Sandy Spring Bank - 10-Q quarterly report FY2011 Q3

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission File Number: 0-19065

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The number of outstanding shares of common stock outstanding as of November 2, 2011.

This Quarterly Report Form 10-Q, as well as other periodic reports filed with the Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of Sandy Spring Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,”  “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.”   Forward-looking statements include statements of our goals, intentions and expectations; statements regarding our business plans, prospects, growth and operating strategies; statements regarding the quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements reflect our expectation or prediction of future conditions, events or results based on information currently available. These forward-looking statements are subject to significant risks and uncertainties that may cause actual results to differ materially from those in such statements.  These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of the Annual Report Form 10-K filed on March 16, 2011 and the following:

Forward-looking statements speak only as of the date of this report.  We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect the occurrence of unanticipated events except as required by federal securities laws.

The accompanying notes are an integral part of these statements

The accompanying notes are an integral part of these statements

The accompanying notes are an integral part of these statements

Sandy Spring Bancorp (the “Company”), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”), which conducts a full-service commercial banking, mortgage banking and trust business. Services to individuals and businesses include accepting deposits, extending real estate, consumer and commercial loans and lines of credit, equipment leasing, general insurance, personal trust, and investment and wealth management services. The Company operates in the six Maryland counties of Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George's, and in Arlington, Fairfax and Loudoun counties in Virginia. The Company offers investment and wealth management services through the Bank’s subsidiary, West Financial Services.  Insurance products are available to clients through the agencies of Sandy Spring Insurance Corporation.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry.  The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report.  Operating results for the nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2011. 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. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.  The Company has evaluated subsequent events through the date of the issuance of its financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2010 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 16, 2011.  There have been no significant changes to the Company’s accounting policies as disclosed in the 2010 Annual Report on Form 10-K.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Sandy Spring Bank and its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and affect the reported amounts of revenues earned and expenses incurred during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan and lease losses and the related allowance, potential impairment of goodwill or other intangible assets, valuation of investment securities and the determination of whether impaired securities are other-than-temporarily impaired, determination of impaired loans and the related measurement of impairment, valuation of other real estate owned, prepayment rates, valuation of share-based compensation, the assessment that a liability should be recognized with respect to any matters under litigation, the calculation of current and deferred income taxes and the actuarial projections related to pension expense and the related liability.

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and interest-bearing deposits with banks (items with an original maturity of three months or less).

In July 2010, the Financial Accounting Standards Board (“FASB”) issued guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses.  This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010.  For disclosures about activity during a reporting period, those disclosures are effective for interim and annual reporting periods beginning on or after December 15, 2010.  The purpose of the guidance is to enhance disclosures required on financing receivables and the allowance for credit losses.  The disclosures provide enhanced information on the credit quality of a creditor’s financing receivables and the adequacy of its allowance for credit losses.  This information is required to be presented on a disaggregated basis and includes the aging of the receivables, the nature and extent of any troubled debt restructurings and the effect on the allowance for credit losses.  This guidance also requires disclosures of any significant purchases or sales of receivables.  The application of this guidance did not have any material impact on the financial position, results of operations or cash flows of the Company, but increased the Company’s disclosures related to the credit quality of financing receivables and the allowance for loan and lease losses.

In April 2011, the FASB issued a standard that  provides creditors guidance when analyzing modifications to the terms of receivables to determine if it meets criteria to be considered a troubled debt restructuring (TDR), both for purposes of recording impairment and  disclosure of troubled debt restructurings. The new guidance also increases the qualitative and quantitative disclosures related to TDRs. This guidance may cause prior-period restructurings to be considered a TDR subsequent to the effective date of this guidance, in addition to producing significant changes to creditors’ evaluation methods and their disclosures of TDRs.  The guidance is effective for the first interim or annual period beginning on or after June 15, 2011.  The application of this guidance did not have any material impact on the financial position, results of operations or cash flows of the Company.

The FASB issued guidance in September 2011 that provides for the optional application of a qualitative assessment to the goodwill impairment test.  The guidance provides entities with the option to qualitatively determine whether they can bypass the two-step goodwill impairment test under current guidance.  Under this guidance, if an entity chooses to perform a qualitative assessment and determine that it is more likely that not that the fair value of a reporting unit is less that its carrying amount, it would have to perform a Step 1 goodwill impairment test and, if necessary, proceed to the Step 2 process.  If the fair value exceeds the carrying amount of goodwill, no further evaluation would be necessary.  The decision to conduct a qualitative assessment must be made at the reporting unit level.  Entities with multiple reporting units may utilize a mix of qualitative and quantitative tests for it’s various reporting units.  The guidance is effective for interim and annual goodwill impairment testing performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The Company has opted to adopt this guidance early in the fourth quarter of 2011.  This guidance will not have any impact on the financial position, results of operations or cash flows of the Company.

