan recoveries: |
|
|
|
|
|
|
|
|
Residential real estate |
|
|
0 |
|
|
|
0 |
|
Commercial loans and leases |
|
|
3 |
|
|
|
89 |
|
Consumer |
|
|
20 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Total recoveries |
|
|
23 |
|
|
|
126 |
|
|
|
|
|
|
|
|
Net recoveries (charge-offs) |
|
|
(3 |
) |
|
|
(189 |
) |
|
|
|
|
|
|
|
Balance, period end |
|
$ |
22,186 |
|
|
$ |
19,492 |
|
|
|
|
|
|
|
|
Net recoveries (charge-offs) to
average loans and leases (annual
basis) |
|
|
0.00 |
% |
|
|
0.01 |
% |
Allowance to total loans and leases |
|
|
1.09 |
% |
|
|
1.08 |
% |
The following table presents nonperforming assets at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
|
December 31, 2006 |
|
Non-accrual loans and leases |
|
$ |
1,982 |
|
|
$ |
1,910 |
|
Loans and leases 90 days past due |
|
|
5,084 |
|
|
|
1,823 |
|
|
|
|
|
|
|
|
Total nonperforming loans and leases* |
|
|
7,066 |
|
|
|
3,733 |
|
|
|
|
|
|
|
|
Other real estate owned, net |
|
|
0 |
|
|
|
182 |
|
Total nonperforming assets |
|
$ |
7,066 |
|
|
$ |
3,915 |
|
|
|
|
|
|
|
|
Nonperforming assets to total assets |
|
|
0.24 |
% |
|
|
0.15 |
% |
|
|
|
* |
|
Those performing credits considered potential problem credits (which the Company classifies as
substandard), as defined and identified by management, amounted to approximately $7.8 million at
March 31, 2007, compared to $10.1 million at December 31, 2006. These are credits where known
information about the borrowers possible credit problems causes management to have doubts as to
their ability to comply with the present repayment terms. This could result in their
reclassification as nonperforming credits in the future, but most are well collateralized and are
not believed to present significant risk of loss. Loans classified for regulatory purposes not
included in either non-performing or potential problem loans consist only of other loans
especially mentioned and do not, in managements opinion, represent or result from trends or
uncertainties reasonably expected to materially impact future operating results, liquidity or
capital resources, or represent material credits where known information about the borrowers
possible credit problems causes management to have doubts as to the borrowers ability to comply
with the loan repayment terms. |
Noninterest Income and Expenses
Total noninterest income was $10.9 million for the three month period ended March 31, 2007, an 11%
or $1.0 million increase from the same period of 2006. The increase in noninterest income for the
first three months of 2007 was due primarily to an increase of $0.6 million or 28% in insurance
agency commissions as the result of the acquisition of Neff & Associates in January, 2006 and
higher premiums from existing commercial property and casualty lines and service charges on deposit
accounts increased $0.5 million or 25%. In addition, fees on sales of investment products
increased
26
$0.1 million or 11% due to increased sales volumes and trust and investment management fees
increased $0.2 million or 8% due mainly to growth in assets under management. Gains on sales of
mortgage loans decreased $0.1 million or 18% due to market conditions and other income decreased
$0.3 million or 23%.
Total noninterest expenses were $23.6 million for the three month period ended March 31, 2007,
a 16% or $3.3 million increase from the same period in 2006. The Company incurs additional costs
in order to enter new markets, provide new services, and support the growth of the Company.
