Sandy Spring Bancorp Earnings 2018-09-30

SASR 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

10-Q 1 maindocument001.htm Form 10-K 2007 (00310308.DOC;1)

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, 2018

( ) 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 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 such files).

Yes X No

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

Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company x Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 6, 2018

Common stock, $1.00 par value – 35,523,703 shares

SANDY SPRING BANCORP, INC.
TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

Item1. FINANCIAL STATEMENTS

	Condensed Consolidated Statements of Condition - Unaudited at
	September 30, 2018 and December 31, 2017	4

	Condensed Consolidated Statements of Income - Unaudited for the Three and Nine Months
	Ended September 30, 2018 and 2017	5

	Condensed Consolidated Statements of Comprehensive Income – Unaudited for
	the Three and Nine Months Ended September 30, 2018 and 2017	6

	Condensed Consolidated Statements of Cash Flows – Unaudited for the Nine
	Months Ended September 30, 2018 and 2017	7

	Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the
	Nine Months Ended September 30, 2018 and 2017	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
	ABOUT MARKET RISK	61

Item 4. CONTROLS AND PROCEDURES		61

PART II - OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS		61

Item 1A. RISK FACTORS		61

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		61

Item 3. DEFAULTS UPON SENIOR SECURITIES		61

Item 4. MINE SAFETY DISCLOSURES		62

Item 5. OTHER INFORMATION		62

Item 6. EXHIBITS		62

SIGNATURES		63

Forward-Looking Statements

This Quarterly Report on 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 Company’s 2017 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

· general business and economic conditions nationally or in the markets that the Company serves 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;

· acquisition integration risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits and costs savings from, and limit any unexpected liabilities associated with, any business combinations;

· 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. The Company does 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
Item 1. FINANCIAL STATEMENTS
Sandy Spring Bancorp, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CONDITION - UNAUDITED


			September 30,		December 31,
(Dollars in thousands)			2018		2017
Assets
	Cash and due from banks		$	63,380	$	55,693
	Federal funds sold			2,055		2,845
	Interest-bearing deposits with banks			13,142		53,962
		Cash and cash equivalents		78,577		112,500
	Residential mortgage loans held for sale (at fair value)			31,581		9,848
	Investments available-for-sale (at fair value)			926,723		729,507
	Other equity securities			66,074		45,518
	Total loans			6,388,959		4,314,248
		Less: allowance for loan losses		(50,409)		(45,257)
	Net loans			6,338,550		4,268,991
	Premises and equipment, net			62,098		54,761
	Other real estate owned			2,118		2,253
	Accrued interest receivable			24,058		15,480
	Goodwill			345,422		85,768
	Other intangible assets, net			10,327		580
	Other assets			149,037		121,469
Total assets			$	8,034,565	$	5,446,675

Liabilities
	Noninterest-bearing deposits		$	1,902,537	$	1,264,392
	Interest-bearing deposits			3,995,857		2,699,270
		Total deposits		5,898,394		3,963,662
	Securities sold under retail repurchase agreements and federal funds purchased			142,669		119,359
	Advances from FHLB			866,445		765,833
	Subordinated debentures			37,460		-
	Accrued interest payable and other liabilities			46,881		34,005
		Total liabilities		6,991,849		4,882,859

Stockholders' Equity
	Common stock -- par value $1.00; shares authorized 100,000,000; shares issued and outstanding 35,521,541
	and 23,996,293 at September 30, 2018 and December 31, 2017, respectively			35,522		23,996
	Additional paid in capital			605,623		168,188
	Retained earnings			425,991		378,489
	Accumulated other comprehensive loss			(24,420)		(6,857)
		Total stockholders' equity		1,042,716		563,816
Total liabilities and stockholders' equity			$	8,034,565	$	5,446,675