The FASB issued a standard in April 2011 that removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee, as the criterion is not a determining factor of effective control.  This guidance is effective for the first interim or annual period beginning on or after December 15, 2011.  This guidance is not expected to have a material impact on the financial position, results of operations or cash flows of the Company.

In May 2011, the FASB issued guidance on fair value that applies to all entities that measure assets, liabilities or instruments classified in stockholders’ equity at fair value or provide fair value disclosures for items not recorded at fair value.  The guidance clarifies how a principal market is determined, addresses the fair value measurement of instruments with offsetting market or counterparty credit risk and the concept of valuation premise and highest and best use, extends the prohibition of blockage factors to all three levels of the fair value hierarchy, and requires additional disclosures.  This guidance is effective for interim and annual periods beginning after December 15, 2011.  Differences in fair value measurement resulting from the application of the guidance will be recognized in income in the period of adoption as a change in estimate.  Disclosure requirements will be recognized prospectively.  Changes in valuation techniques and related inputs as a result of the application of the guidance in addition to an estimate of the total effect of the changes, if practicable, will be disclosed in the period of adoption.   The application of this guidance is not expected to have a significant impact on the financial position, results of operations or cash flows of the Company.

In June 2011, the FASB issued a standard that requires comprehensive income to be reported in either a single statement or two consecutive statements reporting net income and other comprehensive income.  The guidance does not alter the items that are reported in other comprehensive income or require reclassification of items from other comprehensive income to net income. This guidance should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  This guidance will not have any impact on the financial position, results of operations or cash flows of the Company as it will only affect the presentation of the information in the financial statements.

The amortized cost and estimated fair values of investments available-for-sale at the dates indicated are presented in the following table:

At September 30, 2011, unrealized losses associated with U.S. Government Agencies and state and municipal securities have been caused by changes in interest rates and are not considered credit related as the contractual cash flows of these investments are either explicitly or implicitly backed by the full faith and credit of the U.S. government.  The mortgage-backed portfolio at September 30, 2011 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($228.3 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($341.8 million).  The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.  Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity.

At September 30, 2011, the trust preferred portfolio consisted of two securities totaling $3.0 million, each backed by a single financial institution issuer.  The fair value of this security was $3.3 million as determined using broker quotations. The Company also owns one pooled trust preferred security backed by debt issued by banks and thrifts, which totals $2.9 million, with a fair value of $2.4 million.  The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace.

The specialist used an income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs.  The methodology and significant assumptions employed by the specialist to determine fair value included:

As a result of this evaluation, it was determined that the pooled trust preferred security incurred credit-related other-than-temporary impairment  (“OTTI”) of $76 thousand, which was recognized in earnings for the quarter ended September 30, 2011.  For the nine months ended September 30, 2011, credit-related OTTI incurred on this security amounted to $160 thousand.  Cumulative credit-related OTTI of $422 thousand has been recognized in earnings through September 30, 2011.  The non-credit related OTTI recognized in other comprehensive income (“OCI”) at September 30, 2011 was $0.6 million.  The security is not expected to be sold and the Company has the ability to hold the security until maturity.

The significant inputs used to measure the amount related to credit loss consisted of the following:

The following table provides the activity of OTTI on investment securities due to credit losses recognized in earnings for the period indicated:

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in an unrealized loss position at the dates indicated are presented in the following table:

The amortized cost and estimated fair values of investment securities available-for-sale by contractual maturity at the dates indicated are provided in the following table.  The Company has allocated mortgage-backed securities into the four maturity groupings reflected in the following table using the expected average life of the individual securities based on statistics provided by independent third party industry sources.  Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

At September 30, 2011 and December 31, 2010, investments available-for-sale with a book value of $256.7 million and $244.2 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at September 30, 2011 and December 31, 2010.

The amortized cost and estimated fair values of investments held-to-maturity at the dates indicated are presented in the following table:

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 the dates indicated are presented in the following tables:

The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value. Accordingly, the unrealized losses in the held-to-maturity portfolio are considered temporary in nature.

The amortized cost and estimated fair values of debt securities held-to-maturity by contractual maturity at the dates indicated are reflected in the following table. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

At September 30, 2011 and December 31, 2010, investments held-to-maturity with a book value of $61.4 million and $85.8 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law.  The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at September 30, 2011 and December 31, 2010.

Other equity securities at the dates indicated are presented in the following table:

The loan portfolio segment balances are presented in the following table at the dates indicated, net of unearned income and deferred fees of $2.0 million and $2.1 million, at September 30, 2011 and December 31, 2010, respectively:

Summary information on the allowance for loan and lease loss activity at the dates indicated ended is provided in the following table:

The following table provides information on the activity in the allowance for loan and lease losses by the respective loan portfolio segment for the period indicated:

The following table presents the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged-off at the dates indicated: