SANDY SPRING BANCORP INC - FORM 10-Q

Attached files

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EX-32.(B) - SANDY SPRING BANCORP INC	v200957_ex32-b.htm
EX-31.(B) - SANDY SPRING BANCORP INC	v200957_ex31-b.htm
EX-32.(A) - SANDY SPRING BANCORP INC	v200957_ex32-a.htm
EX-10.(B) - SANDY SPRING BANCORP INC	v200957_ex10-b.htm
EX-31.(A) - SANDY SPRING BANCORP INC	v200957_ex31-a.htm
EX-10.(A) - SANDY SPRING BANCORP INC	v200957_ex10-a.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2010

¨ 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: 0-19065

SANDY SPRING BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland		52-1532952
(State of incorporation)		(I.R.S. Employer Identification Number)

17801 Georgia Avenue, Olney, Maryland		20832
(Address of principal executive office)		(Zip Code)

301-774-6400

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

The number of outstanding shares of common stock outstanding as of November 3, 2010.

Common stock, $1.00 par value – 24,011,029 shares

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Condensed Consolidated Statements of Condition - Unaudited at September 30, 2010 and December 31, 2009	2

Condensed Consolidated Statements of Income/(Loss) - Unaudited for the Three Month and Nine Months Periods Ended September 30, 2010 and 2009	3

Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine Month Periods Ended September 30, 2010 and 2009	4

Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Nine Month Periods Ended September 30, 2010 and 2009	5

Notes to Condensed Consolidated Financial Statements	6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44

ITEM 4. CONTROLS AND PROCEDURES	44

PART II - OTHER INFORMATION

ITEM 1A. RISK FACTORS	44

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	44

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	44

ITEM 4. [RESERVED]	44

ITEM 5. OTHER INFORMATION	44

ITEM 6. EXHIBITS	44

SIGNATURES	45

Forward-Looking Statements

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 12, 2010 and the following:

general business and economic conditions nationally or in the markets we serve could adversely affect, among other things, real estate prices, unemployment levels, and consumer and business confidence, which could lead to decreases in the demand for loans, deposits and other financial services that we provide and increases in loan delinquencies and defaults;

changes or volatility in the capital markets and interest rates may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance sheet as well as our liquidity;

our liquidity requirements could be adversely affected by changes in our assets and liabilities;

our investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates we use to value certain of the securities in our portfolio;

the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

competitive factors among financial services companies, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;

the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company Accounting Oversight Board and other regulatory agencies; and

the effect of fiscal and governmental policies of the United States federal government.

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

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONDITION - UNAUDITED

	September 30,			December 31,
(Dollars in thousands)	2010			2009
Assets
Cash and due from banks	$	40,511		$	49,430
Federal funds sold		1,522			1,863
Interest-bearing deposits with banks		37,692			8,503
Cash and cash equivalents		79,725			59,796
Residential mortgage loans held for sale (at fair value)		19,234			12,498
Investments available-for-sale (at fair value)		960,313			858,433
Investments held-to-maturity — fair value of $111,298 and $137,787 at September 30, 2010 and December 31, 2009, respectively		106,553			132,593
Other equity securities		32,652			32,773
Total loans and leases		2,185,207			2,298,010
Less: allowance for loan and lease losses		(67,282	)		(64,559	)
Net loans and leases		2,117,925			2,233,451
Premises and equipment, net		48,175			49,606
Other real estate owned		10,011			7,464
Accrued interest receivable		13,083			13,653
Goodwill		76,816			76,816
Other intangible assets, net		7,050			8,537
Other assets		135,080			144,858
Total assets	$	3,606,617		$	3,630,478

Liabilities
Noninterest-bearing deposits	$	580,309		$	540,578
Interest-bearing deposits		2,005,187			2,156,264
Total deposits		2,585,496			2,696,842
Securites sold under retail repurchase agreements and federal funds purchased		97,884			89,062
Advances from FHLB		409,263			411,584
Subordinated debentures		35,000			35,000
Accrued interest payable and other liabilities		27,257			24,404
Total liabilities		3,154,900			3,256,892

Stockholders' Equity
Preferred stock—par value $1.00 (liquidation preference of $1,000 per share) shares authorized 83,094, shares issued and outstanding 41,547 and 83,094, net of discount of $1,239 and $2,999 at September 30, 2010 and December 31, 2009, respectively		40,308			80,095
Common stock — par value $1.00; shares authorized 49,916,906; shares issued and outstanding 24,006,748 and 16,487,852 at September 30, 2010 and December 31, 2009, respectively		24,007			16,488
Warrants		3,699			3,699
Additional paid in capital		176,582			87,334
Retained earnings		198,737			188,622
Accumulated other comprehensive income (loss)		8,384			(2,652	)
Total stockholders' equity		451,717			373,586
Total liabilities and stockholders' equity	$	3,606,617		$	3,630,478

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS) - UNAUDITED

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2010			2009			2010			2009
Interest Income:
Interest and fees on loans and leases	$	29,084		$	31,280		$	87,742		$	96,579
Interest on loans held for sale		148			121			321			654
Interest on deposits with banks		61			23			158			112
Interest and dividends on securities:
Taxable		6,336			5,947			18,640			13,673
Exempt from federal income taxes		1,737			1,814			5,372			5,560
Interest on federal funds sold		1			-			2			3
Total interest income		37,367			39,185			112,235			116,581
Interest Expense:
Interest on deposits		3,883			8,743			13,741			28,118
Interest on retail repurchase agreements and federal funds purchased		61			87			198			225
Interest on advances from FHLB		3,676			3,706			10,949			11,005
Interest on subordinated debt		248			247			693			1,358
Total interest expense		7,868			12,783			25,581			40,706
Net interest income		29,499			26,402			86,654			75,875
Provision for loan and lease losses		2,453			34,450			23,585			55,678
Net interest income (loss) after provision for loan and lease losses		27,046			(8,048	)		63,069			20,197
Non-interest Income:
Investment securities gains		25			15			323			207
Total other-than-temporary impairment ("OTTI") losses		(334	)		-			(1,168	)		-
Portion of OTTI losses recognized in other comprehensive income, before taxes		(46	)		-			699			-
Net OTTI recognized in earnings		(380	)		-			(469	)		-
Service charges on deposit accounts		2,567			2,823			7,984			8,537
Gains on sales of mortgage loans		915			1,011			2,544			2,819
Fees on sales of investment products		782			740			2,464			2,062
Trust and investment management fees		2,505			2,406			7,488			7,063
Insurance agency commissions		978			1,048			3,895			4,138
Income from bank owned life insurance		709			740			2,105			2,176
Visa check fees		843			758			2,438			2,144
Other income		1,794			1,121			5,175			4,520
Total non-interest income		10,738			10,662			33,947			33,666
Non-interest Expenses:
Salaries and employee benefits		13,841			14,411			41,393			41,319
Occupancy expense of premises		2,826			2,685			8,625			8,008
Equipment expenses		1,137			1,444			3,655			4,332
Marketing		589			484			1,678			1,389
Outside data services		966			987			3,007			2,754
FDIC insurance		1,056			1,219			3,383			4,968
Amortization of intangible assets		495			1,048			1,487			3,150
Other expenses		4,429			4,289			13,370			11,755
Total non-interest expenses		25,339			26,567			76,598			77,675
Income (loss) before income taxes		12,445			(23,953	)		20,418			(23,812	)
Income tax expense (benefit)		3,961			(10,379	)		5,174			(12,175	)
Net income (loss)	$	8,484		$	(13,574	)	$	15,244		$	(11,637	)
Preferred stock dividends and discount accretion		2,074			1,205			4,477			3,607
Net income (loss) available to common stockholders	$	6,410		$	(14,779	)	$	10,767		$	(15,244	)

Net Income (Loss) Per Share Amounts:
Basic net income (loss) per share	$	0.35		$	(0.83	)	$	0.70		$	(0.71	)
Basic net income (loss) per common share		0.27			(0.90	)		0.49			(0.93	)
Diluted net income (loss) per share	$	0.35		$	(0.83	)	$	0.70		$	(0.71	)
Diluted net income (loss) per common share		0.27			(0.90	)		0.49			(0.93	)
Dividends declared per common share	$	0.01		$	0.12		$	0.03		$	0.36

