UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2017
Commission File Number 0-19065
SANDY SPRING BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
17801 Georgia Avenue, Olney, Maryland
(Address of principal executive offices)
52-1532952
(I.R.S. Employer
Identification No.)
20832
(Zip Code)
301-774-6400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $1.00 per share
Name of each exchange on which registered
The NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No*
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 such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 shorter period that the registrant was required to submit and post such
files). [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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 definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [X] Accelerated filer [ ] 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 Act). [ ] Yes [X] No
The aggregate market value of the voting common stock of the registrant held by non-affiliates on June 30, 2017, the last day of the registrant’s most recently completed
second fiscal quarter was approximately $949 million, based on the closing sales price of $40.66 per share of the registrant's Common Stock on that date.
The number of outstanding shares of common stock outstanding as of February 21, 2018.
Common stock, $1.00 par value – 35,453,721 shares
Part III: Portions of the definitive proxy statement for the Annual Meeting of Shareholders to be held on April 25 , 2018 (the "Proxy Statement").
Documents Incorporated By Reference
* The registrant is required to file reports pursuant to Section 13 of the Act.
SANDY SPRING BANCORP, INC.
Table of Contents
Forward-Looking Statements .......................................................................................................................................
PART I.
Item 1. Business .........................................................................................................................................................
Item 1A. Risk Factors .................................................................................................................................................
Item 1B. Unresolved Staff Comments ...........................................................................................................................
Item 2. Properties .......................................................................................................................................................
Item 3. Legal Proceedings ............................................................................................................................................
Item 4. Mine Safety Disclosures ...................................................................................................................................
PART II.
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..
Item 6. Selected Financial Data ....................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .......................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ..............................................................................
Item 8. Financial Statements and Supplementary Data ....................................................................................................
Reports of Independent Registered Public Accounting Firm ..................................................................................
Consolidated Financial Statements ....................................................................................................................
Notes to the Consolidated Financial Statements ..................................................................................................
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ......................................
Item 9A. Controls and Procedures ................................................................................................................................
Item 9B. Other Information ..........................................................................................................................................
PART III.
Item 10. Directors, Executive Officers and Corporate Governance ...................................................................................
Item 11. Executive Compensation ................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .....................
Item 13. Certain Relationships and Related Transactions and Director Independence .........................................................
Item 14. Principal Accounting Fees and Services ............................................................................................................
PART IV.
Item 15. Exhibits, Financial Statement Schedules ...........................................................................................................
Item 16. Form 10-K Summary ......................................................................................................................................
Signatures……………………………………………………………………………………………………………………. ...........
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Forward-Looking Statements
This Annual Report Form 10-K, 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 risk and uncertainties
include, but are not limited to, the risks identified in Item 1A 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;
·
competitive factors among financial services companies, including product and pricing pressures and our ability to attract, develop and retain qualified banking
professionals;
·
acquisition integration risks, including potential deposit attrition, higher than expected costs, customer loss, business disruption and the inability to realize benefits
and cost savings from, and limit any unexpected liabilities associated with, any business combinations;
·
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.
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PART I
Item 1. BUSINESS
General
Sandy Spring Bancorp, Inc. (the “Company") is the bank holding company for Sandy Spring Bank (the "Bank"). The Company is registered as a bank holding company
pursuant to the Bank Holding Company Act of 1956, as amended (the "Holding Company Act"). As such, the Company is subject to supervision and regulation by the Board
of Governors of the Federal Reserve System (the "Federal Reserve"). The Company began operating in 1988. Sandy Spring Bank traces its origin to 1868, making it among
the oldest banking institutions in the region. The Bank is independent, community oriented, and conducts a full-service commercial banking business through 42 community
offices and 6 financial centers located in Central Maryland, Northern Virginia, and Washington D. C as of December 31, 2017. The Bank is a state chartered bank subject to
supervision and regulation by the Federal Reserve and the State of Maryland. The Bank's deposit accounts are insured by the Deposit Insurance Fund administered by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum permitted by law. The Bank is a member of the Federal Reserve System and is an Equal Housing
Lender. The Company, the Bank, and its other subsidiaries are Affirmative Action/Equal Opportunity Employers.
The Company is a community banking organization that focuses its lending and other services on businesses and consumers in the local market area with $5.4 billion in
assets at December 31, 2017. Through its subsidiaries, Sandy Spring Insurance Corporation and West Financial Services, Inc., Sandy Spring Bank offers a comprehensive
menu of insurance and investment management services.
On January 1, 2018, the Company completed its acquisition of WashingtonFirst Bankshares, Inc. (“WashingtonFirst”), the parent company for WashingtonFirst Bank, in a
transaction valued at approximately $452 million. WashingtonFirst was headquartered in Reston, Virginia, and had 19 community banking offices and more than $2.1
billion in assets as of December 31, 2017.
The Company's and the Bank's principal executive office is located at 17801 Georgia Avenue, Olney, Maryland 20832, and its telephone number is 301-774-6400.
Availability of Information
This report is not part of the proxy materials; it is provided along with the annual proxy statement for convenience of use and as an expense control measure. The Company
makes available through the Investor Relations area of the Company website, at www.sandyspringbank.com , annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Access to
these reports is provided by means of a link to a third-party vendor that maintains a database of such filings. In general, the Company intends that these reports be available
as soon as practicable after they are filed with or furnished to the Securities and Exchange Commission (“SEC”). Technical and other operational obstacles or delays caused
by the vendor may delay their availability. The SEC maintains a website ( www.sec.gov ) where these filings also are available through the SEC’s EDGAR system. There
is no charge for access to these filings through either the Company’s site or the SEC’s site.
Market and Economic Overview
Sandy Spring Bank is headquartered in Montgomery County, Maryland and conducts business primarily in Central Maryland, Northern Virginia and Washington D.C. The
Bank’s business footprint serves Greater Washington, which includes the District of Columbia proper, Northern Virginia and suburban Maryland, one of the country’s most
economically successful regions. The region’s economic strength is due to the region’s significant federal government presence and its strong growth in the business and
professional services sector. The proximity to numerous armed forces installations in Maryland, including the United States Cyber Command in Ft. Meade, Maryland,
together with a strategic location between two of the country’s leading ports - the Port of Baltimore and the Port of Norfolk – has provided opportunities for growth in a
variety of areas, including logistics and transportation.
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The unemployment rate in the region has remained consistently below the national average for the last several years. Much of this success is due to the region’s highly
trained and educated workforce. According to the U.S. Census Bureau, the region is home to six of the top ten most highly educated counties in the nation and five of the top
ten most affluent counties, as measured by household income. The Company’s geographical location provides access to key neighboring markets such as Philadelphia, New
York City, Pittsburgh and the Richmond/Norfolk, Virginia corridor.
The local economy that the Company operates in continues to improve and indications are that the regional economy will continue to strengthen and expand. Consumer
confidence continued to improve throughout 2017. While the economic improvement has resulted in many positive economic trends such as lower unemployment,
increased housing starts and strong housing prices, these have been offset by other concerns such as the lack of wage growth, low inflation levels and the strength of the
dollar, that in concert, have acted to suppress the pace of economic expansion. Volatility in global economic markets and various episodes of geo-political unrest continue
to cause a degree of uncertainty in the financial markets. Additionally, the potential for additional interest rate increases in the future has tempered confidence among
individual consumers and small and mid-sized businesses. Management is encouraged by the overall strength of the current economic environment and the prospects for
continued growth of the Company.
Loan Products
The Company currently offers a complete menu of loan products primarily in the Company’s identified market footprint that are discussed in detail below and on the
following pages. These following sections should be read in conjunction with the section “Credit Risk” on page 47 of this report.
Residential Real Estate Loans
The residential real estate category contains loans principally to consumers secured by residential real estate. The Company's residential real estate lending policy requires
each loan to have viable repayment sources. Residential real estate loans are evaluated for the adequacy of these repayment sources at the time of approval, based upon
measures including credit scores, debt-to-income ratios, and collateral values. Credit risk for residential real estate loans arises from borrowers lacking the ability or
willingness to repay the loan or by a shortfall in the value of the residential real estate in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of the real estate collateral. The residential real estate portfolio includes both conforming and non-conforming mortgage loans.
Conforming mortgage loans represent loans originated in accordance with underwriting standards set forth by the government-sponsored entities (“GSEs”), including the
Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Government National Mortgage
Association (“Ginnie Mae”), which serve as the primary purchasers of loans sold in the secondary mortgage market by mortgage lenders. These loans are generally
collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less or have mortgage insurance to insure down to 80%, and are
made to borrowers in good credit standing. Substantially all fixed-rate conforming loans originated are sold in the secondary mortgage market. For any loans retained by the
Company, title insurance insuring the priority of its mortgage lien, as well as fire and extended coverage casualty insurance protecting the properties securing the loans is
required. Borrowers may be required to advance funds, with each monthly payment of principal and interest, to a loan escrow account from which the Company makes
disbursements for items such as real estate taxes and mortgage insurance premiums. Appraisers approved by the Company appraise the properties securing substantially all
of the Company's residential mortgage loans.
Non-conforming mortgage loans represent loans that generally are not saleable in the secondary market to the GSEs for inclusion in conventional mortgage-backed
securities due to the credit characteristics of the borrower, the underlying documentation, the loan-to-value ratio, or the size of the loan, among other factors. The Company
originates non-conforming loans for its own portfolio and for sale to third-party investors, usually large mortgage companies, under commitments by the mortgage company
to purchase the loans subject to compliance with pre-established investor criteria. Non-conforming loans generated for sale include loans that may not be underwritten using
customary underwriting standards. These loans typically are held after funding for thirty days or less, and are included in residential mortgages held for sale. The Company
may sell both conforming and non-conforming loans on either a servicing released or servicing retained basis.
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The Company makes residential real estate development and construction loans generally to provide interim financing on property during the development and construction
period. Borrowers include builders, developers and persons who will ultimately occupy the single-family dwelling. Residential real estate development and construction loan
funds are disbursed periodically as pre-specified stages of completion are attained based upon site inspections. Interest rates on these loans are usually adjustable. Loans to
individuals for the construction of primary personal residences are typically secured by the property under construction, frequently include additional collateral (such as a
second mortgage on the borrower's present home), and commonly have maturities of twelve to eighteen months. The Company attempts to obtain the permanent mortgage
loan under terms, conditions and documentation standards that permit the sale of the mortgage loan in the secondary mortgage loan market.
Commercial Loans
Included in this category are commercial real estate loans, commercial construction loans and other commercial loans. Over the years, the Company’s commercial loan
clients have come to represent a diverse cross-section of small to mid-size local businesses within the Company’s market footprint, whose owners and employees are often
established Bank customers. Such banking relationships are a natural business for the Company, with its long-standing community roots and extensive experience in serving
and lending to this market segment.
Commercial loans are evaluated for the adequacy of repayment sources at the time of approval and are regularly reviewed for any possible deterioration in the ability of the
borrower to repay the loan. Collateral generally is required to provide the Company with an additional source of repayment in the event of default by a commercial
borrower. The structure of the collateral package, including the type and amount of the collateral, varies from loan to loan depending on the financial strength of the
borrower, the amount and terms of the loan, and the collateral available to be pledged by the borrower, but generally may include real estate, accounts receivable, inventory,
equipment or other assets. Loans also may be supported by personal guarantees from the principals of the commercial loan borrowers. The financial condition and cash flow
of commercial borrowers are closely monitored by the submission of corporate financial statements, personal financial statements and income tax returns. The frequency of
submissions of required information depends upon the size and complexity of the credit and the collateral that secures the loan. Credit risk for commercial loans arises from
borrowers lacking the ability or willingness to repay the loan, and in the case of secured loans, by a shortfall in the collateral value in relation to the outstanding loan balance
in the event of a default and subsequent liquidation of collateral. The Company has no commercial loans to borrowers in similar industries that exceed 10% of total loans.
Included in commercial loans are credits directly originated by the Company and, to a lesser extent, syndicated transactions or loan participations that are originated by other
lenders. The Company's commercial lending policy requires each loan, regardless of whether it is directly originated or is purchased, to have viable repayment sources. The
risks associated with syndicated loans or purchased participations are similar to those of directly originated commercial loans, although additional risk may arise from the
limited ability to control actions of the primary lender. Shared National Credits (SNC), as defined by the banking regulatory agencies, represent syndicated lending
arrangements with three or more participating financial institutions and credit exceeding $20.0 million in the aggregate. As of December 31, 2017, the Company had no
SNC purchases outstanding and $26.9 million in SNC sold outstanding. During 2017, the Company’s primary regulator completed its annual SNC examination. As a result
of this review no action was required on the Company’s SNC participations.
The Company sells participations in loans it originates to other financial institutions in order to build long-term customer relationships or limit loan concentration. The
Company also purchases whole loans and loan participations as part of its asset/liability management strategy. Strict policies are in place governing the degree of risk
assumed and volume of loans held. At December 31, 2017, other financial institutions had $26.9 million in outstanding commercial and commercial real estate loan
participations sold by the Company, excluding SNC participations. In addition, the Company had $33.1 million in outstanding commercial and commercial real estate loan
participations purchased from other lenders, excluding SNC participations.
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The Company's commercial real estate loans consist of both loans secured by owner occupied properties and non-owner occupied properties where an established banking
relationship exists and involves investment properties for warehouse, retail, and office space with a history of occupancy and cash flow. The commercial real estate category
contains mortgage loans to developers and owners of commercial real estate. Commercial real estate loans are governed by the same lending policies and subject to credit
risk as previously described for commercial loans. Commercial real estate loans secured by owner-occupied properties are based upon the borrower’s financial health and
the ability of the borrower and the business to repay. The Company seeks to reduce the risks associated with commercial mortgage lending by generally lending in its market
area, using conservative loan-to-value ratios and obtaining periodic financial statements and tax returns from borrowers to perform loan reviews. It is also the Company's
general policy to obtain personal guarantees from the principals of the borrowers and to underwrite the business entity from a cash flow perspective. Interest rate risks are
mitigated by using either floating interest rates or by fixing rates for a short period of time, generally less than three years. While loan amortizations may be approved for up
to 300 months, each loan generally has a call provision (maturity date) of five to seven years or less.
The Company primarily lends for commercial construction in local markets that are familiar and understandable, works selectively with top-quality builders and developers,
and requires substantial equity from its borrowers. The underwriting process is designed to confirm that the project will be economically feasible and financially viable; it is
generally evaluated as though the Company will provide permanent financing. The Company's portfolio growth objectives do not include speculative commercial
construction projects or projects lacking reasonable proportionate sharing of risk. Development and construction loans are secured by the properties under development or
construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely upon the value of the underlying collateral, the Company
considers the financial condition and reputation of the borrower and any guarantors, the amount of the borrower's equity in the project, independent appraisals, cost estimates
and pre-construction sales information. A risk rating system is used on the commercial loan portfolio to determine any exposures to losses.
Acquisition, development and construction loans (“AD&C loans”) to residential builders are generally made for the construction of residential homes for which a binding
sales contract exists and the prospective buyers had been pre-qualified for permanent mortgage financing by either third-party lenders (mortgage companies or other
financial institutions) or the Company. Loans for the development of residential land are extended when evidence is provided that the lots under development will be or
have been sold to builders satisfactory to the Company. These loans are generally extended for a period of time sufficient to allow for the clearing and grading of the land
and the installation of water, sewer and roads, which is typically a minimum of eighteen months to three years.
The Company makes commercial business loans. Commercial term loans are made to provide funds for equipment and general corporate needs. This loan category is
designed to support borrowers who have a proven ability to service debt over a term generally not to exceed 84 months. The Company generally requires a first lien position
on all collateral and requires guarantees from owners having at least a 10% interest in the involved business. Interest rates on commercial term loans are generally floating
or fixed for a term not to exceed five years. Management monitors industry and collateral concentrations to avoid loan exposures to a large group of similar industries or
similar collateral. Commercial business loans are evaluated for historical and projected cash flow attributes, balance sheet strength, and primary and alternate resources of
personal guarantors. Commercial term loan documents require borrowers to forward regular financial information on both the business and personal guarantors. Loan
covenants require at least annual submission of complete financial information and in certain cases this information is required monthly, quarterly or semi-annually
depending on the degree to which the Company desires information resources for monitoring a borrower’s financial condition and compliance with loan covenants.
Examples of properly margined collateral for loans, as required by bank policy, would be a 75% advance on the lesser of appraisal or recent sales price on commercial
property, an 80% or less advance on eligible receivables, a 50% or less advance on eligible inventory and an 80% advance on appraised residential property. Collateral
borrowing certificates may be required to monitor certain collateral categories on a monthly or quarterly basis. Loans may require personal guarantees. Key person life
insurance may be required as appropriate and as necessary to mitigate the risk of loss of a primary owner or manager. Whenever appropriate and available, the Bank seeks
governmental loan guarantees, such as the Small Business Administration loan programs, to reduce risks.
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Commercial lines of credit are granted to finance a business borrower’s short-term credit needs and/or to finance a percentage of eligible receivables and inventory. In
addition to the risks inherent in term loan facilities, line of credit borrowers typically require additional monitoring to protect the lender against increasing loan volumes and
diminishing collateral values. Commercial lines of credit are generally revolving in nature and require close scrutiny. The Company generally requires at least an annual
out of debt period (for seasonal borrowers) or regular financial information (monthly or quarterly financial statements, borrowing base certificates, etc.) for borrowers with
more growth and greater permanent working capital financing needs. Advances against collateral value are limited. Lines of credit and term loans to the same borrowers
generally are cross-defaulted and cross-collateralized. Interest rate charges on this group of loans generally float at a factor at or above the prime lending rate.
Consumer Loans
Consumer lending continues to be important to the Company’s full-service, community banking business. This category of loans includes primarily home equity loans and
lines, installment loans and personal lines of credit.
The home equity category consists mainly of revolving lines of credit to consumers that are secured by residential real estate. Home equity lines of credit and other home
equity loans are originated by the Company for typically up to 85% of the appraised value, less the amount of any existing prior liens on the property. While home equity
loans have maximum terms of up to twenty years and interest rates are generally fixed, home equity lines of credit have maximum terms of up to ten years for draws and
thirty years for repayment, and interest rates are generally adjustable. The Company secures these loans with mortgages on the homes (typically a second mortgage).
Purchase money second mortgage loans originated by the Company have maximum terms ranging from ten to thirty years. These loans generally carry a fixed rate of
interest for a term of 15 or 20 years. ARM loans have a 30 year amortization period with a fixed rate of interest for the first five, seven or ten years, re-pricing annually
thereafter at a predetermined spread to LIBOR. Home equity lines are generally governed by the same lending policies and subject to credit risk as described for residential
real estate loans.
Other consumer loans include installment loans used by customers to purchase automobiles, boats and recreational vehicles. These consumer loans are generally governed
by the same overall lending policies as described for residential real estate. Credit risk for consumer loans arises from borrowers lacking the ability or willingness to repay
the loan, and in the case of secured loans, by a shortfall in the value of the collateral in relation to the outstanding loan balance in the event of a default and subsequent
liquidation of collateral.
Consumer installment loans are generally offered for terms of up to six years at fixed interest rates. Automobile loans can be for up to 100% of the purchase price or the
retail value listed by the National Automobile Dealers Association. The terms of the loans are determined by the age and condition of the collateral. Collision insurance
policies are required on all these loans, unless the borrower has substantial other assets and income. The Company also makes other consumer loans, which may or may not
be secured. The term of the loans usually depends on the collateral. The majority of unsecured loans usually do not exceed $50 thousand and have a term of no longer than
36 months.
Deposit Activities
Subject to the Company’s Asset/Liability Committee (the “ALCO”) policies and current business plan, the Treasury function works closely with the Company’s retail
deposit operations to accomplish the objectives of maintaining deposit market share within the Company’s primary markets and managing funding costs to preserve the net
interest margin.
One of the Company’s primary objectives as a community bank is to develop long-term, multi-product customer relationships from its comprehensive menu of financial
products. To that end, the lead product to develop such relationships is typically a deposit product. The Company intends to rely on deposit growth to fund long-term loan
growth.
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Treasury Activities
The Treasury function manages the wholesale segments of the balance sheet, including investments, purchased funds and long-term debt, and is responsible for all facets of
interest rate risk management for the Company, which includes the pricing of deposits consistent with conservative interest rate risk and liquidity practices. Management’s
objective is to achieve the maximum level of consistent earnings over the long term, while minimizing interest rate risk, credit risk and liquidity risk and optimizing capital
utilization. In managing the investment portfolio under its stated objectives, the Company invests primarily in U.S. Treasury and Agency securities, U.S Agency mortgage-
backed securities (“MBS”), U.S. Agency Collateralized Mortgage Obligations (“CMO”), municipal bonds and, to a minimal extent, trust preferred securities and corporate
bonds. Treasury strategies and activities are overseen by the Risk Committee of the board of directors, ALCO and the Company’s Investment Committee, which reviews all
investment and funding transactions. The ALCO activities are summarized and reviewed quarterly with the Company’s board of directors.
The primary objective of the investment portfolio is to provide the necessary liquidity consistent with anticipated levels of deposit funding and loan demand with a minimal
level of risk. The overall average duration of 3.7 years of the investment portfolio together with the types of investments (97% of the portfolio is rated AA or above) is
intended to provide sufficient cash flows to support the Company’s lending goals. Liquidity is also provided by lines of credit maintained with the Federal Home Loan Bank
of Atlanta (“FHLB”), the Federal Reserve, and to a lesser extent, bank lines of credit.
Borrowing Activities
Management utilizes a variety of sources to raise borrowed funds at competitive rates, including federal funds purchased, FHLB borrowings and retail repurchase
agreements. FHLB borrowings typically carry rates at varying spreads from the LIBOR rate or treasury yield curve for the equivalent term because they may be secured with
investments or high quality loans. Federal funds purchased, which are generally overnight borrowings, are typically purchased at the Federal Reserve target rate.
The Company’s borrowing activities are achieved through the use of the previously mentioned lines of credit to address overnight and short-term funding needs, match-fund
loan activity and, when opportunities are present, to lock in attractive rates due to market conditions.
Employees
The Company and its subsidiaries employed 754 persons, including executive officers, loan and other banking and trust officers, branch personnel, and others at December
31, 2017. None of the Company's employees is represented by a union or covered under a collective bargaining agreement. Management of the Company considers its
employee relations to be excellent.
Competition
The Bank's principal competitors for deposits are other financial institutions, including other banks, credit unions, and savings institutions located in the Bank’s primary
market area of central Maryland, Northern Virginia and Washington D. C. Competition among these institutions is based primarily on interest rates and other terms offered,
service charges imposed on deposit accounts, the quality of services rendered, and the convenience of banking facilities. Additional competition for depositors' funds comes
from mutual funds, U.S. Government securities, and private issuers of debt obligations and suppliers of other investment alternatives for depositors such as securities firms.
Competition from credit unions has intensified in recent years as historical federal limits on membership have been relaxed. Because federal law subsidizes credit unions by
giving them a general exemption from federal income taxes, credit unions have a significant cost advantage over banks and savings associations, which are fully subject to
federal income taxes. Credit unions may use this advantage to offer rates that are highly competitive with those offered by banks and thrifts.
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The banking business in Central Maryland, Northern Virginia and Washington D. C. generally, and the Bank's primary service areas specifically, are highly competitive with
respect to both loans and deposits. As noted above, the Bank competes with many larger banking organizations that have offices over a wide geographic area. These larger
institutions have certain inherent advantages, such as the ability to finance wide-ranging advertising campaigns and promotions and to allocate their investment assets to
regions offering the highest yield and demand. They also offer services, such as international banking, that are not offered directly by the Bank (but are available indirectly
through correspondent institutions), and, by virtue of their larger total capitalization, such banks have substantially higher legal lending limits, which are based on bank
capital, than does the Bank. The Bank can arrange loans in excess of its lending limit, or in excess of the level of risk it desires to take, by arranging participations with other
banks. The primary factors in competing for loans are interest rates, loan origination fees, and the range of services offered by lenders. Competitors for loan originations
include other commercial banks, mortgage bankers, mortgage brokers, savings associations, and insurance companies.
Sandy Spring Insurance Corporation (“SSIC”), a wholly owned subsidiary of the Bank, offers annuities as an alternative to traditional deposit accounts. SSIC operates Sandy
Spring Insurance, a general insurance agency located in Annapolis, Maryland, and Neff & Associates, an insurance agency located in Ocean City, Maryland. Both agencies
face competition primarily from other insurance agencies and insurance companies. West Financial Services, Inc. (“WFS”), a wholly owned subsidiary of the Bank, is an
asset management and financial planning company located in McLean, Virginia. The competition that WFS faces is primarily from other financial planners, banks, and
financial management companies.
In addition to competing with other commercial banks, credit unions and savings associations, commercial banks such as the Bank compete with non-bank institutions for
funds. For instance, yields on corporate and government debt and equity securities affect the ability of commercial banks to attract and hold deposits. Mutual funds also
provide substantial competition to banks for deposits. Other entities, both governmental and in private industry, raise capital through the issuance and sale of debt and
equity securities and indirectly compete with the Bank in the acquisition of deposits.
Financial holding companies may engage in banking as well as types of securities, insurance, and other financial activities. Banks with or without holding companies also
may establish and operate financial subsidiaries that may engage in most financial activities in which financial holding companies may engage. Competition may increase as
bank holding companies and other large financial services companies expand their operations to engage in new activities and provide a wider array of products.
Monetary Policy
The Company and the Bank are affected by fiscal and monetary policies of the federal government, including those of the Federal Reserve Board, which regulates the
national money supply in order to mitigate recessionary and inflationary pressures. Among the techniques available to the Federal Reserve Board are engaging in open
market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against bank deposits. These techniques are used in
varying combinations to influence the overall growth of bank loans, investments and deposits. Their use may also affect interest rates charged on loans and paid on deposits.
The effect of governmental policies on the earnings of the Company and the Bank cannot be predicted.
Regulation, Supervision, and Governmental Policy
The following is a brief summary of certain statutes and regulations that significantly affect the Company and the Bank. A number of other statutes and regulations may
affect the Company and the Bank but are not discussed in the following paragraphs.
Bank Holding Company Regulation
The Company is registered as a bank holding company under the Holding Company Act and, as such, is subject to supervision and regulation by the Federal Reserve. As a
bank holding company, the Company is required to furnish to the Federal Reserve annual and quarterly reports of its operations and additional information and reports. The
Company is also subject to regular examination by the Federal Reserve.
Under the Holding Company Act, a bank holding company must obtain the prior approval of the Federal Reserve before (1) acquiring direct or indirect ownership or control
of any class of voting securities of any bank or bank holding company if, after the acquisition, the bank holding company would directly or indirectly own or control more
than 5% of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding
company.
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Prior to acquiring control of the Company or the Bank, any company must obtain approval of the Federal Reserve. For purposes of the Holding Company Act, "control" is
defined as ownership of 25% or more of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the
exercise of a controlling influence over management or policies of the Company or the Bank.
The Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or
indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, non-bank activities that are closely related to banking, and other
financially related activities. The activities of the Company are subject to these legal and regulatory limitations under the Holding Company Act and Federal Reserve
regulations.
The Change in Bank Control Act and the related regulations of the Federal Reserve require any person or persons acting in concert (except for companies required to make
application under the Holding Company Act) to file a written notice with the Federal Reserve before the person or persons acquire control of the Company or the Bank. The
Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of
a bank holding company or an insured bank.
In general, bank holding companies that qualify as financial holding companies under federal banking law may engage in an expanded list of non-bank activities. Non-bank
and financially related activities of bank holding companies, including companies that become financial holding companies, also may be subject to regulation and oversight
by regulators other than the Federal Reserve. The Company is not a financial holding company, but may choose to become one in the future.
The Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when
it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that holding company.
The Federal Reserve has adopted guidelines regarding the capital adequacy of bank holding companies, which require bank holding companies to maintain specified
minimum ratios of capital to total assets and capital to risk-weighted assets. See "Regulatory Capital Requirements."
The Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a
policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent
with the company's capital needs, asset quality, and overall financial condition.
Bank Regulation
The Bank is a state chartered bank and trust company subject to supervision by the State of Maryland. As a member of the Federal Reserve System, the Bank is also subject
to supervision by the Federal Reserve. Deposits of the Bank are insured by the FDIC to the legal maximum. Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of branches, mergers and acquisitions, corporate activities, changes in control, electronic funds
transfers, responsiveness to community needs, management practices, compensation policies, and other aspects of operations are subject to regulation by the appropriate
federal and state supervisory authorities. In addition, the Bank is subject to numerous federal, state and local laws and regulations which set forth specific restrictions and
procedural requirements with respect to extensions of credit (including to insiders), credit practices, disclosure of credit terms and discrimination in credit transactions.
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The Federal Reserve regularly examines the operations and condition of the Bank, including, but not limited to, its capital adequacy, reserves, loans, investments, and
management practices. These examinations are for the protection of the Bank's depositors and the Deposit Insurance Fund. In addition, the Bank is required to furnish
quarterly and annual reports to the Federal Reserve. The Federal Reserve's enforcement authority includes the power to remove officers and directors and the authority to
issue cease-and-desist orders to prevent a bank from engaging in unsafe or unsound practices or violating laws or regulations governing its business.
The Federal Reserve has adopted regulations regarding capital adequacy, which require member banks to maintain specified minimum ratios of capital to total assets and
capital to risk-weighted assets. See "Regulatory Capital Requirements." Federal Reserve and State regulations limit the amount of dividends that the Bank may pay to the
Company. See “Note 11 –Stockholders’ Equity” in the Notes to the Consolidated Financial Statements.
The Bank is subject to restrictions imposed by federal law on extensions of credit to, and certain other transactions with, the Company and other affiliates, and on
investments in their stock or other securities. These restrictions prevent the Company and the Bank's other affiliates from borrowing from the Bank unless the loans are
secured by specified collateral, and require those transactions to have terms comparable to terms of arms-length transactions with third persons. In addition, secured loans
and other transactions and investments by the Bank are generally limited in amount as to the Company and as to any other affiliate to 10% of the Bank's capital and surplus
and as to the Company and all other affiliates together to an aggregate of 20% of the Bank's capital and surplus. Certain exemptions to these limitations apply to extensions
of credit and other transactions between the Bank and its subsidiaries. These regulations and restrictions may limit the Company's ability to obtain funds from the Bank for
its cash needs, including funds for acquisitions and for payment of dividends, interest, and operating expenses.
Under Federal Reserve regulations, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit secured by liens or
interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards;
prudent underwriting standards, including loan-to-value limits, that are clear and measurable; loan administration procedures; and documentation, approval, and reporting
requirements. A bank's real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
adopted by the federal bank regulators. The Interagency Guidelines, among other things, call for internal loan-to-value limits for real estate loans that are not in excess of the
limits specified in the Guidelines. The Interagency Guidelines state, however, that it may be appropriate in individual cases to originate or purchase loans with loan-to-value
ratios in excess of the supervisory loan-to-value limits.
Sandy Spring Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal Deposit
Insurance Corporation’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned.
Assessment rates currently range from 1.5 to 40 basis points. No institution may pay a dividend if in default of the federal deposit insurance assessment. Deposit insurance
assessments are based on total assets less tangible equity. The Federal Deposit Insurance Corporation has authority to increase insurance assessments. Management cannot
predict what insurance assessment rates will be in the future.
Regulatory Capital Requirements
The Federal Reserve establishes capital and leverage requirements for the Company and the Bank. Specifically, the Company and the Bank are subject to the following
minimum capital requirements: (1) a common equity Tier 1 risk-based capital ratio of 4.5%; (2) a Tier 1 risk-based capital ratio of 6% ; (3) a total risk-based capital ratio of
8% ; and (4) a leverage ratio of 4%.
Common Equity Tier 1 capital consists solely of common stock (plus related surplus), retained earnings, accumulated other comprehensive income, and limited amounts of
minority interests that are in the form of common stock. Additional Tier 1 capital includes other perpetual instruments historically included in Tier 1 capital, such as non-
cumulative perpetual preferred stock. The rule permits bank holding companies with less than $15 billion in total consolidated assets to continue to include trust preferred
securities and cumulative perpetual preferred stock issued before May 19, 2010 in Tier 1 capital, but not in Common Equity Tier 1 capital, subject to certain restrictions.
Tier 2 capital consists of instruments that previously qualified in Tier 2 capital plus instruments that the rule has disqualified from Tier 1 capital treatment.
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In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, a covered banking organization must maintain a "capital
conservation buffer" on top of its minimum risk-based capital requirements. The capital conservation buffer requirement began to phase in beginning in January 2016 at
0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. This buffer must consist solely of Tier 1 Common
Equity and the buffer applies to all three measurements: Common Equity Tier 1, Tier 1 capital and total capital.
Supervision and Regulation of Mortgage Banking Operations
The Company's mortgage banking business is subject to the rules and regulations of the U.S. Department of Housing and Urban Development ("HUD"), the Federal Housing
Administration ("FHA"), the Veterans' Administration ("VA") and Fannie Mae with respect to originating, processing, selling and servicing mortgage loans. Those rules and
regulations, among other things, prohibit discrimination and establish underwriting guidelines, which include provisions for inspections and appraisals, require credit reports
on prospective borrowers, and fix maximum loan amounts. Lenders such as the Company are required annually to submit audited financial statements to Fannie Mae, FHA
and VA. Each of these regulatory entities has its own financial requirements. The Company's affairs are also subject to examination by the Federal Reserve, Fannie Mae,
FHA and VA at all times to assure compliance with the applicable regulations, policies and procedures. Mortgage origination activities are subject to, among others, the
Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Fair Housing Act, Fair Credit Reporting Act, the National Flood Insurance Act and the Real Estate Settlement
Procedures Act and related regulations that prohibit discrimination and require the disclosure of certain basic information to mortgagors concerning credit terms and
settlement costs. The Company's mortgage banking operations also are affected by various state and local laws and regulations and the requirements of various private
mortgage investors.
Community Reinvestment
Under the Community Reinvestment Act (“CRA”), a financial institution has a continuing and affirmative obligation to help meet the credit needs of the entire community,
including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, or limit an institution’s
discretion to develop the types of products and services that it believes are best suited to its particular community. However, institutions are rated on their performance in
meeting the needs of their communities. Performance is tested in three areas: (a) lending, to evaluate the institution’s record of making loans in its assessment areas; (b)
investment, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income
individuals and businesses; and (c) service, to evaluate the institution’s delivery of services through its branches, ATMs and other offices. The CRA requires each federal
banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution’s record of meeting the credit needs of
the community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit
facilities, relocations, mergers, consolidations, acquisitions of assets or assumptions of liabilities, and savings and loan holding company acquisitions. The CRA also
requires that all institutions make public, disclosure of their CRA ratings. The Bank was assigned a “satisfactory” rating as a result of its last CRA examination.
Bank Secrecy Act
Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the
transaction. Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury. In addition, financial
institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects, or has reason to
suspect involves illegal funds, is designed to evade the requirements of the BSA, or has no lawful purpose. The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act, commonly referred to as the "USA Patriot Act" or the "Patriot Act”, enacted prohibitions against
specified financial transactions and account relationships, as well as enhanced due diligence standards intended to prevent the use of the United States financial system for
money laundering and terrorist financing activities. The Patriot Act requires banks and other depository institutions, brokers, dealers and certain other businesses involved in
the transfer of money to establish anti-money laundering programs, including employee training and independent audit requirements meeting minimum standards specified
by the act, to follow standards for customer identification and maintenance of customer identification records, and to compare customer lists against lists of suspected
terrorists, terrorist organizations and money launderers. The Patriot Act also requires federal bank regulators to evaluate the effectiveness of an applicant in combating
money laundering in determining whether to approve a proposed bank acquisition.
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Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) established a broad range of corporate governance and accounting measures intended to increase corporate
responsibility and protect investors by improving the accuracy and reliability of disclosures under federal securities laws. The Company is subject to Sarbanes-Oxley
because it is required to file periodic reports with the SEC under the Securities Exchange Act of 1934. Among other things, Sarbanes-Oxley, its implementing regulations
and related Nasdaq Stock Market rules have established membership requirements and additional responsibilities for the Company’s audit committee, imposed restrictions
on the relationship between the Company and its outside auditors (including restrictions on the types of non-audit services the auditors may provide to the Company),
imposed additional financial statement certification responsibilities for the Company’s chief executive officer and chief financial officer, expanded the disclosure
requirements for corporate insiders, required management to evaluate the Company’s disclosure controls and procedures and its internal control over financial reporting, and
required the Company’s auditors to issue a report on its internal control over financial reporting.
Regulatory Restructuring Legislation
The Dodd-Frank Act, enacted in 2010, implements significant changes to the regulation of depository institutions. The Dodd-Frank Act created the Consumer Financial
Protection Bureau as an independent bureau of the Federal Reserve to take over the implementation of federal consumer financial protection and fair lending laws from the
depository institution regulators. However, institutions of $10 billion or fewer in assets continue to be examined for compliance with such laws and regulations by, and to be
subject to the primary enforcement authority of, their primary federal regulator. In addition, the Dodd-Frank Act, among other things, requires changes in the way that
institutions are assessed for deposit insurance, requires that originators of securitized loans retain a percentage of the risk for the transferred loans, directs the Federal
Reserve to regulate pricing of certain debit card interchange fees, and contains a number of reforms related to mortgage originations.
Other Laws and Regulations
Some of the aspects of the lending and deposit business of the Bank that are subject to regulation by the Federal Reserve and the FDIC include reserve requirements and
disclosure requirements in connection with personal and mortgage loans and deposit accounts. In addition, the Bank is subject to numerous federal and state laws and
regulations that include specific restrictions and procedural requirements with respect to the establishment of branches, investments, interest rates on loans, credit practices,
the disclosure of credit terms, and discrimination in credit transactions.
Enforcement Actions
Federal statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake an enforcement action against an institution that fails to
comply with regulatory requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to civil money penalties, cease-and-
desist orders, receivership, conservatorship, or the termination of the deposit insurance.
Executive Officers
The following listing sets forth the name, age (as of February 23, 2018), principal position and recent business experience of each executive officer:
R. Louis Caceres, 55, Executive Vice President of the Bank. Mr. Caceres was made Executive Vice President of the Bank in 2002. Prior to that, Mr. Caceres was a Senior
Vice President of the Bank.
Ronald E. Kuykendall, 65, became Executive Vice President, General Counsel and Secretary of the Company and the Bank in 2002. Prior to that, Mr. Kuykendall was
General Counsel and Secretary of the Company and Senior Vice President of the Bank.
Philip J. Mantua, CPA, 59, became Executive Vice President and Chief Financial Officer of the Company and the Bank in 2004. Prior to that, Mr. Mantua was Senior Vice
President of Managerial Accounting.
Ronda M. McDowell, 53, became an Executive Vice President and Chief Credit Officer of the Bank in 2013. Prior to that, Ms. McDowell served as a Senior Vice President,
Loan Administration and Retail Senior Credit Officer of the Bank.
Joseph J. O'Brien, Jr., 54, became Executive Vice President for Commercial and Retail Banking on January 1, 2011. Mr. O’Brien joined the Bank in July 2007 as Executive
Vice President for Commercial Banking.
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John D. Sadowski, 54, became Executive Vice President and Chief Information Officer of the Bank on February 1, 2011. Prior to that, Mr. Sadowski served as a Senior Vice
President of the Bank.
Daniel J. Schrider, 53, became President of the Company and the Bank effective March 26, 2008 and Chief Executive Officer effective January 1, 2009. Prior to that, Mr.
Schrider served as an Executive Vice President and Chief Revenue Officer of the Bank.
Item 1A. RISK FACTORS
Investing in the Company’s common stock involves risks. The investor should carefully consider the following risk factors before deciding to make an investment decision
regarding the Company’s stock. The risk factors may cause future earnings to be lower or the financial condition to be less favorable than expected. In addition, other risks
that the Company is not aware of, or which are not believed to be material, may cause earnings to be lower, or may deteriorate the financial condition of the Company.
Consideration should also be given to the other information in this Annual Report on Form 10-K, as well as in the documents incorporated by reference into this Form 10-K.
Changes in U.S. or regional economic conditions could have an adverse effect on the Company’s business, financial condition or results of operations.
The Company’s business activities and earnings are affected by general business conditions in the United States and in the Company’s local market area. These conditions
include short-term and long-term interest rates, inflation, unemployment levels, consumer confidence and spending, fluctuations in both debt and equity capital markets, and
the strength of the economy in the United States generally and in the Company’s market area in particular. A favorable business environment is generally characterized by,
among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings.
Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on
the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters; or a combination of these or other
factors. Economic pressure on consumers and uncertainty regarding continuing economic improvement may result in changes in consumer and business spending, borrowing
and savings habits. A return to elevated levels of unemployment, declines in the values of real estate, or other events that affect household and/or corporate incomes could
impair the ability of the Company’s borrowers to repay their loans in accordance with their terms and reduce demand for banking products and services.
The geographic concentration of the Company’s operations makes the Company susceptible to downturns in local economic conditions.
The Company’s commercial and commercial real estate lending operations are concentrated in central Maryland, Northern Virginia and Washington D.C. The Company’s
success depends in part upon economic conditions in these markets. Adverse changes in economic conditions in these markets could limit growth in loans and deposits,
impair the Company’s ability to collect amounts due on loans, increase problem loans and charge-offs and otherwise negatively affect performance and financial condition.
Declines in real estate values could cause some of the Company’s residential and commercial real estate loans to be inadequately collateralized, which would expose the
Company to a greater risk of loss in the event that the recovery on amounts due on defaulted loans is resolved by selling the real estate collateral.
The Company’s allowance for loan losses may not be adequate to cover its actual loan losses, which could adversely affect the Company’s financial condition and
results of operations.
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An allowance for loan losses is maintained in an amount that is believed to be adequate to provide for probable losses inherent in the portfolio. The Company has an
aggressive program to monitor credit quality and to identify loans that may become non-performing; however, at any time there could be loans included in the portfolio that
may result in losses, but that have not been identified as non-performing or potential problem credits. There can be no assurance that the ability exists to identify all
deteriorating credits prior to them becoming non-performing assets, or that the Company will have the ability to limit losses on those loans that are identified. As a result,
future additions to the allowance may be necessary. Additionally, future additions may be required based on changes in the loans comprising the portfolio and changes in the
financial condition of borrowers, or as a result of assumptions by management in determining the allowance. Additionally, banking regulators, as an integral part of their
supervisory function, periodically review the adequacy of Company’s allowance for loan losses. These regulatory agencies may require an increase in the provision for loan
losses or to recognize further loan charge-offs based upon their judgments, which may be different from the Company’s. Any increase in the allowance for loan losses could
have a negative effect on the financial condition and results of operations of the Company.
If non-performing assets increase, earnings will be adversely impacted.
At December 31, 2017, non-performing assets, which are comprised of non-accrual loans, 90 days past due loans and other real estate owned, totaled $31.6 million, or
0.58%, of total assets, compared to non-performing assets of $33.8 million, or 0.66% of total assets at December 31, 2016. Non-performing assets adversely affect net
income in various ways. Interest income is not recorded on non-accrual loans or other real estate owned. The Company must record a reserve for probable losses on loans,
which is established through a current period charge to the provision for loan losses, and from time to time must write-down the value of properties in the Company’s other
real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such
as taxes, insurance and maintenance related to other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management,
which can distract them from more profitable activity. Finally, if the estimate for the recorded allowance for loan losses proves to be incorrect and the allowance is
inadequate, the allowance will have to be increased and, as a result, Company earnings would be adversely affected. A downturn in the Company’s market areas could
increase credit risk associated with the loan portfolio, as it could have a material adverse effect on both the ability of borrowers to repay loans as well as the value of the real
property or other property held as collateral for such loans. There can be no assurance that non-performing loans will not increase in the future, or that the Company’s non-
performing assets will not result in further losses in the future.
The Company may be subject to certain risks related to originating and selling mortgage loans.
When mortgage loans are sold, it is customary to make representations and warranties to the purchaser about the mortgage loans and the manner in which they were
originated. Whole loan sale agreements require the repurchase or substitution of mortgage loans in the event the Company breaches any of these representations or
warranties. In addition, there may be a requirement to repurchase mortgage loans as a result of borrower fraud or in the event of early payment default of the borrower on a
mortgage loan. The Company receives a limited number of repurchase and indemnity demands from purchasers as a result of borrower fraud and early payment default of
the borrower on mortgage loans. The Company has enhanced its underwriting policies and procedures, however, these steps may not be effective or reduce the risk
associated with loans sold in the past. If repurchase and indemnity demands increase materially, the Company’s results of operations could be adversely affected.
Any delays in the Company’s ability to foreclose on delinquent mortgage loans may negatively impact the Company’s business.