The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

				Three Months Ended				Nine Months Ended
				September 30,				September 30,
(Dollars in thousands, except per share data)				2018		2017		2018		2017
Interest income:
	Interest and fees on loans			$	76,786	$	43,891	$	215,050	$	126,861
	Interest on loans held for sale				336		119		983		273
	Interest on deposits with banks				211		108		1,082		289
	Interest and dividends on investment securities:
		Taxable			5,112		3,410		15,297		10,572
		Exempt from federal income taxes			1,921		2,053		6,035		6,110
	Interest on federal funds sold				8		8		28		18
			Total interest income		84,374		49,589		238,475		144,123
Interest expense:
Interest on deposits					10,773		3,701		26,583		9,212
Interest on retail repurchase agreements and federal funds purchased					383		83		599		238
Interest on advances from FHLB					5,141		3,108		15,557		9,385
Interest on subordinated debt					486		-		1,436		12
			Total interest expense		16,783		6,892		44,175		18,847
Net interest income					67,591		42,697		194,300		125,276
Provision for loan losses					1,890		934		5,620		2,450
			Net interest income after provision for loan losses		65,701		41,763		188,680		122,826
Non-interest income:
	Investment securities gains				82		-		145		1,275
	Service charges on deposit accounts				2,316		2,140		6,865		6,121
	Mortgage banking activities				1,672		632		5,943		2,080
	Wealth management income				5,344		4,864		15,792		14,092
	Insurance agency commissions				2,016		1,950		5,020		4,924
	Income from bank owned life insurance				663		609		3,664		1,808
	Bank card fees				1,436		1,211		4,199		3,609
	Other income				1,504		1,340		5,391		5,040
			Total non-interest income		15,033		12,746		47,019		38,949
Non-interest expense:
	Salaries and employee benefits				24,488		18,442		73,064		54,525
	Occupancy expense of premises				4,355		3,294		13,939		9,907
	Equipment expense				2,441		1,722		6,909		5,213
	Marketing				770		784		2,863		2,223
	Outside data services				1,736		1,286		4,840		4,045
	FDIC insurance				1,257		850		3,840		2,478
	Amortization of intangible assets				540		25		1,622		76
	Merger expenses				580		345		11,766		1,332
	Other expense				6,226		4,443		18,273		14,241
			Total non-interest expense		42,393		31,191		137,116		94,040
Income before income taxes					38,341		23,318		98,583		67,735
Income tax expense					9,107		8,229		23,285		22,793
			Net income	$	29,234	$	15,089	$	75,298	$	44,942

Per share information:
Basic net income per share				$	0.82	$	0.62	$	2.11	$	1.86
Diluted net income per share				$	0.82	$	0.62	$	2.11	$	1.86
Dividends declared per common share				$	0.28	$	0.26	$	0.82	$	0.78

The accompanying notes are an integral part of these statements

SANDY SPRING BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)				2018		2017		2018		2017
Net income				$	29,234	$	15,089	$	75,298	$	44,942
	Other comprehensive income:
	Investments available-for-sale:
		Net change in unrealized gains/(losses) on investments available-for-sale			(5,399)		113		(22,318)		5,618
			Related income tax (expense)/benefit		1,411		(45)		5,839		(2,236)
		Net investment gains reclassified into earnings			(82)		-		(145)		(1,275)
			Related income tax expense		22		-		38		508
			Net effect on other comprehensive income/(loss) for the period		(4,048)		68		(16,586)		2,615

	Defined benefit pension plan:
		Recognition of unrealized loss			250		296		750		886
			Related income tax benefit		(66)		(129)		(250)		(364)
			Net effect on other comprehensive income for the period		184		167		500		522
	Total other comprehensive income/(loss)				(3,864)		235		(16,086)		3,137
Comprehensive income				$	25,370	$	15,324	$	59,212	$	48,079