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

	Nine Months Ended
	September 30,
(Dollars in thousands)	2010			2009
Operating activities:
Net income (loss)	$	15,244		$	(11,637	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		5,816			7,849
Net OTTI recognized in earnings		469			-
Provision for loan and lease losses		23,585			55,678
Share based compensation expense		791			1,105
Deferred income tax benefit		(1,911	)		(5,868	)
Origination of loans held for sale		(161,814	)		(285,116	)
Proceeds from sales of mortgage loans held for sale		157,182			288,253
Gains on sales of mortgage loans held for sale		(2,104	)		(2,672	)
Securities gains		(323	)		(207	)
Gains on sales of premises and equipment		(92	)		-
Net decrease (increase) in accrued interest receivable		570			(1,515	)
Net decrease (increase) in other assets		3,162			(13,083	)
Net increase in accrued expenses and other liabilities		3,114			3,278
Other – net		4,495			2,675
Net cash provided by operating activities		48,184			38,740
Investing activities:
Purchases of other equity securities		121			(3,628	)
Purchases of investments available-for-sale		(600,295	)		(719,202	)
Proceeds from maturities, calls and principal payments of investments held-to-maturity		26,282			31,229
Proceeds from maturities, calls and principal payments of investments available-for-sale		512,503			213,407
Net decrease in loans and leases		83,641			108,208
Proceeds from the sales of other real estate owned		5,294			788
Contingent consideration payout		-			(2,308	)
Expenditures for premises and equipment		(1,757	)		(2,200	)
Net cash provided (used) in investing activities		25,789			(373,706	)
Financing activities:
Net (decrease) increase in deposits		(111,346	)		318,230
Net increase in retail repurchase agreements and federal funds purchased		8,822			9,032
Repayment of advances from FHLB		(2,321	)		(725	)
Common stock issued pursuant to West Financial Services acquisition		-			628
Redemption of preferred stock		(41,547	)		-
Proceeds from issuance of common stock		95,961			424
Tax benefits associated with shared based compensation		15			-
Dividends paid		(3,628	)		(8,842	)
Net cash provided (used) by financing activities		(54,044	)		318,747
Net increase (decrease) in cash and cash equivalents		19,929			(16,219	)
Cash and cash equivalents at beginning of period		59,796			105,229
Cash and cash equivalents at end of period	$	79,725		$	89,010

Supplemental Disclosures:
Interest payments	$	25,931		$	41,378
Income tax payments		181			3,920
Transfers from loans to other real estate owned		8,300			4,889

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - UNAUDITED

														Accumulated
								Additional						Other			Total
	Preferred			Common				Paid-In			Retained			Comprehensive			Stockholders’
(Dollars in thousands, except per share data)	Stock			Stock		Warrants		Capital			Earnings			Income (Loss)			Equity
Balances at December 31, 2009	$	80,095		$	16,488	$	3,699	$	87,334		$	188,622		$	(2,652	)	$	373,586
Comprehensive Income:
Net income		-			-		-		-			15,244			-			15,244
Other comprehensive income, net of tax:
Net unrealized gain on debt securities, net of reclassification adjustment		-			-		-		-			-			10,527			10,527
Change in funded status of defined benefit pension		-			-		-		-			-			509			509
Total Comprehensive Income																		26,280
Redemption of preferred stock - 41,547 shares		(41,547	)		-		-		-			-			-			(41,547	)
Common stock dividends - $0.03 per share		-			-		-		-			(652	)		-			(652	)
Preferred stock dividends - $37.50 per share		-			-		-		-			(2,717	)		-			(2,717	)
Stock compensation expense		-			-		-		791			-			-			791
Discount accretion		1,760			-		-		-			(1,760	)		-			-
Common stock issued pursuant to:
Common stock issuance - 7,475,000 shares		-			7,475		-		88,159			-			-			95,634
Stock option plan - 2,216 shares		-			2		-		30			-			-			32
Employee stock purchase plan - 25,519 shares		-			26		-		276			-			-			302
Restricted stock - 12,247 shares		-			12		-		(79	)		-			-			(67	)
Director stock purchase plan - 3,709 shares		-			4		-		68			-			-			72
DRIP plan - 205 shares		-			-		-		3			-			-			3
Balances at September 30, 2010	$	40,308		$	24,007	$	3,699	$	176,582		$	198,737		$	8,384		$	451,717

Balances at December 31, 2008	$	79,440		$	16,399	$	3,699	$	85,486		$	214,410		$	(7,572	)	$	391,862
Comprehensive Income:
Net income		-			-		-		-			(11,637	)		-			(11,637	)
Other comprehensive income, net of tax:
Net unrealized gain on debt securities, net of reclassification adjustment		-			-		-		-			-			6,649			6,649
Change in funded status of defined benefit pension		-			-		-		-			-			613			613
Total Comprehensive Income																		(4,375	)
Common stock dividends - $0.36 per share		-			-		-		-			(5,957	)		-			(5,957	)
Preferred stock dividends - $37.49 per share		-			-		-		-			(3,116	)		-			(3,116	)
Stock compensation expense		-			-		-		1,105			-			-			1,105
Discount accretion		490			-		-		-			(490	)		-			-
Common stock issued pursuant to:
Contingent consideration relating to 2005 acquisition of West Financial - 31,663 shares		-			32		-		596			-			-			628
Employee stock purchase plan - 28,909 shares		-			29		-		324			-			-			353
Director stock purchase plan - 2,988 shares		-			3		-		37			-			-			40
Restricted stock - 5,608 shares		-			5		-		(6	)		-			-			(1	)
DRIP plan – 2,441 shares		-			2		-		30			-			-			32
Balances at September 30, 2009	$	79,930		$	16,470	$	3,699	$	87,572		$	193,210		$	(310	)	$	380,571

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

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 Fairfax and Loudoun counties in Virginia. The Company offers investment and wealth management services through the Bank’s subsidiary, West Financial Services. Insurance products are available to clients through Chesapeake Insurance Group, and Neff & Associates, which are agencies of Sandy Spring Insurance Corporation. The Equipment Leasing Company provides leasing primarily for technology-based equipment to retail businesses.

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, 2010 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2010. These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2009 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 12, 2010. There have been no significant changes to the Company’s accounting policies as disclosed in the 2009 Annual Report on Form 10-K.

Principles of Consolidation and Basis of Presentation

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, The Equipment Leasing Company, and West Financial Services, Inc. Consolidation has resulted in the elimination of all significant intercompany accounts and transactions. 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. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that could change significantly relate to the provision for loan and lease losses and the related allowance, potential impairment of goodwill or intangibles, estimates with respect to other-than-temporary impairment involving investment securities, non-accrual loans, other real estate owned, prepayment rates, share-based payment, litigation, income taxes and projections of pension expense and the related liability.

Cash Flows

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

Adopted Accounting Pronouncements

The Company applies the guidance for the Financial Accounting Standards Board (“FASB”) Accounting Standards Topic (“ASC”) regarding disclosure requirements that apply to transfers that occur both before and after November 15, 2009. This guidance changes the de-recognition guidance for transferors of financial assets, including entities that sponsor securitizations. In addition existing qualifying special-purpose entities (“QSPE”) must be evaluated for consolidation by the reporting entity. The concept of QSPE is eliminated and transferors are required to evaluate transfers to such entities. The guidance also introduces the concept of a participating interest. A participating interest is defined as a proportionate ownership interest in a financial asset in which the cash flows from the asset are allocated to the participating interest holders in proportion to their ownership share.

Additionally, the guidance significantly modifies the conditions required for a transfer of a financial asset or a participating interest therein to qualify as a sale. The guidance also changes the measurement guidance for transfers of financial assets in that it requires that a transferor recognize and initially measure at fair value any servicing assets, servicing liabilities, and any other assets obtained and liabilities incurred in a sale. The statement amends the disclosure requirements to allow financial statement users to understand the nature and extent of the transferor’s continuing involvement with financial assets that have been transferred. The application of this guidance did not have any impact on the Company’s financial position, results of operations or cash flows.

The Company applies the guidance for identifying the primary beneficiary of a VIE (“variable interest entity”) and applies the required analytical approach to determine if an enterprise’s variable interests give it a controlling financial interest in the VIE. The guidance expanded the disclosure requirements for an enterprise that has a variable interest in a VIE. The application of this guidance did not have a material impact on the financial position, results of operations or cash flows of the Company.

Pending Accounting Pronouncements

In July 2010, the 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, 2011. The purpose of the guidance is to enhance disclosures required on financing receivables and the allowance for credit losses. The disclosures will 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 is not expected to have any material impact on the financial position, results of operations or cash flows of the Company, but will increase the Company’s disclosures related to loans and the allowance for loan and lease losses.

NOTE 2 – INVESTMENTS

At September 30, 2010, unrealized losses associated with U.S. Government Agencies 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 municipal securities portfolio segment is not experiencing any significant credit problems at September 30, 2010 and the Company believes it will receive all contractual cash flows due on this portfolio. The mortgage-backed securities portfolio at September 30, 2010 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($229.2 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($341.7 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. The non-credit related unrealized losses in the available-for-sale portfolio are considered temporary in nature. 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, 2010, the Company owned a total of $3.0 million in securities backed by single issuer trust preferred securities issued by banks. The fair value of these securities was $3.4 million as determined using broker quotations. The Company also owns pooled trust preferred securities, which total $3.8 million, with a fair value of $3.1 million. These pooled securities are backed by the trust preferred securities issued by banks, thrifts, and insurance companies. These particular securities have exhibited limited trading activity due to the state of the economy. There are currently very few market participants who are willing and or able to transact for these securities. Given current conditions in the debt markets and the absence of observable transactions in the secondary markets, the Company has determined:

The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value.

The pooled trust preferred securities will be classified within Level 3 of the fair value hierarchy and the fair value is determined based upon independent modeling.

An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be more representative of fair value than a market approach valuation technique.

The assumptions used to determine fair value on a present value basis, in the absence of observable trading prices as noted, included the following:

Detailed credit and structural evaluation for each piece of collateral in the pooled trust preferred securities.

Collateral performance projections for each piece of collateral in the pooled trust preferred securities (default, recovery and prepayment/amortization probabilities).

Terms of the structure of the pooled trust preferred securities as established in the indenture.

An 11.1% discount rate that was developed by using the risk free rate adjusted for a risk premium and a liquidity adjustment that considered the characteristics of the securities and the related collateral.

As part of its formal quarterly evaluation of the pooled trust preferred securities for the presence of other-than-temporary impairment (“OTTI”), the Company utilized a third party valuation service. The Company reviewed the methodology employed by the third party valuation service for reasonableness by considering a number of inputs and the appropriateness of the key underlying assumptions above. In addition, the Company also reviewed and considered the following:

The projected cash flows from the underlying securities that incorporate default expectations and the severity of losses;

The underlying cause and conditions associated with defaults or deferrals and an assessment of the relative strength of the issuer;

The receipt of payments on a timely basis and the ability of the issuer to make scheduled interest or principal payments;

The length of time and the extent to which the fair value has been less than the amortized cost;

Adverse conditions specifically related to the security, industry, or geographic area;

Historical and implied volatility of the fair value of the security;

Credit risk concentrations;

Amount of principal likely to be recovered by stated maturity;

Ratings changes of the security;

Performance of bond collateral;

Recoveries of additional declines in fair value subsequent to the date of the statement of condition;

That the securities are senior notes with first priority;

Other information currently available, such as the latest trustee reports; and

An analysis of the credit worthiness of the remaining individual pooled banks.

As a result of this evaluation, it was determined that the pooled trust preferred securities issued by banks had credit-related OTTI of $219 thousand which was recognized in earnings for the nine months ended September 30, 2010. The credit-related OTTI recognized in earnings for the three months ended September 30, 2010 was $130 thousand. Non-credit related OTTI on these securities, which are not expected to be sold and that the Company has the ability to hold until maturity, was $699 thousand for the nine months ended September 30, 2010. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at September 30, 2010. All payments have been received as contractually required on these securities at September 30, 2010.

At September 30, 2010, the Company held $350 thousand in marketable equity securities of two entities. The quarterly review of the financial statements and review of other recently available data determined that OTTI existed with respect to one of the investments. As a result, the Company recognized in earnings for the three and nine months ended September 30, 2010 credit-related OTTI of $250 thousand which represented the Company’s entire investment in the particular institution.

Investments available-for-sale

The amortized cost and estimated fair values of investments available-for-sale for the periods indicated are as follows:

	September 30, 2010									December 31, 2009
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. government agencies	$	333,458	$	5,635	$	(1	)	$	339,092	$	352,841	$	3,190	$	(434	)	$	355,597
State and municipal		41,093		2,565		-			43,658		41,283		903		(44	)		42,142
Mortgage-backed		554,928		16,066		(75	)		570,919		449,722		5,767		(1,491	)		453,998
Trust preferred		6,828		415		(699	)		6,544		7,841		180		(1,675	)		6,346
Total debt securities		936,307		24,681		(775	)		960,213		851,687		10,040		(3,644	)		858,083
Marketable equity securities		100		-		-			100		350		-		-			350
Total investments available-for-sale	$	936,407	$	24,681	$	(775	)	$	960,313	$	852,037	$	10,040	$	(3,644	)	$	858,433

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in an unrealized loss position for the periods indicated are as follows:

As of September 30, 2010					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		1	$	9,981	$	1	$	-	$	1
Mortgage-backed		7		50,405		74		1		75
Trust preferred		2		3,353		-		699		699
Total		10	$	63,739	$	75	$	700	$	775

As of December 31, 2009					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		10	$	72,793	$	434	$	-	$	434
State and municipal		5		5,805		40		4		44
Mortgage-backed		30		150,369		1,454		37		1,491
Trust preferred		3		4,366		24		1,651		1,675
Total		48	$	233,333	$	1,952	$	1,692	$	3,644

The amortized cost and estimated fair values of investment securities available-for-sale at September 30, 2010 and December 31, 2009 by contractual maturity are shown 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.

	September 30, 2010				December 31, 2009
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	41,515	$	41,852	$	56,739	$	57,454
Due after one year through five years		174,484		179,412		273,351		275,712
Due after five years through ten years		216,805		219,646		70,770		71,132
Due after ten years		503,503		519,303		450,827		453,785
Total debt securities available for sale	$	936,307	$	960,213	$	851,687	$	858,083

At September 30, 2010 and December 31, 2009, investments available-for-sale with a book value of $233.2 million and $290.2 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. Agency securities, exceeded ten percent of stockholders' equity at September 30, 2010 and December 31, 2009.

Investments held-to-maturity

The amortized cost and estimated fair values of investments held-to-maturity for the periods indicated are as follows:

	September 30, 2010									December 31, 2009
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
State and municipal	$	106,032	$	4,699	$	(4	)	$	110,727	$	131,996	$	5,156	$	(1	)	$	137,151
Mortgage-backed		521		50		-			571		597		39		-			636
Total investments held-to-maturity	$	106,553	$	4,749	$	(4	)	$	111,298	$	132,593	$	5,195	$	(1	)	$	137,787

Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position for the periods indicated are as follows:

As of September 30, 2010					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
State and municipal		2	$	400	$	2	$	2	$	4
Total		2	$	400	$	2	$	2	$	4

As of December 31, 2009					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
State and municipal		4	$	1,782	$	1	$	-	$	1
Total		4	$	1,782	$	1	$	-	$	1

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, substantiates that 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 at September 30, 2010 and December 31, 2009 by contractual maturity are shown below. Expected maturities will differ from contractual maturities as borrowers may have the right to prepay obligations with or without prepayment penalties.

	September 30, 2010				December 31, 2009
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	20,701	$	21,108	$	13,626	$	13,800
Due after one year through five years		20,174		21,605		26,356		27,687
Due after five years through ten years		25,694		26,888		34,545		35,776
Due after ten years		39,984		41,697		58,066		60,524
Total debt securities held-to-maturity	$	106,553	$	111,298	$	132,593	$	137,787

At September 30, 2010 and December 31, 2009, investments held to maturity with a book value of $90.3 million and $115.7 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, 2010 and December 31, 2009.

Equity securities

Other equity securities are composed primarily of FHLB stock and Federal Reserve Bank stock, at cost. With respect to the FHLB stock, the Company has received the most recent quarterly dividend that was due. Additionally, on June 30, 2010, the FHLB announced that it will begin repurchasing excess stock on July 15, 2010. The Company has determined through a comprehensive review that there have been no other events that would result in a significant adverse effect on the fair value of the FHLB stock and that the par value of this investment will ultimately be recovered.

Other equity securities for the periods indicated are as follows:

	September 30,		December 31,
(In thousands)	2010		2009
Federal Reserve Bank stock	$	7,530	$	7,531
Federal Home Loan Bank of Atlanta stock		25,047		25,167
Atlantic Central Bank stock		75		75
Total equity securities	$	32,652	$	32,773

NOTE 3 – LOANS AND LEASES

Major categories for the periods indicated are presented below:

	September 30,		December 31,
(In thousands)	2010		2009
Residential real estate:
Residential mortgages	$	442,723	$	457,414
Residential construction		92,485		92,283
Commercial loans and leases:
Commercial mortgages		903,195		894,951
Commercial construction		96,823		131,789
Commercial business		240,671		296,220
Leases		17,895		25,704
Consumer		391,415		399,649
Total loans and leases	$	2,185,207	$	2,298,010

NOTE 4 – ALLOWANCE FOR LOAN AND LEASE LOSSES

Activity in the allowance for loan and lease losses for the periods indicated is presented below:

	Nine Months Ended September 30,
(In thousands)	2010			2009
Balance at beginning of period	$	64,559		$	50,526
Provision for loan and lease losses		23,585			55,678
Loan and lease charge-offs		(23,969	)		(43,871	)
Loan and lease recoveries		3,107			604
Net charge-offs		(20,862	)		(43,267	)
Balance at end of period	$	67,282		$	62,937

Information regarding the composition of impaired loans and the associated specific reserves for the periods indicated is as follows:

	September 30,		December 31,
(In thousands)	2010		2009
Impaired loans with specific reserves
Commercial mortgage	$	20,091	$	8,693
Commercial construction		13,490		7,571
Commercial business		9,033		7,419
Total impaired loans with specific reserves		42,614		23,683

Impaired loans without specific reserves
Commercial mortgage		2,709		12,166
Commercial construction		27,268		58,720
Commercial business		1,714		4,883
Total impaired loans without specific reserves		31,691		75,769
Total impaired loans	$	74,305	$	99,452

Allowance for loan and lease losses related to impaired loans	$	10,602	$	6,613
Allowance for loan and lease losses related to other than impaired loans		56,680		57,946
Total allowance for loan and lease losses	$	67,282	$	64,559

Average impaired loans for the year	$	84,673	$	100,387
Contractual interest income due on loans in non-accrual status during the year	$	4,434	$	6,355
Interest income on impaired loans recognized on a cash basis	$	-	$	-

NOTE 5 – STOCKHOLDERS’ EQUITY

On March 17, 2010, the Company completed an offering of 7,475,000 common shares at a price of $13.50 per share, before the underwriting discount of $0.675 per share. This resulted in proceeds of $95.6 million, net of the offering expenses. Each share of the issued common stock has the same relative rights as, and is identical in all respects with, each other share of common stock.

On July 21, 2010, the Company repaid the U.S. Treasury for half of the preferred stock issued under the Troubled Asset Relief Program (“TARP”) which amounted to $41.5 million of the $83.0 million of preferred stock issued by the Company in December 2008 as part of TARP. The repayment resulted in a reduction of the associated preferred dividends and Tier 1 regulatory capital. As a result of the repayment, the Company recognized $1.3 million in accelerated discount accretion during the third quarter of 2010. This transaction had no effect on the outstanding warrant to purchase common shares sold to the U.S. Treasury as part of the original issuance of the preferred stock.

Management intends to use the remainder of the net proceeds from the aforementioned sale of common shares for general corporate purposes which may include financing possible acquisitions of branches or other financial institutions or financial service companies, extending credit to, or funding investments in, the Company’s subsidiaries and repaying, reducing or refinancing indebtedness, which could include repayment of the remaining preferred stock issued by the Company as part of the TARP. The precise amounts and the timing of the use of the remaining net proceeds will depend upon market conditions, the Company’s subsidiaries’ funding requirements, the availability of other funds and other factors. Until the remaining net proceeds from the sale of any of the Company’s securities are used for general corporate purposes, the proceeds will be used to reduce the Company’s indebtedness or for temporary investments

NOTE 6 – SHARE BASED COMPENSATION

At September 30, 2010, the Company had two share based compensation plans in existence, the 1999 Stock Option Plan (expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.

The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the Board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 1,107,225 are available for issuance at September 30, 2010, has a term of ten years, and is administered by a committee comprised of at least three directors appointed by the Board of Directors. Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be exercised within seven to ten years from the date of grant. The exercise price of stock options must be paid for in full in cash or shares of common stock, or a combination of both. The committee has the discretion to impose restrictions on the shares to be purchased upon the exercise of such options. Options granted under the expired 1999 Stock Option Plan remain outstanding until exercised or they expire. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

During 2010, 37,389 stock options were granted, subject to a three year vesting schedule with one third of the options vesting each year on the anniversary date of the grant. Additionally, 104,281 shares of restricted stock were granted, subject to either a five or three year vesting schedule with an equal portion of the shares vesting each year on the grant date anniversary. Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The fair values of all of the options granted have been estimated using a binomial option-pricing model.

Compensation expense related to awards of stock options and restricted stock was $0.3 million and $0.6 million for the three months ended September 30, 2010 and 2009, respectively. The Company recognized compensation expense related to the awards of stock options and restricted stock grants of $0.8 million and $1.1 million for the nine months ended September 30, 2010 and 2009, respectively. Stock options exercised in the nine months ended September 30, 2010 had an immaterial intrinsic value. No stock options were exercised for the nine months ended September 30, 2009. The total of unrecognized compensation cost related to stock options was approximately $0.4 million as of September 30, 2010. That cost is expected to be recognized over a period of approximately 1.9 years. The total of unrecognized compensation cost related to restricted stock was approximately $2.5 million as of September 30, 2010. That cost is expected to be recognized over a period of approximately 3.6 years.

A summary of share option activity for the period indicated is reflected in the following table:

						Weighted
	Number			Weighted		Average		Aggregate
	of			Average		Contractual		Intrinsic
	Common			Exercise		Remaining		Value
(In thousands, except per share data):	Shares			Share Price		Life(Years)		(in thousands)
Balance at January 1, 2010		833,727		$	32.56			$	216
Granted		37,389		$	15.00				18
Exercised		(2,216	)	$	14.54				(7	)
Forfeited or expired		(71,283	)	$	35.25				-
Balance at September 30, 2010		797,617		$	31.54		3.2	$	227

Exercisable at September 30, 2010		691,016		$	33.71		2.9	$	70

Weighted average fair value of options granted during the year				$	6.65

A summary of the activity for the Company’s non-vested options and restricted stock for the period indicated is presented on the following tables:

				Weighted
				Average
	Number			Grant-Date
(In dollars, except share data):	of Shares			Fair Value
Non-vested options at January 1, 2010		123,088		$	3.88
Granted		37,389		$	6.65
Vested		(50,163	)	$	4.04
Forfeited or expired		(3,713	)	$	3.74
Non-vested options at September 30, 2010		106,601		$	4.78

				Weighted
				Average
	Number			Grant-Date
(In dollars, except share data):	Of Shares			Fair Value
Restricted stock at January 1, 2010		111,173		$	16.64
Granted		104,281		$	15.00
Vested		(25,736	)	$	14.85
Forfeited or expired		(1,723	)	$	(23.51	)
Restricted stock at September 30, 2010		187,995		$	16.34

NOTE 7 – PENSION, PROFIT SHARING, AND OTHER EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plan

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all employees. Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus future salary increases will no longer affect the defined benefit provided by the plan, although additional vesting may continue to occur.

The Company’s funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds. The Company has not yet determined the amount of its 2010 contribution to the plan.

Net periodic benefit cost for the periods indicated includes the following components:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2010			2009			2010			2009
Interest cost on projected benefit obligation	$	401		$	361		$	1,083		$	1,076
Expected return on plan assets		(326	)		(300	)		(876	)		(942	)
Recognized net actuarial loss		317			342			846			1,020
Net periodic benefit cost	$	392		$	403		$	1,053		$	1,154

Contributions

The decision as to whether or not to make a plan contribution and the amount of any such contribution is dependent on a number of factors. Such factors include the investment performance of the plan assets in the current economy and, since the plan is currently frozen, the remaining investment horizon of the plan. The Company continues to monitor the funding level of the pension plan and may make additional contributions as deemed necessary during 2010.

Plan Assets

The Company has a written investment policy approved by the board of directors that governs the investment of the defined benefit pension fund trust portfolio. The investment policy is designed to provide limits on risk that is undertaken by the investment managers both in terms of market volatility of the portfolio and the quality of the individual assets that are held in the portfolio. The investment policy statement focuses on the following areas of concern: preservation of capital, diversification, risk tolerance, investment duration, rate of return, liquidity and investment management costs.

The Company has constituted the Retirement Plans Investment Committee (“RPIC”) in part to monitor the investments of the Plan as well as to recommend to executive management changes in the Investment Policy Statement which governs the Plan’s investment operations. These recommendations include asset allocation changes based on a number of factors including the investment horizon for the Plan. The Company’s Investment Management and Fiduciary Services Division is the investment manager of the Plan and also serves as an advisor to RPIC on the Plan’s investment matters.

Investment strategies and asset allocations are based on careful consideration of plan liabilities, the plan’s funded status and the Company’s financial condition. Investment performance and asset allocation are measured and monitored on an ongoing basis. The current target allocations for plan assets are 0-30% for equity securities, 0-100% for fixed income securities and 0-100% for cash funds and emerging market debt funds. This relatively conservative asset allocation has been set after taking into consideration the Plan’s current frozen status and the possibility of partial plan terminations over the intermediate term.

Market volatility risk is controlled by limiting the asset allocation of the most volatile asset class, equities, to no more than 30% of the portfolio and by ensuring that there is sufficient liquidity to meet distribution requirements from the portfolio without disrupting long-term assets. Diversification of the equity portion of the portfolio is controlled by limiting the value of any initial acquisition so that it does not exceed 5% of the market value of the portfolio when purchased. The policy requires the sale of any portion of an equity position when its value exceeds 10% of the portfolio. Fixed income market volatility risk is managed by limiting the term of fixed income investments to five years. Fixed income investments must carry an “A” or better rating by a recognized credit rating agency. Corporate debt of a single issuer may not exceed 10% of the market value of the portfolio. The investment in derivative instruments such as “naked” call options, futures, commodities, and short selling is prohibited. Investment in equity index funds and the writing of “covered” call options (a conservative strategy to increase portfolio income) are permitted. Foreign currency-denominated debt instruments are not permitted. At September 30, 2010, there are no significant concentrations of risk in the assets of the plan with respect to any single entity, industry, country, commodity or investment fund that are not otherwise mitigated by FDIC insurance available to the participants of the plan and collateral pledged for any such amount that may not be covered by FDIC insurance. Investment performance is measured against industry accepted benchmarks. The risk tolerance and asset allocation limitations imposed by the policy are consistent with attaining the rate of return assumptions used in the actuarial funding calculations. The RPIC committee meets quarterly to review to ensure adherence with the Investment Policy Statement.

Fair Values

The fair values of the Company’s pension plan assets at September 30, 2010 and December 31, 2009 by asset category are as follows:

	At September 30, 2010
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset Category:
Cash and certificates of deposit	$	13,902	$	-	$	-	$	13,902
Equity Securities:
Common Stocks		4,141		-		-		4,141
American Depositary Receipts		1,127		-		-		1,127
Fixed income securities:
U. S. Government Agencies		-		850		-		850
Corporate bonds		-		6,580		-		6,580
Other		103		-		-		103
Total pension plan sssets	$	19,273	$	7,430	$	-	$	26,703

	At December 31, 2009
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset Category:
Cash and certificates of deposit	$	13,405	$	-	$	-	$	13,405
Equity Securities:
Common Stocks		6,471		-		-		6,471
American Depositary Receipts		1,488		-		-		1,488
Fixed income securities:
U. S. Government Agencies		-		2,269		-		2,269
Corporate bonds		-		3,112		-		3,112
Other		96		-		-		96
Total pension plan sssets	$	21,460	$	5,381	$	-	$	26,841

Cash and Deferred Profit Sharing Plan

The Sandy Spring Bancorp, Inc. Cash and Deferred Profit Sharing Plan includes a 401(k) provision with a Company match. The 401(k) provision is voluntary and covers all eligible employees after ninety days of service. Employees contributing to the 401(k) provision receive a matching contribution of 100% of the first 3% of compensation and 50% of the next 2% of compensation subject to employee contribution limitations. The Company’s match vests immediately. The Plan permits employees to purchase shares of Sandy Spring Bancorp, Inc. common stock with their 401(k) contributions, Company match, and other contributions under the Plan. Profit sharing contributions and Company match are included in non-interest expenses and totaled $0.3 million for both of the three month periods ended September 30, 2010 and 2009, and $1.0 million for both of the nine month periods ended September 30, 2010 and 2009.

Executive Incentive Retirement Plan

In past years, the Company had Supplemental Executive Retirement Agreements ("SERAs") with its executive officers providing for retirement income benefits as well as pre-retirement death benefits. Retirement benefits payable under the SERAs, if any, were integrated with other pension plan and Social Security retirement benefits expected to be received by the executive. The Company accrued the present value of these benefits over the remaining number of years to the executives' retirement dates. Effective January 1, 2008, these agreements were replaced with a defined contribution plan, the “Executive Incentive Retirement Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as of December 31, 2007, and those amounts accrued were transferred to the new plan on behalf of each participant. Additionally, under the new Plan, officers designated by the board of directors earned a deferral bonus which was accrued annually based on the Company’s financial performance compared to a selected group of peer banks. For current participants, accruals for 2008 vested immediately. Amounts transferred to the Plan from the SERAs on behalf of each participant continue to vest based on years of service. No bonus was accrued in 2010 or 2009 due to limitations placed on such incentive plans under TARP. Benefit costs related to the Plan included in non-interest expense for three months ended September 30, 2010 and 2009 totaled $39 thousand and $0.1 million, respectively. For the nine months ended September 30, 2010 and 2009, the Plan incurred expenses of $.01 million and $0.3 million, respectively.

NOTE 9 – NET INCOME (LOSS) PER COMMON SHARE

The following table presents a summary of per share data and amounts for the periods indicated:

	Three Months Ended September 30,					Nine Months Ended September 30,
(Dollars and amounts in thousands, except per share data)	2010		2009			2010		2009
Net income (loss)	$	8,484	$	(13,574	)	$	15,244	$	(11,637	)
Less: Dividends - preferred stock		2,074		1,205			4,477		3,607
Net income (loss) available to common stockholders	$	6,410	$	(14,779	)	$	10,767	$	(15,244	)

Basic:
Basic weighted average EPS shares		24,004		16,467			21,772		16,439

Basic net income (loss) per share	$	0.35	$	(0.83	)	$	0.70	$	(0.71	)
Basic net income (loss) per common share		0.27		(0.90	)		0.49		(0.93	)

Diluted:
Basic weighted average EPS shares		24,004		16,467			21,772		16,439
Dilutive common stock equivalents		98		-			40		-
Dilutive EPS shares		24,102		16,467			21,812		16,439

Diluted net income (loss) per share	$	0.35	$	(0.83	)	$	0.70	$	(0.71	)
Diluted net income (loss) per common share		0.27		(0.90	)		0.49		(0.93	)

Anti-dilutive shares		655		789			790		961

Certain dilutive common stock equivalents, comprised of unexercised/unvested issuances of shared-based compensation, have been excluded from the computation of EPS in certain periods if the result would be anti-dilutive.

NOTE 10 – OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is defined as net income (loss) plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements presented for the Company, non-owner changes are comprised of unrealized gains or losses on available-for-sale debt securities and any minimum pension liability adjustments. These do not have an impact on the Company’s net income (loss). Below are the components of other comprehensive income (loss) and the related tax effects allocated to each component for the periods indicated:

	Nine Months Ended September 30,
(In thousands)	2010			2009
Net income (loss)	$	15,244		$	(11,637	)
Investments available-for-sale:
Net change in unrealized gains on investments available-for-sale		17,187			10,852
Related income tax expense		(6,854	)		(4,328	)
Net investment gains (losses) reclassified into earnings		323			207
Related income tax expense		(129	)		(82	)
Net effect on other comprehensive income for the period		10,527			6,649

Defined benefit pension plan:
Recognition of unrealized gain		846			1,020
Related income tax expense		(337	)		(407	)
Net effect on other comprehensive income for the period		509			613
Total other comprehensive income		11,036			7,262
Comprehensive income (loss)	$	26,280		$	(4,375	)

The following table presents net accumulated other comprehensive income (loss) for the periods indicated:

(In thousands)	Unrealized Gains on Investments Available- for-Sale		Defined Benefit Pension Plan			Total
Balance at December 31, 2009	$	3,845	$	(6,497	)	$	(2,652	)
Period change, net of tax		10,527		509			11,036
Balance at September 30, 2010	$	14,372	$	(5,988	)	$	8,384

(In thousands)	Unrealized Gains on Investments Available- for-Sale		Defined Benefit Pension Plan			Total
Balance at December 31, 2008	$	461	$	(8,033	)	$	(7,572	)
Period change, net of tax		6,649		613			7,262
Balance at September 30, 2009	$	7,110	$	(7,420	)	$	(310	)

NOTE 11 – FAIR VALUE

Generally accepted accounting principles provides entities the option to measure eligible financial assets, financial liabilities and commitments at fair value (i.e. the fair value option), on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon entering into a commitment. Subsequent changes in fair value must be recorded in earnings

The Company applies the fair value option for mortgage loans held for sale. The fair value option on residential mortgage loans held for sale allows the accounting for gains on sale of mortgage loans to more accurately reflect the timing and economics of the transaction.

The Company adopted the standards for fair value measurement which clarified that fair value is an exit price, representing the amount that would be received for sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are not adjusted for transaction costs. The standard for fair value measurement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below.

Basis of Fair Value Measurement:

Level 1- Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2- Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3- Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Assets and Liabilities

Mortgage loans held for sale

Mortgage loans held for sale are valued based quotations from the secondary market for similar instruments and are classified as Level 2 of the fair value hierarchy.

Investment available-for-sale

The types of instruments valued based on quoted market prices in active markets include U.S. government agency securities, many state and municipal government obligations, mortgage-backed securities (comprised entirely of either the most senior tranches of GNMA collateralized mortgage obligations or GNMA, FNMA or FHLMC mortgage-backed securities) and equity securities. Such instruments are generally classified within Level 2 of the fair value hierarchy. The Company does not adjust the quoted price for such instruments.

The types of instruments valued based on quoted prices in markets that are not active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency include most investment-grade and high-yield corporate bonds, liquid mortgage-backed securities, less liquid equities and state, municipal and provincial obligations. Such instruments are generally classified within level 2 of the fair value hierarchy.

Level 3 are positions that are not traded in active markets or are subject to transfer restrictions. Valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management uses a process that employs certain assumptions to determine the present value, for further information, refer to Note 2 – Investments.

The Company owns $3.8 million of collateralized debt obligation securities that are backed by pooled trust preferred securities issued by banks, thrifts, and insurance companies that have exhibited limited trading activity due to the state of the economy at September 30, 2010 and December 31, 2009, respectively. There are currently very few market participants who are willing and or able to transact for these securities.

Given current conditions in the debt markets and the absence of observable transactions in the secondary markets, the Company has determined:

The few observable transactions and market quotations that are available are not reliable for purposes of determining fair value.