The origination of mortgage loans occurs with the expectation that if the borrower defaults then the ultimate loss is mitigated by the value of the collateral that secures the
mortgage loan. The ability to mitigate the losses on defaulted loans depends upon the ability to promptly foreclose upon the collateral after an appropriate cure period. In
some states, the large number of mortgage foreclosures that have occurred has resulted in delays in foreclosing. Any delay in the foreclosure process will adversely affect the
Company by increasing the expenses related to carrying such assets, such as taxes, insurance, and other carrying costs, and exposes the Company to losses as a result of
potential additional declines in the value of such collateral.
Changes in interest rates may adversely affect earnings and financial condition.
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The Company’s net income depends to a great extent upon the level of net interest income. Changes in interest rates can increase or decrease net interest income and net
income. Net interest income is the difference between the interest income earned on loans, investments, and other interest-earning assets, and the interest paid on interest-
bearing liabilities, such as deposits and borrowings. Net interest income is affected by changes in market interest rates, because different types of assets and liabilities may
react differently, and at different times, to market interest rate changes. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a
period, an increase in market rates of interest could reduce net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing
liabilities, falling interest rates could reduce net interest income.
Changes in market interest rates are affected by many factors beyond the Company’s control, including inflation, unemployment, money supply, international events, and
events in world financial markets. The Company attempts to manage its risk from changes in market interest rates by adjusting the rates, maturity, re-pricing, and balances of
the different types of interest-earning assets and interest-bearing liabilities, but interest rate risk management techniques are not exact. As a result, a rapid increase or
decrease in interest rates could have an adverse effect on the net interest margin and results of operations. Changes in the market interest rates for types of products and
services in various markets also may vary significantly from location to location and over time based upon competition and local or regional economic factors. At December
31, 2017, the Company’s interest rate sensitivity simulation model projected that net interest income would decrease by 2.82% if interest rates immediately rose by 200 basis
points. The results of an interest rate sensitivity simulation model depend upon a number of assumptions which may not prove to be accurate. There can be no assurance that
the Company will be able to successfully manage interest rate risk.
The Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk.
The investment securities portfolio has risk factors beyond the Company’s control that may significantly influence its fair value. These risk factors include, but are not
limited to, rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, and instability in the credit markets.
Lack of market activity with respect to some securities has, in certain circumstances, required the Company to base its fair market valuation on unobservable inputs. Any
changes in these risk factors, in current accounting principles or interpretations of these principles could impact the Company’s assessment of fair value and thus the
determination of other-than-temporary impairment of the securities in the investment securities portfolio. Investment securities that previously were determined to be other-
than-temporarily impaired could require further write-downs due to continued erosion of the creditworthiness of the issuer. Write-downs of investment securities would
negatively affect the Company’s earnings and regulatory capital ratios.
The Company is subject to liquidity risks.
Market conditions could negatively affect the level or cost of available liquidity, which would affect the Company’s ongoing ability to accommodate liability maturities and
deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse
consequences. Core deposits and Federal Home Loan Bank advances are the Company’s primary source of funding. A significant decrease in the core deposits, an inability
to renew Federal Home Loan Bank advances, an inability to obtain alternative funding to core deposits or Federal Home Loan Bank advances, or a substantial, unexpected,
or prolonged change in the level or cost of liquidity could have a negative effect on the Company’s business, financial condition and results of operations.
Impairment in the carrying value of goodwill could negatively impact the Company’s earnings.
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At December 31, 2017, goodwill totaled $85.8 million. The Company has provisionally recognized approximately $264 million in additional goodwill in connection with
the acquisition of WashingtonFirst, which was completed on January 1, 2018. Goodwill represents the excess purchase price paid over the fair value of the net assets
acquired in a business combination. The estimated fair values of the acquired assets and assumed liabilities may be subject to refinement as additional information relative
to closing date fair values becomes available and may result in adjustments to goodwill within the first 12 months following the closing date of the acquisition. The
Company expects to finalize the valuation by the end of the first quarter of 2018. Goodwill is reviewed for impairment at least annually or more frequently if events or
changes in circumstances indicate that the carrying value may not be recoverable. There could be a requirement to evaluate the recoverability of goodwill prior to the normal
annual assessment if there is a disruption in the Company’s business, unexpected significant declines in operating results, or sustained market capitalization declines. These
types of events and the resulting analyses could result in goodwill impairment charges in the future, which would adversely affect the results of operations. A goodwill
impairment charge does not adversely affect regulatory capital ratios or tangible capital. Based on an analysis, it was determined that the fair value of the Company’s
reporting units exceeded the carrying value of their assets and liabilities and, therefore, goodwill was not considered impaired at December 31, 2017.
The Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of
their services.
The Company believes that its continued growth and future success will depend in large part on the skills of its management team and its ability to motivate and retain these
individuals and other key personnel. In particular, the Company relies on the leadership of its Chief Executive Officer, Daniel J. Schrider. The loss of service of Mr. Schrider
or one or more of the Company’s other executive officers or key personnel could reduce the Company’s ability to successfully implement its long-term business strategy, its
business could suffer and the value of the Company’s common stock could be materially adversely affected. Leadership changes will occur from time to time and the
Company cannot predict whether significant resignations will occur or whether the Company will be able to recruit additional qualified personnel. The Company believes its
management team possesses valuable knowledge about the banking industry and the Company’s markets and that their knowledge and relationships would be very difficult
to replicate. Although the Chief Executive Officer and Chief Financial Officer have entered into employment agreements with the Company, it is possible that they may not
complete the term of their employment agreements or renew them upon expiration. The Company’s success also depends on the experience of its branch managers and
lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact the Company’s banking
operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on the Company’s business,
financial condition or operating results.
The market price for the Company’s stock may be volatile.
The market price for the Company’s common stock has fluctuated, ranging between $37.15 and $45.17 per share during the 12 months ended December 31, 2017. The
overall market and the price of the Company’s common stock may experience volatility. There may be a significant impact on the market price for the common stock due to,
among other things:
·
past and future dividend practice;
·
financial condition, performance, creditworthiness and prospects;
·
quarterly variations in operating results or the quality of the Company’s assets;
·
operating results that vary from the expectations of management, securities analysts and investors;
·
changes in expectations as to the future financial performance;
·
announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by the Company or its
competitors;
·
the operating and securities price performance of other companies that investors believe are comparable to the Company;
·
future sales of the Company’s equity or equity-related securities;
·
the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and developments with respect to financial
institutions generally; and
·
changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, stock, commodity or
real estate valuations or volatility or other geopolitical, regulatory or judicial events.
There can be no assurance that a more active or consistent trading market in the Company’s common stock will develop. As a result, relatively small trades could have a
significant impact on the price of the Company’s common stock.
18
Combining acquired businesses may be more difficult, costly or time consuming than expected and the anticipated benefits and cost savings of acquisitions may not be
realized.
The success of the Company’s mergers and acquisitions, including anticipated benefits and cost savings, will depend, in part, on the Company’s ability to successfully
combine and integrate the acquired business in a manner that permits growth opportunities and does not materially disrupt existing customer relations nor result in decreased
revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses
or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with clients, customers,
depositors, employees and other constituents or to achieve the anticipated benefits and cost savings of the transaction. The loss of key employees could adversely affect the
Company’s ability to successfully conduct its business, which could have an adverse effect on the Company’s financial results and the value of its common stock. If the
Company experiences difficulties with the integration process, the anticipated benefits of a transaction may not be realized fully or at all, or may take longer to realize than
expected. As with any merger of financial institutions, there also may be business disruptions that cause the Company to lose customers or cause customers to remove their
accounts from the Company and move their business to competing financial institutions. Integration efforts will also divert management attention and resources. These
integration matters could have an adverse effect on the Company during this transition period and for an undetermined period after completion of a transaction. It is possible
that the potential cost savings could turn out to be more difficult to achieve than anticipated. The cost savings estimates also depend on the ability to combine the businesses
in a manner that permits those cost savings to be realized. If the estimates turn out to be incorrect or there is an inability to combine successfully, the anticipated cost savings
may not be realized fully or at all, or may take longer to realize than expected.
Market competition may decrease the Company’s growth or profits.
The Company competes for loans, deposits, and investment dollars with other banks and other financial institutions and enterprises, such as securities firms, insurance
companies, savings associations, credit unions, mortgage brokers, and private lenders, many of which have substantially greater resources than possessed by the Company.
Credit unions have federal tax exemptions, which may allow them to offer lower rates on loans and higher rates on deposits than taxpaying financial institutions such as
commercial banks. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to institutions that offer federally
insured deposits. Other institutions may have other competitive advantages in particular markets or may be willing to accept lower profit margins on certain products. These
differences in resources, regulation, competitive advantages, and business strategy may decrease the Company’s net interest margin, increase the Company’s operating costs,
and may make it harder to compete profitably.
The Company operates in a highly regulated industry, and compliance with, or changes to, the laws and regulations that govern its operations may adversely affect the
Company.