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)			2018		2017
Operating activities:
Net income			$	75,298	$	44,942
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			9,265		5,939
	Provision for loan losses			5,620		2,450
	Stock based compensation expense			1,941		1,611
	Tax benefits associated with share based compensation			250		700
	Deferred income tax expense			6,959		163
	Origination of loans held for sale			(321,224)		(105,970)
	Proceeds from sales of loans held for sale			331,212		114,474
	Gains on sales of loans held for sale			(5,809)		(2,653)
	(Gains)/losses on sales of other real estate owned			104		(82)
	Investment securities gains			(145)		(1,275)
	Net increase in accrued interest receivable			(2,072)		(1,456)
	Net decrease/(increase) in other assets			1,653		(5,314)
	Net increase/(decrease) in accrued expenses and other liabilities			(3,160)		19
	Other – net			3,988		3,521
		Net cash provided by operating activities		103,880		57,069
Investing activities:
	(Purchases of)/proceeds from other equity securities			(3,659)		6,241
	Purchases of investments available-for-sale			(55,251)		(125,028)
	Proceeds from sales of investment available-for-sale			34,691		2,251
	Proceeds from maturities, calls and principal payments of investments available-for-sale			83,789		103,775
	Net increase in loans			(454,760)		(306,755)
	Proceeds from the sales of other real estate owned			759		1,228
	Proceeds from sales of loans previously held for investment			59,945		40,031
	Acquisition of business activity, net of cash paid			32,552		-
	Expenditures for premises and equipment			(8,545)		(4,589)
		Net cash used in investing activities		(310,479)		(282,846)
Financing activities:
	Net increase in deposits			323,890		378,248
	Net increase in retail repurchase agreements and federal funds purchased			16,424		21,450
	Proceeds from advances from FHLB			4,930,000		3,080,000
	Repayment of advances from FHLB			(5,068,745)		(3,237,083)
	Retirement of subordinated debt			-		(30,000)
	Proceeds from issuance of common stock			1,140		1,015
	Stock tendered for payment of withholding taxes			(760)		(953)
	Dividends paid			(29,273)		(18,844)
		Net cash provided by financing activities		172,676		193,833
Net decrease in cash and cash equivalents				(33,923)		(31,944)
Cash and cash equivalents at beginning of period				112,500		134,125
Cash and cash equivalents at end of period			$	78,577	$	102,181

Supplemental disclosures:
	Interest payments		$	42,279	$	19,244
	Income tax payments			19,092		22,927
	Transfer from loans to residential mortgage loans held for sale			60,043		39,744
	Transfer from loans to other real estate owned			289		700

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
		Common		Paid-In		Retained		Comprehensive		Stockholders’
(Dollars in thousands, except per share data)		Stock		Capital		Earnings		Income (Loss)		Equity
Balances at January 1, 2018		$	23,996	$	168,188	$	378,489	$	(6,857)	$	563,816
	Net income		-		-		75,298		-		75,298
	Other comprehensive loss, net of tax		-		-		-		(16,086)		(16,086)
Common stock dividends - $0.82 per share			-		-		(29,273)		-		(29,273)
Stock compensation expense			-		1,941		-		-		1,941
Common stock issued pursuant to:
	Acquisition of WashingtonFirst
	Bankshares, Inc. - 11,446,197 shares		11,446		435,194		-		-		446,640
	Stock option plan - 19,918 shares		20		403		-		-		423
	Employee stock purchase plan - 21,428 shares		22		695		-		-		717
	Restricted stock - 37,705 shares		38		(798)		-		-		(760)
Reclassification of tax effects from other comprehensive
income			-		-		1,477		(1,477)		-
Balances at September 30, 2018		$	35,522	$	605,623	$	425,991	$	(24,420)	$	1,042,716