The pooled trust preferred securities will be classified within Level 3 of the fair value and the fair value determined based on independent modeling.

Interest rate swap agreements

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets and liabilities in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.

Assets Measured at Fair Value on a Recurring Basis

The following tables set forth the Company’s financial assets and liabilities for the periods indicated, that were accounted for or disclosed at fair value. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

	At September 30, 2010
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets
Residential mortgage loans held-for-sale	$	-	$	19,234		$	-	$	19,234
Investments available-for-sale:
U.S. government agencies				339,092					339,092
State and municipal				43,658					43,658
Mortgage-backed				570,919					570,919
Trust preferred				3,410			3,134		6,544
Marketable equity securities				100					100
Interest rate swap agreements		-		1,673			-		1,673

Liabilities
Interest rate swap agreements	$	-	$	(1,673	)	$	-	$	(1,673	)

	At December 31, 2009
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets
Residential mortgage loans held-for-sale	$	-	$	12,498		$	-	$	12,498
Investments available-for-sale:		-		855,300
U.S. government agencies				355,597					355,597
State and municipal				42,142					42,142
Mortgage-backed				453,998					453,998
Trust preferred				3,213			3,133		6,346
Marketable equity securities				350					350
Interest rate swap agreements		-		289			-		289

Liabilities
Interest rate swap agreements	$	-	$	(289	)	$	-	$	(289	)

The following table provides unrealized losses included in assets measured in the consolidated balance sheets at fair value on a recurring basis that are still held at September 30, 2010.

	Significant Unobservable Inputs
(In thousands)	(Level 3)
Investments available-for-sale:
Balance at December 31, 2009	$	3,133
Total OTTI included in earnings		(219	)
Principal redemption		(656	)
Total unrealized gains included in other comprehensive income (loss)		876
Balance at September 30, 2010	$	3,134

Assets Measured at Fair Value on a Non-recurring Basis

The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a non-recurring basis as they are valued at the lower of cost or market. Assets are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

	At September 30, 2010
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Impaired loans	$	-	$	-	$	63,703	$	63,703	$	9,058
Other real estate owned		-		-		10,011		10,011		533
Total	$	-	$	-	$	73,714	$	73,714	$	9,591

	At December 31, 2009
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Impaired loans	$	-	$	-	$	92,810	$	92,810	$	39,241

At September 30, 2010, impaired loans totaling $74.3 million were written down to fair value of $63.7 million as a result of specific loan loss reserves of $10.6 million associated with the impaired loans which was included in the allowance for loan losses. Impaired loans totaling $99.5 million were written down to fair value of $92.8 million at December 31, 2009 as a result of specific loan loss reserves of $6.6 million associated with the impaired loans.

Impaired loans are valued based on the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs) if the loans are collateral dependent and are classified at a level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of business equipment, inventory and accounts receivable collateral is based on net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

The estimated fair value for other real estate owned included in Level 3 is determined by either an independent market based appraisal less cost to sell, that may be reduced further based on market expectations or an executed sales agreement.

Fair Value of Financial Instruments

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price, if one exists.

Quoted market prices, where available, are shown as estimates of fair market values. Because no quoted market prices are available for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on the amount and timing of future cash flows and estimated discount rates.

Present value techniques used in estimating the fair value of many of the Company's financial instruments are significantly affected by the assumptions used. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate cash settlement of the instrument. Additionally, the accompanying estimates of fair values are only representative of the fair values of the individual financial assets and liabilities, and should not be considered an indication of the fair value of the Company.

The estimated fair values of the Company's financial instruments are as follows for the periods indicated:

	At September 30, 2010				At December 31, 2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value
Financial Assets
Cash and temporary investments (1)	$	98,959	$	98,959	$	72,294	$	72,294
Investments available-for-sale		960,313		960,313		858,433		858,433
Investments held-to-maturity and other equity securities		139,205		143,950		165,366		170,560
Loans, net of allowance		2,117,925		1,872,245		2,233,451		2,022,029
Accrued interest receivable and other assets (2)		92,523		92,523		89,315		89,315

Financial Liabilities
Deposits	$	2,585,496	$	2,592,086	$	2,696,842	$	2,702,142
Securities sold under retail repurchase agreements and federal funds purchased		97,884		97,884		89,062		89,062
Advances from FHLB		409,263		456,211		411,584		441,020
Subordinated debentures		35,000		8,837		35,000		8,077
Accrued interest payable and other liabilities (2)		4,450		4,450		3,156		3,156

(1) Temporary investments include federal funds sold, interest-bearing deposits with banks and residential mortgage loans held for sale.

(2) Only financial instruments as defined by GAAP are included in other assets and other liabilities.

The following methods and assumptions were used to estimate the fair value of each category of financial instruments for which it is practicable to estimate that value:

Cash and Temporary Investments:

Cash and due from banks, federal funds sold and interest-bearing deposits with banks. The carrying amount approximated the fair value.

Residential mortgage loans held for sale. The fair value of residential mortgage loans held for sale was derived from secondary market quotations for similar instruments.

Investments. The fair value for U.S. Treasury, U.S. Agency, state and municipal, corporate debt and some trust preferred securities was based upon quoted market bids; for mortgage-backed securities upon bid prices for similar pools of fixed and variable rate assets, considering current market spreads and prepayment speeds; and, for equity securities upon quoted market prices. Certain trust preferred securities were estimated by utilizing the discounted value of estimated cash flows.

Loans. The fair value was estimated by computing the discounted value of estimated cash flows, adjusted for potential loan and lease losses, for pools of loans having similar characteristics. The discount rate was based upon the current loan origination rate for a similar loan. Non-performing loans have an assumed interest rate of 0%.

Accrued interest receivable. The carrying amount approximated the fair value of accrued interest, considering the short-term nature of the receivable and its expected collection.

Other assets. The carrying amount approximated the fair value considering their short-term nature.

Deposits. The fair value of demand, money market savings and regular savings deposits, which have no stated maturity, were considered equal to their carrying amount, representing the amount payable on demand. While management believes that the Bank’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial intangible value separate from the value of the deposit balances, these estimated fair values do not include the intangible value of core deposit relationships, which comprise a significant portion of the Bank’s deposit base. The fair value of time deposits was based upon the discounted value of contractual cash flows at current rates for deposits of similar remaining maturity.

Securities sold under repurchase agreements and federal funds purchased. The carrying amount approximated the fair value of such borrowings due to their variable interest rates and the short terms.

Advances from FHLB and Subordinated debentures. The fair value of the Federal Home Loan Bank of Atlanta advances and subordinated debentures was estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms.

Accrued interest payable and other liabilities. The carrying amount approximated the fair value of accrued interest payable, accrued dividends and premiums payable, considering their short-term nature and expected payment.

NOTE 12 - SEGMENT REPORTING

The Company operates in four operating segments—Community Banking, Insurance, Leasing and Investment Management. Only Community Banking presently meets the threshold for reportable segment reporting; however, the Company is disclosing separate information for all four operating segments. Each of the operating segments is a strategic business unit that offers different products and services. The Insurance, Leasing and Investment Management segments were businesses that were acquired in separate transactions where management was retained at the time of acquisition. The accounting policies of the segments are described in Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K. The segment data reflects inter-segment transactions and balances.

The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products to both individuals and businesses. The income of Sandy Spring Bancorp, the parent company, is included in the Community Banking segment, as the majority of its functions 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 non-cash charges associated with amortization of intangibles related to acquired entities totaling $0.3 million and $0.8 million for the three months ended September 30, 2010 and 2009, respectively. For the nine month period ended September 30, 2010 and 2009, the amortization related to acquired entities totaled $1.0 million and $2.4 million, respectively.

The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank, and offers annuities as an alternative to traditional deposit accounts. Sandy Spring Insurance Corporation operates the Chesapeake Insurance Group, a general insurance agency located in Annapolis, Maryland, and Neff and Associates, located in Ocean City, Maryland. Major sources of revenue are insurance commissions from commercial lines, personal lines, and medical liability lines. Expenses include personnel and support charges. Non-cash charges were associated with amortization of intangibles related to acquired entities for the three months ended September 30, 2010 and 2009 were $.1 million. Non-cash charges associated with amortization amounted to $0.2 million for the nine months ended September 30, 2010 and 2009.

The Leasing segment is conducted through The Equipment Leasing Company, a subsidiary of the Bank that provides leases for essential commercial equipment used by small to medium sized businesses. Equipment leasing is conducted through vendor relations and direct solicitation to end-users located primarily in states along the east coast from New Jersey to Florida. The typical lease is categorized as a financing lease and is characterized as a “small ticket” by industry standards, averaging less than $100 thousand per lease, with individual leases generally not exceeding $500 thousand. 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. This asset management and financial planning firm, located in McLean, Virginia, provides comprehensive investment management and financial planning to individuals, families, small businesses and associations including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial currently has approximately $718 million in assets under management. Major revenue sources include non-interest income earned on the above services. Expenses include personnel and support charges. Included in investment management expenses are non-cash charges associated with amortization of intangibles related to acquired entities totaling $0.1 million and $0.2 million for the three months ended September 30, 2010 and 2009, respectively. These charges amounted to $0.2 million and $0.6 million for the nine month periods ended September 30, 2010 and 2009, respectively.