The banking industry is heavily regulated. Banking regulations are primarily intended to protect the federal deposit insurance funds and depositors, not shareholders. Sandy
Spring Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System and by Maryland banking authorities. Sandy Spring Bancorp
is subject to regulation and supervision by the Board of Governors of the Federal Reserve System. The burdens imposed by federal and state regulations put banks at a
competitive disadvantage compared to less regulated competitors such as finance companies, mortgage banking companies, and leasing companies. Changes in the laws,
regulations, and regulatory practices affecting the banking industry may increase the cost of doing business or otherwise adversely affect the Company and create
competitive advantages for others. Regulations affecting banks and financial services companies undergo continuous change, and the Company cannot predict the ultimate
effect of these changes, which could have a material adverse effect on the Company’s results of operations or financial condition. Federal economic and monetary policy
may also affect the Company’s ability to attract deposits and other funding sources, make loans and investments, and achieve satisfactory interest spreads.
The Company’s ability to pay dividends is limited by law.
The ability to pay dividends to shareholders largely depends on Sandy Spring Bancorp’s receipt of dividends from Sandy Spring Bank. The amount of dividends that Sandy
Spring Bank may pay to Sandy Spring Bancorp is limited by federal laws and regulations. The ability of Sandy Spring Bank to pay dividends is also subject to its
profitability, financial condition and cash flow requirements. There is no assurance that Sandy Spring Bank will be able to pay dividends to Sandy Spring Bancorp in the
future. The Company may limit the payment of dividends, even when the legal ability to pay them exists, in order to retain earnings for other uses.
19
Restrictions on unfriendly acquisitions could prevent a takeover of the Company.
The Company’s articles of incorporation and bylaws contain provisions that could discourage takeover attempts that are not approved by the board of directors. The
Maryland General Corporation Law includes provisions that make an acquisition of the Company more difficult. These provisions may prevent a future takeover attempt in
which the shareholders otherwise might receive a substantial premium for their shares over then-current market prices.
These provisions include supermajority provisions for the approval of certain business combinations and certain provisions relating to meetings of shareholders. The
Company’s articles of incorporation also authorize the issuance of additional shares without shareholder approval on terms or in circumstances that could deter a future
takeover attempt.
Future sales of the Company’s common stock or other securities may dilute the value and adversely affect the market price of the Company’s common stock.
In many situations, the board of directors has the authority, without any vote of the Company’s shareholders, to issue shares of authorized but unissued stock, including
shares authorized and unissued under the Company’s equity incentive plans. In the future, additional securities may be issued, through public or private offerings, in order to
raise additional capital. Any such issuance would dilute the percentage of ownership interest of existing shareholders and may dilute the per share book value of the
Company’s common stock. In addition, option holders may exercise their options at a time when the Company would otherwise be able to obtain additional equity capital on
more favorable terms.
Changes in tax laws may negatively impact the Company’s financial performance.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, contain a number of provisions that could have an impact on the banking
industry, borrowers and the market for single family residential and multifamily residential real estate. Among the changes are: lower limits on the deductibility of mortgage
interest on single family residential mortgages; limitations on deductibility of business interest expense; and limitations on the deductibility of property taxes and state and
local income taxes. Such changes may have an adverse effect on the market for and valuation of single family residential properties and multifamily residential properties,
and on the demand for such loans in the future. If home ownership or multifamily residential property ownership become less attractive, demand for mortgage loans would
decrease. The value of the properties securing loans in the Company’s portfolio may be adversely impacted as a result of the changing economics of home ownership and
multifamily residential ownership, which could require an increase in the Company’s provision for loan losses, which would reduce its profitability and could materially
adversely affect its business, financial condition and results of operations. Additionally, certain borrowers could become less able to service their debts as a result of higher
tax obligations. These changes could adversely affect the Company’s business, financial condition and results of operations.
Changes in accounting standards or interpretation of new or existing standards may affect how the Company reports its financial condition and results of operations.
From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change accounting regulations and reporting standards that govern the preparation of
the Company’s financial statements. In addition, the FASB, SEC, bank regulators and the
outside independent auditors may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These
changes can be difficult to predict and can materially impact how to record and report the Company’s financial condition and results of operations. In some cases, there
could be a requirement to apply a new or revised accounting standard retroactively, resulting in the restatement of prior period financial statements.
New capital rules that became effective in 2015 and 2016 generally require insured depository institutions and their holding companies to hold more capital.
20
On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework. These rules substantially amend the regulatory risk-based capital rules
applicable to the Company. The rules phase in over time beginning in 2015 and will become fully effective in 2019. The rules apply to the Company as well as to Sandy
Spring Bank. Under these rules, the Company’s minimum capital requirements are (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus
Additional Tier 1 capital) of 6% and (iii) a total capital ratio of 8%. The Company’s leverage ratio requirement remains at the 4% level previously required. Beginning in
2016, a capital conservation buffer began to phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital
requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital
requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum
percentage of eligible retained income that could be utilized for such actions.
The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
"PATRIOT Act") and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and
file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to
administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and engages in coordinated enforcement
efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. Federal
and state bank regulators also focus on compliance with Bank Secrecy Act and anti-money laundering regulations. If the Company’s policies, procedures and systems are
deemed to be deficient or the policies, procedures and systems of the financial institutions that the Company may acquire in the future are deficient, the Company would be
subject to liability, including fines and regulatory actions such as restrictions on its ability to pay dividends and the necessity to obtain regulatory approvals to proceed with
certain aspects of its business plan, including its acquisition plans, which would negatively impact the Company’s business, financial condition and results of operations.
Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for the
Company.
The Company’s accounting estimates and risk management processes rely on analytical and forecasting models.
The processes that the Company uses to estimate its inherent loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the
effects of changing interest rates and other market measures on its financial condition and results of operations, depends upon the use of analytical and forecasting models.
These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate,
the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models that the Company uses for interest rate risk
and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the
models that the Company uses for determining its probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If
the models that the Company uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly
or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or
forecasting models could have a material adverse effect on its business, financial condition and results of operations.
Failure to keep up with technological change in the financial services industry could have a material adverse effect on the Company’s competitive position or
profitability.
The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of
technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its
ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional
efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company
may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to
successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on the Company’s business, financial
condition and results of operations.
21
The Company’s risk management framework may not be effective in mitigating risks and/or losses to the Company.
The Company’s risk management framework is comprised of various processes, systems and strategies, and is designed to manage the types of risk to which the Company is
subject, including, among others, credit, market, liquidity, interest rate and compliance. The Company’s framework also includes financial or other modeling methodologies
that involve management assumptions and judgment. The Company’s risk management framework may not be effective under all circumstances and may not adequately
mitigate any risk or loss to the Company. If the Company’s risk management framework is not effective, the Company could suffer unexpected losses and the Company’s
business, financial condition, or results of operations could be materially and adversely affected. The Company may also be subject to potentially adverse regulatory
consequences.
The Company’s information systems may experience an interruption or security breach.
The Company relies heavily on communications and information systems to conduct its business. The Company, its customers, and other financial institutions with which
the Company interacts, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored
organizations. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company’s customer relationship management,
general ledger, deposit, loan and other systems, misappropriation of funds, and theft of proprietary Company or customer data. While the Company has policies and
procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of the Company’s information systems, there can be no assurance
that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or
security breach of the Company’s information systems could damage its reputation, result in a loss of customer business, subject the Company to additional regulatory
scrutiny, or expose the Company to civil litigation and possible financial liability.
Security breaches and other disruptions could compromise the Company’s information and expose the Company to liability, which would cause its business and
reputation to suffer.
In the ordinary course of the Company’s business, the Company collects and stores sensitive data, including intellectual property, its proprietary business information and
that of the Company’s customers, suppliers and business partners, and personally identifiable information of its customers and employees, in the Company’s data centers and
on its networks. The secure processing, maintenance and transmission of this information is critical to the Company’s operations and business strategy. Despite the
Company’s security measures, the Company’s information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error,
malfeasance or other disruptions. Any such breach could compromise the Company’s networks and the information stored there could be accessed, publicly disclosed, lost
or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal
information, and regulatory penalties, disrupt the Company’s operations and the services it provides to customers, damage its reputation, and cause a loss of confidence in its
products and services, which could adversely affect the Company’s business, revenues and competitive position.
The reliance of the Company on third party vendors could expose it to additional cyber risk and liability.
The operation of the Company’s business involves outsourcing of certain business functions and reliance on third-party providers, which may result in transmission and
maintenance of personal, confidential, and proprietary information to and by such vendors. Although the Company requires third-party providers to maintain certain levels
of information security, such providers remain vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious attacks that could ultimately
compromise sensitive information possessed by the Company. Although the Company contracts to limit its liability in connection with attacks against third-party providers,
the Company remains exposed to risk of loss associated with such vendors.
The Company outsources certain aspects of its data processing to certain third-party providers which may expose it to additional risk.
The Company outsources certain key aspects of the Company’s data processing to certain third-party providers. While the Company has selected these third-party providers
carefully, it cannot control their actions. If the Company’s third-party providers encounter difficulties, including those which result from their failure to provide services for
any reason or their poor performance of services, or if the Company has difficulty in communicating with them, its ability to adequately process and account for customer
transactions could be affected, and the Company’s business operations could be adversely impacted. Replacing these third-party providers could also entail significant delay
and expense.