Balance at January 1, 2017		$	23,901	$	165,871	$	350,414	$	(6,614)	$	533,572
	Net income		-		-		44,942		-		44,942
	Other comprehensive income, net of tax		-		-		-		3,137		3,137
Common stock dividends - $0.78 per share			-		-		(18,844)		-		(18,844)
Stock compensation expense			-		1,611		-		-		1,611
Common stock issued pursuant to:
	Stock option plan - 28,736 shares		29		521		-		-		550
	Employee stock purchase plan - 13,486 shares		13		452		-		-		465
	Restricted stock - 47,064 shares		47		(1,000)		-		-		(953)
Balances at September 30, 2017		$	23,990	$	167,455	$	376,512	$	(3,477)	$	564,480




















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

Nature of Operations

Sandy Spring Bancorp (the “Company”), a Maryland corporation, is the bank holding company for Sandy Spring Bank (the “Bank”). Independent and community-oriented, Sandy Spring Bank offers a broad range of commercial banking, retail banking, mortgage and trust services throughout central Maryland, Northern Virginia, and the greater Washington, D.C. market. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank also offers a comprehensive menu of insurance and wealth management services.

Basis of Presentation

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 three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2018. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. Certain reclassifications have been made to prior period amounts, as necessary, to conform to the current period presentation. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2017 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on February 23, 2018. There have been no significant changes to the Company’s accounting policies as disclosed in the 2017 Annual Report on Form 10-K.

Principles of Consolidation

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

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

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 stated original maturity of three months or less).

Revenue from Contracts with Customers

The Company’s revenue includes net interest income on financial instruments and non-interest income. Specific categories of revenue are presented in the Condensed Consolidated Statements of Income. Most of the Company’s revenue is not within the scope of Accounting Standard Update (ASU) No. 2014-09 – Revenue from Contracts with Customers. For revenue within the scope of ASU 2014-09, the Company provides services to customers and has related performance obligations. The revenue from such services is recognized upon satisfaction of all contractual performance obligations. The following discusses key revenue streams within the scope of the new revenue recognition guidance.

Wealth Management Income

West Financial Services, Inc., a subsidiary of the Bank, provides comprehensive investment management and financial planning services. Wealth management income is comprised of income for providing trust, estate and investment management services. Trust services include acting as a trustee for corporate or personal trusts. Investment management services include investment management, record-keeping and reporting of security portfolios. Fees for these services are recognized based on a contractually-agreed fixed percentage applied to net assets under management at the end of each reporting period. The Company does not charge/recognize any performance based fees.

Insurance Agency Commissions

Sandy Spring Insurance, a subsidiary of the Bank, performs the function of an insurance intermediary by introducing the policyholder and insurer and is compensated by a commission fee for placement of an insurance policy. Sandy Spring Insurance does not provide any captive management services or any claim handling services. Commission fees are set as a percentage of the premium for the insurance policy for which the Sandy Spring Insurance is a producer. The Company recognizes revenue when the insurance policy has been contractually agreed to by the insurer and policyholder (at transaction date).

Service Charges on Deposit Accounts

Service charges on deposit accounts are earned on depository accounts for consumer and commercial account holders and include fees for account and overdraft services. Account services include fees for event-driven services and periodic account maintenance activities. The obligation for event-driven services is satisfied at the time of the event when service is delivered and revenue recognized as earned. Obligation for maintenance activities is satisfied over the course of each month and revenue recognized at month end. Obligation for overdraft services is satisfied at the time of the overdraft and revenue recognized as earned.

Loans Acquired with Deteriorated Credit Quality

Acquired loans with evidence of credit deterioration since their origination as of the date of the acquisition are recorded at their initial fair value. Credit deterioration is determined based on the probability of collection of all contractually required principal and interest payments. The historical allowance for loan losses related to the acquired loans is not carried over to the Company’s financial statements. The determination of credit quality deterioration as of the purchase date may include parameters such as past due and non-accrual status, commercial risk ratings, cash flow projections, type of loan and collateral, collateral value and recent loan-to-value ratios or appraised values. For loans acquired with evidence of credit deterioration, the Company determines at the acquisition date the excess of the loan’s contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount, representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans, is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). Subsequent to the purchase date, increases in expected cash flows over those expected at the purchase date are recognized prospectively as interest income over the remaining life of the loan as an adjustment to the accretable yield. The present value of any decreases in expected cash flows after the purchase date is recognized as an impairment through addition to the valuation allowance.