Management controls its operating expenses, however, with the goal of maximizing profitability over
time. Salaries and employee benefits increased $1.0 million or 8% during the first three months of
2007 due in part to the acquisition of Potomac Bank in February 2007, as well as growth in the
number of full-time equivalent employees. Marketing expenses increased by $0.2 million or 55% as
part of the Companys plan to increase brand recognition and to grow market share, while outside
data services grew by $0.1 million or 19%. Occupancy and equipment expenses increased $0.3 million
or 14% due to growth in the branch network and the acquisition of Potomac Bank. Average full-time
equivalent employees increased to 681 during the first three months of 2007, from 624 during the
like period in 2006, a 9% increase. The ratio of net income per average full-time-equivalent
employee after completion of the first three months of the year was $11,000 in 2007 and $13,000 in
2006. Other noninterest expenses increased $1.3 million or 51% primarily due to $.6 million in
merger costs incurred due to the acquisition of Potomac Bank during the first quarter of 2007.
Income Taxes
The effective tax rate decreased to 27.9% for the three month period ended March 31, 2007,
from 28.8% for the prior year period. This decrease was primarily due to the acquisition in
February 2007 of Potomac Bank which is not subject to state income taxes.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Financial Condition Market Risk and Interest Rate Sensitivity in Managements
Discussion and Analysis of Financial Condition and Results of Operations, above, which is
incorporated herein by reference. Management has determined that no additional disclosures are
necessary to assess changes in information about market risk that have occurred since December 31,
2006.
Item 4. CONTROLS AND PROCEDURES
The Companys management, under the supervision and with the participation of the Companys
Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period
covered by this report, the effectiveness of the design and operation of the Companys disclosure
controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective. There were no significant changes in
the Companys internal controls over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the quarter ended March 31, 2007, that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II OTHER INFORMATION
Item 1A. RISK FACTORS
There have been no material changes in the risk factors as disclosed in the 2006 Annual Report on
Form 10-K.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
27
The following table provides information on the Companys purchases of its common stock during the
three months ended March 31, 2007.
Issuer Purchases of Equity Securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum |
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
Number that May Yet |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
Be Purchased Under |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
the Plans or |
|
|
(a) Total Number of |
|
(b) Average Price |
|
Announced Plans or |
|
Programs |
Period |
|
Shares Purchased |
|
Paid per Share |
|
Programs |
|
(2)(3) |
January 2007 |
|
|
0 |
|
|
NA |
|
|
0 |
|
|
|
661,634 |
|
February 2007 |
|
|
0 |
|
|
NA |
|
|
0 |
|
|
|
661,634 |
|
March 2007 |
|
|
0 |
|
|
NA |
|
|
0 |
|
|
|
661,634 |
|
|
|
|
(1) |
|
Includes purchases of the Companys stock made by or on behalf of the Company or any
affiliated purchasers of the Company as defined in Securities and Exchange Commission Rule 10b-18. |
|
(2) |
|
On March 28, 2007, the Companys board of directors approved a continuation of the stock
repurchase program that permits the repurchase of up to 5%, or approximately 786,000 shares, of its
outstanding common stock. The current program continued a similar plan that expired on March 31,
2007. Repurchases under the program may be made on the open market and in privately negotiated
transactions from time to time until March 31, 2009, or earlier termination of the program by the
Board. The repurchases are made in connection with shares expected to be issued under the Companys
various benefit plans, as well as for other corporate purposes. At March 31, 2007, a total of
661,634 shares remained under the plan. |
|
(3) |
|
Indicates the number of shares remaining under the plan at the end of the indicated month. |
Item 6. EXHIBITS
|
|
|
Exhibit 31(a) and (b)
|
|
Rule 13a-14(a) / 15d-14(a) Certifications |
Exhibit 32 (a) and (b)
|
|
18 U.S.C. Section 1350 Certifications |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
SANDY SPRING BANCORP, INC.
(Registrant) |
|
|
|
|
|
|
|
By:
|
|
/S/ HUNTER R. HOLLAR
Hunter R. Hollar
President and Chief Executive Officer
|
|
|
|
|
|
|
|
Date: May 7, 2007 |
|
|
|
|
|
|
|
By:
|
|
/S/ PHILIP J. MANTUA
Philip J. Mantua
Executive Vice President and Chief Financial Officer
|
|
|
|
|
|
|
|
Date: May 7, 2007 |
|
|
29