Information about operating segments and reconciliation of such information to the consolidated financial statements follows for the periods indicated:

	Three Months Ended September 30, 2010
	Community						Investment		Inter-Segment
(In thousands)	Banking		Insurance		Leasing		Mgmt.		Elimination			Total
Interest income	$	37,110	$	2	$	340	$	2	$	(87	)	$	37,367
Interest expense		7,871		-		84		-		(87	)		7,868
Provision for loan and lease losses		2,453		-		-		-		-			2,453
Non-interest income		8,565		1,102		58		1,216		(203	)		10,738
Non-interest expenses		23,679		1,080		65		718		(203	)		25,339
Income before income taxes		11,672		24		249		500		-			12,445
Income tax expense		3,668		10		88		195		-			3,961
Net income	$	8,004	$	14	$	161	$	305	$	-		$	8,484

Assets	$	3,613,455	$	12,764	$	18,385	$	13,079	$	(51,066	)	$	3,606,617

	Three Months Ended September 30, 2009
	Community							Investment		Inter-Segment
(In thousands)	Banking			Insurance		Leasing		Mgmt.		Elimination			Total
Interest income	$	38,823		$	2	$	551	$	1	$	(192	)	$	39,185
Interest expense		12,785			-		190		-		(192	)		12,783
Provision for loan and lease losses		34,450			-		-		-		-			34,450
Non-interest income		8,302			1,224		88		1,201		(153	)		10,662
Non-interest expenses		24,563			1,174		126		857		(153	)		26,567
Income (loss) before income taxes		(24,673	)		52		323		345		-			(23,953	)
Income tax expense (benefit)		(10,653	)		21		118		135		-			(10,379	)
Net income (loss)	$	(14,020	)	$	31	$	205	$	210	$	-		$	(13,574	)

Assets	$	3,644,641		$	12,348	$	28,147	$	11,931	$	(64,676	)	$	3,632,391

	Nine Months Ended September 30, 2010
	Community						Investment		Inter-Segment
(In thousands)	Banking		Insurance		Leasing		Mgmt.		Elimination			Total
Interest income	$	111,370	$	6	$	1,184	$	4	$	(329	)	$	112,235
Interest expense		25,590		-		320		-		(329	)		25,581
Provision for loan and lease losses		23,585		-		-		-		-			23,585
Non-interest income		26,354		4,348		142		3,711		(608	)		33,947
Non-interest expenses		71,179		3,396		294		2,337		(608	)		76,598
Income before income taxes		17,370		958		712		1,378		-			20,418
Income tax expense		3,975		387		275		537		-			5,174
Net income	$	13,395	$	571	$	437	$	841	$	-		$	15,244

Assets	$	3,613,455	$	12,764	$	18,385	$	13,079	$	(51,066	)	$	3,606,617

	Nine Months Ended September 30, 2009
	Community							Investment		Inter-Segment
(In thousands)	Banking			Insurance		Leasing		Mgmt.		Elimination			Total
Interest income	$	115,434		$	5	$	1,785	$	4	$	(647	)	$	116,581
Interest expense		40,714			-		639		-		(647	)		40,706
Provision for loan and lease losses		55,678			-		-		-		-			55,678
Non-interest income		25,773			4,733		231		3,388		(459	)		33,666
Non-interest expenses		71,247			3,767		479		2,641		(459	)		77,675
Income (loss) before income taxes		(26,432	)		971		898		751		-			(23,812	)
Income tax expense (benefit)		(13,210	)		392		350		293		-			(12,175	)
Net income (loss)	$	(13,222	)	$	579	$	548	$	458	$	-		$	(11,637	)

Assets	$	3,644,641		$	12,348	$	28,147	$	11,931	$	(64,676	)	$	3,632,391

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company

Sandy Spring Bancorp (the “Company”) is the registered bank holding company for Sandy Spring Bank (the "Bank"), headquartered in Olney, Maryland. The Bank operates forty three community offices in Anne Arundel, Carroll, Frederick, Howard, Montgomery, and Prince George’s Counties in Maryland and Fairfax and Loudoun counties in Virginia, together with an insurance subsidiary, equipment leasing company and an investment management company in McLean, Virginia.

The Company offers a broad range of financial services to consumers and businesses in this market area. Through September 30, 2010, average commercial loans and leases and commercial real estate loans accounted for approximately 58% of the Company’s loan and lease portfolio, and average consumer and residential real estate loans accounted for approximately 42%. 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 arise.

Critical Accounting Policies

The Company’s condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States of America and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely to a greater extent on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary for assets and liabilities that are required to be recorded at fair value. A decline in the assets required to be recorded at fair values will warrant an impairment write-down or valuation allowance to be established. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when readily available. The following accounting policies comprise those policies that management believes are the most critical to aid in fully understanding and evaluating our reported financial results:

Allowance for loan and lease losses;

Goodwill impairment;

Accounting for income taxes;

Fair value measurements, including assessment of other-than-temporary impairment;

Defined benefit pension plan.

Allowance for loan and lease losses

The allowance for loan and lease losses is an estimate of the losses that are inherent in the loan and lease portfolio. The allowance is based on two basic principles of accounting: (1) the requirement that a loss be accrued when it is probable that the loss has occurred at the date of the financial statements and the amount of the loss can be reasonably estimated and (2) the requirement that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the loan’s or lease’s contractual terms.

Management believes that the allowance is adequate. However, its determination requires significant judgment, and estimates of probable losses in the loan and lease portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the loans and leases comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Company, periodically review the loan and lease portfolio and the allowance. Such review may result in additional provisions based on their judgments of information available at the time of each examination.

The Company’s allowance for loan and lease losses has two basic components: a general reserve reflecting historical losses by loan category, as adjusted by several factors whose effects are not reflected in historical loss ratios, and specific allowances for separately identified impaired loans. Each of these components, and the systematic allowance methodology used to establish them, are described in detail in Note 1 of the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The amount of the allowance is reviewed monthly by the Credit Risk Committee of the board of directors and formally approved quarterly by that same committee of the board.

The general reserve portion of the allowance that is based upon historical loss factors, as adjusted, establishes allowances for the major loan categories based upon adjusted historical loss experience over the prior eight quarters, weighted so that losses realized in the most recent quarters have the greatest effect. The use of these historical loss factors is intended to reduce the differences between estimated losses inherent in the loan and lease portfolio and actual losses. The factors used to adjust the historical loss ratios address changes in the risk characteristics of the Company’s loan and lease portfolio that are related to (1) trends in delinquencies and other non-performing loans, (2) changes in the risk level of the loan portfolio related to large loans, (3) changes in the categories of loans comprising the loan portfolio, (4) concentrations of loans to specific industry segments, (5) changes in economic conditions on both a local and national level, (6) changes in the Company’s credit administration and loan and lease portfolio management processes, and (7) quality of the Company’s credit risk identification processes. This component comprised 84% of the total allowance at September 30, 2010 and 89% at December 31, 2009.

A specific allowance is used to establish an allowance for individual impaired credits and is based on the Company’s calculation of the potential loss imbedded in an individual loan. At September 30, 2010, the specific allowance accounted for 16% of the total allowance as compared to 11% at December 31, 2009. The process of evaluating whether a loan is impaired includes consideration of the borrower’s financial condition, resources and payment record, the sufficiency of collateral and to a lesser extent, the credible financial support from guarantors. The measurement of impairment for individual impaired credits is based on the present value of expected cash flows, the loan’s observable market price or the fair value of the collateral (less selling costs), if the loan is collateral dependent. The severity of estimated losses on impaired loans can differ substantially from actual losses.

Goodwill

Goodwill is the excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of the Company’s reporting units be compared to the carrying amount of its net assets, including goodwill. The Company’s reporting units were identified based upon an analysis of each of its individual operating segments. Determining the fair value of a reporting unit requires the Company to use a high degree of subjectivity. If the fair values of the reporting units exceed their book values, no write-down of recorded goodwill is necessary. If the fair value of a reporting unit is less than book value, an expense may be required on the Company’s books to write down the related goodwill to the proper carrying value. The Company tests for impairment of goodwill as of October 1 of each year, and again at any quarter-end if any triggering events occur during a quarter that may affect goodwill. Examples of such events include, but are not limited to adverse action by a regulator or a loss of key personnel. For this testing the Company typically works together with a third-party valuation firm to perform a “step one” test for potential goodwill impairment. At September 30, 2010 it was determined that there was no evidence of impairment of goodwill or intangibles.