Adopted Accounting Pronouncements

The FASB issued Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), in May 2014 that provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to customers. The guidance also provides for a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial assets, such as property and equipment, including real estate. The Company’s revenue is comprised of net interest income and non-interest income. The guidance does not apply to revenue associated with financial instruments, net interest income, mortgage origination and servicing activities, and gains and losses from securities. Accordingly, the majority of the Company’s revenues have not been affected. The following revenue streams were identified to be in scope of ASC 606: 1) wealth management income; 2) insurance agency commissions; and 3) service charges on deposit accounts. The Company adopted the standard on January 1, 2018 using modified retrospective adoption method. The Company’s accounting policies and revenue recognition principles did not change materially as the principles of ASC 606 are largely consistent with the current revenue recognition practices.

The FASB issued Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, in February 2018. The guidance permits entities to reclassify from accumulated other comprehensive income (“OCI”) to retained earnings stranded income tax effects resulting from the Tax Cuts and Jobs Act enacted in December 2017. The Company made the election to adopt this guidance during the first quarter of 2018 and reclassified $1.5 million of stranded income tax effects from OCI to retained earnings. The Company made the adjustment between OCI and retained earnings in the Condensed Consolidated Statements of Changes in Stockholders’ Equity as of the beginning of the current reporting period.

The FASB issued Update No. 2016-01, Financial Instruments – (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities”, in January 2016. This guidance amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under fair value option and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Company adopted the guidance in the first quarter 2018 with no impact to retained earnings or other comprehensive income. The Company has no investments in marketable equity securities classified as available-for-sale accounted for at fair value. The Company’s marketable equity securities that do not have determinable fair values are measured at cost less any impairment. The Company’s existing accounting policy is consistent with the measurement alternative provided by the guidance. For purposes of disclosing fair values of financial instruments carried at amortized cost, we determined the fair values based on “exit price” as required by the guidance.

Pending Accounting Pronouncements

The FASB issued Update No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, in March 2017. This guidance is intended to eliminate the current diversity in practice with respect to the amortization period for certain purchased callable debt securities held at a premium. Under current GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this update shorten the amortization period for such callable debt securities held at a premium requiring the premium to be amortized to the earliest call date. This guidance is effective for a public business entity that is a U.S. Securities and Exchange Commission (SEC) filer for its fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB issued Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, in January 2017. The objective of this guidance is to simplify an entity’s required test for impairment of goodwill by eliminating Step 2 from the goodwill impairment test. In Step 2 an entity measured a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill, an entity had to determine the fair value at the impairment date of its assets and liabilities, including any unrecognized assets and liabilities, following a procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under this Update, an entity should perform its annual or quarterly goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount and record an impairment charge for the excess of the carrying amount over the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to the reporting unit and the entity must consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. This guidance is effective for a public business entity that is an SEC filer for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The FASB issued Update No. 2016-13, Current Expected Credit Losses (CECL), in June 2016. This guidance changes the impairment model for most financial assets measured at amortized cost and certain other instruments. Entities will be required to use an expected loss model, replacing the incurred loss model that is currently in use. Under the new guidance, an entity will measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current condition and reasonable and supportable forecasts. This will result in earlier recognition of loss allowances in most instances. Credit losses related to available-for-sale debt securities (regardless of whether the impairment is considered to be other-than-temporary) will be measured in a manner similar to the present, except that such losses will be recorded as allowances rather than as reductions in the amortized cost of the related securities. With respect to trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance-sheet credit exposures, the guidance requires that an entity estimate its lifetime expected credit loss and record an allowance resulting in the net amount expected to be collected to be reflected as the financial asset. Entities are also required to provide significantly more disclosures, including information used to track credit quality by year of origination for most financing receivables. This guidance is effective for public business entities for the first interim or annual period beginning after December 15, 2019. The standard’s provisions will be applied as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Early adoption by public business entities is permitted for the first interim or annual period beginning after December 15, 2018. The Company assessed the guidance and has identified the available historical loan level information and completed a data gap analysis. The Company is in process of reviewing various calculation methodologies and the approximate impact on the Company’s financial position, results of operations and cash flows.