Accounting for Income Taxes

The Company accounts for income taxes by recording deferred income taxes that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management exercises significant judgment in the evaluation of the amount and timing of the recognition of the resulting tax assets and liabilities. The judgments and estimates required for the evaluation are updated based upon changes in business factors and the tax laws. If actual results differ from the assumptions and other considerations used in estimating the amount and timing of tax recognized, there can be no assurance that additional expenses will not be required in future periods. The Company’s accounting policy follows the prescribed authoritative guidance that a minimal probability threshold of a tax position must be met before a financial statement benefit is recognized. The Company recognized, when applicable, interest and penalties related to unrecognized tax benefits in other non-interest expenses in the Consolidated Statements of Income/(Loss). Assessment of uncertain tax positions requires careful consideration of the technical merits of a position based on management’s analysis of tax regulations and interpretations. Significant judgment may be involved in applying the applicable reporting and accounting requirements.

Management expects that the Company’s adherence to the required accounting guidance may result in increased volatility in quarterly and annual effective income tax rates because of the requirement that any change in judgment or measurement of a tax position taken in a prior period be recognized as a discrete event in the period in which it occurs. Factors that could impact management’s judgment include changes in income, tax laws and regulations, and tax planning strategies.

Fair Value

The Company, in accordance with applicable accounting standards, measures certain financial assets and liabilities at fair value. Significant financial instruments measured at fair value on a recurring basis are investment securities available for sale and commercial loan interest rate swap agreements. The Company elected, at its option, to measure mortgage loans held for sale at fair value. Loans where it is probable that the Company will not collect all principal and interest payments according to the contractual terms are considered impaired loans and are measured on a non-recurring basis. In addition, other real estate owned is also measured at fair value by the Company on a non-recurring basis.

The Company conducts a review each quarter for all investment securities which reflect possible impairment to determine whether unrealized losses are temporary. Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not available, such valuation is based on pricing models, quotes for similar investment securities, and, where necessary, an income valuation approach based on the present value of expected cash flows. In addition, the Company considers the financial condition of each issuer, the receipt of principal and interest according to the contractual terms and the intent and ability of the Company to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value.

The above accounting policies with respect to fair value are discussed in further detail in “Note 11-Fair Value” to the condensed consolidated financial statements.

Defined Benefit Pension Plan

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all employees. All benefit accruals for employees were frozen as of December 31, 2007 based on past service. Thus, future salary increases and additional years of service will no longer affect the defined benefit provided by the plan although additional vesting may continue to occur.

Several factors affect the net periodic benefit cost of the plan, including (1) the size and characteristics of the plan population, (2) the discount rate, (3) the expected long-term rate of return on plan assets and (4) other actuarial assumptions. Pension cost is directly related to the number of employees covered by the plan and other factors including salary, age, years of employment, and the terms of the plan. As a result of the plan freeze, the characteristics of the plan population should not have a materially different effect in future years. The discount rate is used to determine the present value of future benefit obligations. The discount rate is determined by matching the expected cash flows of the plan to a yield curve based on long term, high quality fixed income debt instruments available as of the measurement date, which is December 31 of each year. The discount rate is adjusted each year on the measurement date to reflect current market conditions. The expected long-term rate of return on plan assets is based on a number of factors that include expectations of market performance and the target asset allocation adopted in the plan investment policy. Should actual asset returns deviate from the projected returns, this can affect the benefit plan expense recognized in the financial statements.

A.	FINANCIAL CONDITION

The Company's total assets were $3.6 billion at September 30, 2010, decreasing $23.9 million or 1% during the first nine months of 2010. Earning assets remained virtually level for the first nine months of the year at $3.3 billion at September 30, 2010. The decrease in total assets for the first nine months of the year was due primarily to a 5% decline in loans as a result of current conditions in both the national and regional economy. Also contributing to this decrease was the repayment by the Company of half of the preferred stock issued to the U.S. Treasury under TARP. The Company repurchased 41,547 shares for $41.5 million on July 21, 2010.

Loans and Leases

Total loans and leases, excluding loans held for sale, decreased $112.8 million or 5% during the first nine months of 2010 to $2.2 billion. Residential real estate loans, comprised of residential construction and permanent residential mortgage loans, decreased $14.5 million or 3%, to $535.2 million at September 30, 2010. Permanent residential mortgages declined to $442.7 million in 2010, a decrease of $14.7 million or 3% reflecting greatly reduced demand for adjustable rate mortgages due to regional economic conditions. The Company generally retains adjustable rate mortgages in its portfolio and sells the fixed rate mortgages that it originates in the secondary mortgage market. Residential construction loans remained virtually level for the first nine months of 2010 at $92.5 million as of September 30, 2010.

Commercial loans and leases, which includes commercial real estate loans, commercial construction loans, equipment leases and commercial business loans, decreased by $90.1 million or 7%, to $1.3 billion at September 30, 2010. This decrease was due primarily to loan pay-downs and charge-offs of problem credits during the year resulting from the Company’s aggressive efforts to reduce its non-performing assets. In addition, soft loan demand resulting from continuing weak market conditions in the regional and national economies played a role in reducing these loan balances as pay-off of performing credits outpaced new originations.

The Company's commercial real estate mortgage loans are secured by owner occupied properties (60%) where an established banking relationship exists or, to a lesser extent, by investment properties (40%) such as warehouse, retail, and office space with a history of occupancy and cash flow. The relatively low increase in commercial real estate loans and the decreases in commercial construction and commercial business loans were due primarily to the lower level of loan demand caused by weak economic conditions in the markets in which the Company does business.

Consumer lending continues to be an integral part of the Company’s full-service, community banking business. This category of loans includes primarily home equity loans and lines of credit. The consumer loan portfolio decreased 2% or $8.2 million, to $391.4 million at September 30, 2010. This decline was driven largely by a decrease of $6.2 million or 16% in installment loans to $31.9 million at quarter-end. Home equity lines and loans remained virtually even with the prior year-end at $352.5 million at September 30, 2010.

Table 1– Analysis of Loans and Leases

The following table presents the trends in the composition of the loan and lease portfolio for the periods indicated.

	September 30, 2010					December 31, 2009					2010/2009
(In thousands)	Amount		%			Amount		%			$ Change			% Change
Residential real estate:
Residential mortgages	$	442,723		20.3	%	$	457,414		19.9	%	$	(14,691	)		(3.2	)%
Residential construction		92,485		4.2			92,283		4.0			202			0.2
Commercial loans and leases:
Commercial mortgage		903,195		41.4			894,951		39.0			8,244			0.9
Commercial construction		96,823		4.4			131,789		5.7			(34,966	)		(26.5	)
Commercial business		240,671		11.0			296,220		12.9			(55,549	)		(18.8	)
Leases		17,895		0.8			25,704		1.1			(7,809	)		(30.4	)
Consumer		391,415		17.9			399,649		17.4			(8,234	)		(2.1	)
Total loans and leases	$	2,185,207		100.0	%	$	2,298,010		100.0	%	$	(112,803	)		(4.9	)

Investments

The investment portfolio, consisting of available-for-sale, held-to-maturity and other equity securities, increased $75.7 million or 7% to $1.1 billion at September 30, 2010, from $1.0 billion at December 31, 2009. This increase was due primarily to investment of excess liquidity due to the decline in the loan portfolio during the first nine months of 2010.

Table 2 – Analysis of Securities

The composition of securities for the periods indicated is reflected in the following table:

	September 30,		December 31,		2010/2009
(In thousands)	2010		2009		$ Change			% Change
Available-for-Sale: (1)
U.S. government agencies and corporations	$	339,092	$	355,597	$	(16,505	)		(4.6	)%
State and municipal		43,658		42,142		1,516			3.6
Mortgage-backed (2)		570,919		453,998		116,921			25.8
Trust preferred		6,544		6,346		198			3.1
Marketable equity securities		100		350		(250	)		(71.4	)
Total available-for-sale		960,313		858,433		101,880			11.9

Held-to-Maturity and Other Equity
State and municipal		106,032		131,996		(25,964	)		(19.7	)
Mortgage-backed (2)		521		597		(76	)		(12.7	)
Other equity securities		32,652		32,773		(121	)		(0.4	)
Total held-to-maturity and other equity		139,205		165,366		(26,161	)		(15.8	)
Total securities	$	1,099,518	$	1,023,799	$	75,719			7.4

(1)	At estimated fair value.

(2)	Issued by a U. S. Government Agency or secured by U.S. Government Agency collateral.

Portfolio quality discussion

At September 30, 2010, unrealized losses associated with U.S. Government Agencies 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 municipal securities portfolio segment is not experiencing any significant credit problems at September 30, 2010 and the Company believes it will receive all contractual cash flows due on this portfolio. The mortgage-backed securities portfolio at September 30, 2010 is composed entirely of either the most senior tranches of GNMA collateralized mortgage obligations ($229.2 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($341.7 million). Any associated unrealized losses 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. Unrealized losses that are related to the prevailing interest rate environment will decline over time and recover as these securities approach maturity.