The FASB issued Update No. 2016-02, Leases, in February 2016. From the lessee’s perspective, the new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. The guidance also eliminates the current real estate-specific provision and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs. With respect to lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. All entities will classify leases to determine how to recognize lease-related revenue and expense. In applying this guidance entities will also need to determine whether an arrangement contains a lease or service agreement. Disclosures are required by lessees and lessors to meet the objective of enabling users of financials statements to assess the amount, timing, and uncertainty of cash flows arising from leases. For public entities, this guidance is effective for the first interim or annual period beginning after December 15, 2018. Early adoption is permitted. The Company assessed this guidance and collected relevant terms for each of its lease agreements. The Company is in process of quantifying the impact on the Company’s financial position, results of operations and cash flows.

NOTE 2 - ACQUISITION OF WASHINGTONFIRST BANKSHARES, INC.

On January 1, 2018 (“Acquisition Date”), the Company completed its acquisition of WashingtonFirst Bankshares, Inc. (“WashingtonFirst”) in a transaction valued at approximately $447 million in the aggregate, based on the Company’s closing market price of $39.02 on December 29, 2017. The Company issued an aggregate of 11,446,197 shares of the Company’s common stock in the transaction. At the effective date of the acquisition, Sandy Spring shareholders owned approximately 67.7% and WashingtonFirst’s shareholders owned approximately 32.3% of the combined company. As of the Acquisition Date, WashingtonFirst was merged into the Company and WashingtonFirst’s wholly-owned subsidiary, WashingtonFirst Bank, was merged with and into Sandy Spring Bank.

WashingtonFirst, headquartered in Reston, Virginia, had 19 community banking offices throughout the Washington D.C. metropolitan region and more than $2.1 billion in assets as of December 31, 2017. In addition, WashingtonFirst provided wealth management services through its subsidiary, 1st Portfolio Wealth Advisors, and mortgage banking services through the bank’s subsidiary, WashingtonFirst Mortgage Corporation.

The acquisition of WashingtonFirst is being accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. During the second quarter of 2018, management recorded a re-measurement period adjustment to goodwill and fair value of the acquired loan portfolio in the total amount of $3.4 million, as the Company continues to assess the credit quality of the acquired loan portfolio from WashingtonFirst. The provisional amount of goodwill recognized as of the Acquisition Date was approximately $259.7 million. The estimated fair values of the acquired assets and assumed liabilities are subject to refinement as additional information relative to closing date fair values becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first 12 months following the closing date of acquisition.

The consideration paid for WashingtonFirst's common equity and the provisional fair values of acquired identifiable assets and liabilities assumed as of the Acquisition Date were as follows:

(In thousands)			January 1, 2018
Purchase Price:
Fair value of common shares issued (11,446,197 shares) based on Sandy Spring's share price of $39.02		$	446,640
Cash for fractional shares			10
	Total purchase price	$	446,650

Identifiable assets:
Cash and cash equivalents		$	32,497
Residential mortgage loans held for sale			25,789
Investment securities			302,321
Loans			1,680,278
Premises and equipment			4,602
Other Real Estate Owned			497
Accrued Interest Receivable			6,648
Other Intangible assets			11,370
Other Assets			34,654
	Total identifiable assets	$	2,098,656

Identifiable liabilities:
Deposits		$	1,610,327
Borrowings			283,808
Other Liabilities			17,525
	Total identifiable liabilities	$	1,911,660

Provisional fair value of net assets acquired including identifiable intangible assets			186,996
Provisional resulting goodwill		$	259,654

Note 3 – Investments

Investments available-for-sale

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

			September 30, 2018								December 31, 2017
					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. treasuries and government agencies			$	246,840	$	-	$	(7,384)	$	239,456	$	109,349	$	-	$	(2,781)	$	106,568
State and municipal				297,348		1,952		(2,794)		296,506		306,109		6,313		(169)		312,253
Mortgage-backed				393,878		472		(13,719)		380,631		302,664		1,585		(4,209)		300,040
Corporate debt				9,100		152		-		9,252		9,100		332		-		9,432
Trust preferred				310		-		-		310		931		71		-		1,002
	Total debt securities			947,476		2,576		(23,897)		926,155		728,153		8,301		(7,159)		729,295
Marketable equity securities				568		-		-		568		212		-		-		212
		Total investments available-for-sale	$	948,044	$	2,576	$	(23,897)	$	926,723	$	728,365	$	8,301	$	(7,159)	$	729,507

Any unrealized losses in the U.S. treasuries and government agencies, state and municipal, mortgage-backed or corporate debt investment securities at September 30, 2018 are not the result of credit related events but due to changes in interest rates. These declines in fair market value are considered temporary in nature and are expected to recover over time as these securities approach maturity.

The mortgage-backed securities portfolio at September 30, 2018 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($144.0 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($249.9 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time to allow for any anticipated recovery in fair value.

During the first quarter of 2018, the Company sold the pooled trust preferred security for an insignificant gain. This security had incurred credit related other-than-temporary impairment which was recognized in periods prior to 2017.

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

September 30, 2018

Continuous Unrealized

Losses Existing for:

Number

Total

Less than

More than

Unrealized

(Dollars in thousands)

Securities

Fair Value

12 months

Losses

U.S. treasuries and government agencies

239,456

1,799

5,585

7,384

State and municipal

133

126,066

2,617

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$32.61	36	$1,160

10-Q	2018-09-30	Quarter: 2018-09-30
10-Q	2018-06-30	Quarter: 2018-06-30
10-Q	2018-03-31	Quarter: 2018-03-31
10-K	2017-12-31	Annual: 2017-12-31
10-Q	2017-09-30	Quarter: 2017-09-30
10-Q	2017-06-30	Quarter: 2017-06-30
10-Q	2017-03-31	Quarter: 2017-03-31
10-K	2016-12-31	Annual: 2016-12-31
10-Q	2016-09-30	Quarter: 2016-09-30
10-Q	2016-06-30	Quarter: 2016-06-30
10-Q	2016-03-31	Quarter: 2016-03-31
10-K	2015-12-31	Annual: 2015-12-31

8-K	2019-01-17	Earnings, Exhibits
8-K	2018-12-13	Other Events, Exhibits
8-K	2018-11-26
8-K	2018-10-18	Regulation FD, Exhibits
8-K	2018-10-18	Earnings, Exhibits
8-K	2018-07-19	Earnings, Exhibits
8-K	2018-04-27	Amend Bylaw, Exhibits
8-K	2018-04-25	Shareholder Vote
8-K	2018-04-19	Earnings, Exhibits
8-K	2018-01-18	Earnings, Exhibits
8-K	2018-01-01	M&A, Officers, Other Events, Exhibits

BOKF	BOK Financial
TMP	Tompkins Financial
BHBK	Blue Hills Bancorp
FBMS	First Bancshares
OSBC	Old Second Bancorp
SHBI	Shore Bancshares
BOCH	Bank of Commerce Holdings
UBCP	United Bancorp
HVBC	HV Bancorp
WCFB	WCF Bancorp

EX-31	exhibit31a.htm
EX-31	exhibit31b.htm
EX-32	exhibit32a.htm
EX-32	exhibit32b.htm