22
The Company’s third-party providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. Threats to information
security also exist in the processing of customer information through various other third-party providers and their personnel. The Company may be required to expend
significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or
viruses. To the extent that the activities of the Company’s third-party providers or the activities of the Company’s customers involve the storage and transmission of
confidential information, security breaches and viruses could expose the Company to claims, regulatory scrutiny, litigation and other possible liabilities.
The Company is dependent on its information technology and telecommunications systems third-party servicers and systems failures, interruptions or breaches of
security could have an adverse effect on its financial condition and results of operations.
The Company’s business is highly dependent on the successful and uninterrupted functioning of its information technology and telecommunications systems third-party
servicers. The Company outsources many of its major systems, such as data processing and deposit processing systems. The failure of these systems, or the termination of a
third-party software license or service agreement on which any of these systems is based, could interrupt the Company’s operations. Because the Company’s information
technology and telecommunications systems interface with and depend on third-party systems, it could experience service denials if demand for such services exceeds
capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of the
Company’s ability to provide customer service, compromise its ability to operate effectively, damage the Company’s reputation, result in a loss of customer business and/or
subject the Company to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on the Company’s financial
condition and results of operations.
In addition, the Company provides its customers the ability to bank remotely, including online over the Internet. The secure transmission of confidential information is a
critical element of remote banking. The Company’s network could be vulnerable to unauthorized access, computer viruses, phishing schemes, spam attacks, human error,
natural disasters, power loss and other security breaches. The Company may be required to spend significant capital and other resources to protect against the threat of
security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. Further, the Company outsources some of the data processing
functions used for remote banking, and accordingly it is dependent on the expertise and performance of its third-party providers. To the extent that the Company’s activities,
the activities of its customers, or the activities of the Company’s third-party service providers involve the storage and transmission of confidential information, security
breaches and viruses could expose the Company to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also
cause existing customers to lose confidence in the Company’s systems and could adversely affect its reputation, results of operations and ability to attract and maintain
customers and businesses. In addition, a security breach could also subject the Company to additional regulatory scrutiny, expose it to civil litigation and possible financial
liability and cause reputational damage.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company’s headquarters is located in Olney, Maryland. As of December 31, 2017, Sandy Spring Bank owned 12 of its 42 full-service community banking centers and
leased the remaining banking centers. See Note 6–Premises and Equipment to the Notes to the Consolidated Financial Statements for additional information.
Item 3. LEGAL PROCEEDINGS
In the normal course of business, the Company becomes involved in litigation arising from the banking, financial, and other activities it conducts. Management, after
consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company's financial
condition, operating results or liquidity.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
23
PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Stock Listing
Common shares of Sandy Spring Bancorp, Inc. are listed on the NASDAQ Global Select Market under the symbol “SASR”. At February 23, 2018 there were approximately
2,300 holders of record of the Company’s common stock.
Transfer Agent and Registrar
Computershare Shareholder Services, P.O. Box 30170, College Station, TX 77842-3170
Dividends
The dividend amount is established by the board of directors each quarter. In making its decision on dividends, the board considers operating results, financial condition,
capital adequacy, regulatory requirements, shareholder returns, and other factors. Shareholders received quarterly cash common dividends totaling $25.1 million in 2017,
$23.7 million in 2016, $22.4 million in 2015, $19.2 million in 2014 and $16.1 million in 2013. Dividends have increased from 2012 through 2017 due to the Company’s
improved operating results.
Share Transactions with Employees
Shares issued under the employee stock purchase plan, which was authorized on July 1, 2011, totaled 17,578 in 2017 and 23,779 in 2016, while issuances pursuant to
exercises of stock options and grants of restricted stock were 77,631 and 93,535 in the respective years. Shares issued under the director stock purchase plan in 2017 and
2016 were not significant.
Quarterly Stock Information
The following table provides stock price activity and dividend payment information for the periods indicated:
2017
Stock Price Range
Quarter
Low
High
1st
2nd
3rd
4th
Total
$
$
$
$
38.25
38.15
36.88
38.23
$
$
$
$
Per Share
Dividend
44.37
45.17
41.44
42.85
$
$
0.26
0.26
0.26
0.26
1.04
Stock Price Range
Low
2016
High
$
$
$
$
24.36
26.03
27.74
29.51
$
$
$
$
27.43
29.47
31.28
40.64
Per Share
Dividend
$
$
0.24
0.24
0.24
0.26
0.98
Issuer Purchases of Equity Securities
The Company’s 2015 stock repurchase program expired on August 31, 2017. Under the recently expired repurchase program a total of 736,139 shares of common stock
were repurchased.
Shares repurchased pursuant to the stock repurchase program during the fourth quarter of 2017 were as follows:
24
Period
October 1, 2017 through
October 31, 2017
November 1, 2017 through
November 30, 2017
December 1, 2017 through
December 31, 2017
Total Number of
Shares Purchased
Average Price Paid
per Share
-
-
-
N/A
N/A
N/A
Total number of Shares
Purchased as part of
Publicly Announced Plans
or Programs
Maximum Number that
May Yet Be Purchased
Under the Plans or
Programs
-
-
-
-
-
-
Total Return Comparison
The following graph and table show the cumulative total return on the common stock of the Company over the last five years, compared with the cumulative total return of a
broad stock market index (the Standard and Poor’s 500 Index or “S&P 500”), and a narrower index of Mid-Atlantic bank holding company peers with assets of $2 billion to
$7 billion. The cumulative total return on the stock or the index equals the total increase in value since December 31, 2012, assuming reinvestment of all dividends paid into
the stock or the index. The graph and table were prepared assuming that $100 was invested on December 31, 2012, in the common stock and the securities included in the
indexes.
25
The Peer Group Index includes twenty publicly traded bank holding companies, other than the Company, headquartered in the Mid-Atlantic region and with assets of $2
billion to $7 billion. The companies included in this index are: Access National Corporation (VA); Bancorp, Inc. (DE); Bryn Mawr Bank Corporation (PA); Burke &
Herbert Bank & Trust Company (VA); Carter Bank & Trust (VA); City Holding Company (WV); CNB Financial Corporation (PA); ConnectOne Bancorp, Inc. (NJ);
Farmers National Banc Corp. (OH); First Bancorp (NC); First Community Bancshares, Inc. (VA); HomeTrust Bancshares, Inc. (NC); Lakeland Bancorp, Inc. (NJ); Live
Oak Bancshares, Inc. (NC); Old Line Bancshares (MD); Peapack-Gladstone Financial Corporation (NJ); Peoples Bancorp Inc. (OH); Peoples Financial Services Corp. (PA);
Republic First Bancorp (PA); Revere Bank (MD); Southern BancShares, Inc. (NC); Southern National Bancorp of Virginia, Inc. (VA); Summit Financial Group, Inc. (WV);
Sun Bancorp, Inc. (NJ); TriState Capital Holdings, Inc. (PA); United Community Financial Corp. (OH); Univest Corporation of Pennsylvania (PA). Returns are weighted
according to the issuer’s stock market capitalization at the beginning of each year shown.
26
Equity Compensation Plans
The following table presents the number of shares available for issuance under the Company’s equity compensation plans at December 31, 2017.
Plan category
Equity compensation plans
approved by security holders
Equity compensation plans not
approved by security holders
Total
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
87,300
Weighted average exercise
price of outstanding options,
warrants and rights
$26.22
-
87,300
-
$26.22
27
Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
the first column)
1,340,359
-
1,340,359
Item 6. SELECTED FINANCIAL DATA
Consolidated Summary of Financial Results
(Dollars in thousands, except per share data)
Results of Operations:
Tax-equivalent interest income
Interest expense
Tax-equivalent net interest income
Tax-equivalent adjustment
Provision (credit) for loan losses
Net interest income after provision (credit) for loan losses
Non-interest income
Non-interest expenses
Income before taxes
Income tax expense
Net income
Per Share Data:
Net income - basic per share
Net income - diluted per share
Dividends declared per common share
Book value per common share
Dividends declared to diluted net income per common share
Period End Balances:
Assets
Investment securities
Loans
Deposits
Borrowings
Stockholders’ equity
Average Balances:
Assets
Investment securities
Loans
Deposits
Borrowings
Stockholders’ equity
Performance Ratios:
Return on average assets
Return on average common equity
Yield on average interest-earning assets
Rate on average interest-bearing liabilities
Net interest spread
Net interest margin
Efficiency ratio – GAAP (1)
Efficiency ratio – Non-GAAP (1)
Capital Ratios:
Tier 1 leverage
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Total regulatory capital to risk-weighted assets
Tangible common equity to tangible assets - Non-GAAP (2)
Average equity to average assets
Credit Quality Ratios:
Allowance for loan losses to loans
Non-performing loans to total loans
Non-performing assets to total assets
Net charge-offs to average loans
$
$
$
$
2017
2016
2015
2014
2013
$
$
$
$
$
$
$
$
202,258
26,031
176,227
7,459
2,977
165,791
51,243
129,099
87,935
34,726
53,209
2.20
2.20
1.04
23.50
47.27 %
5,446,675
775,025
4,314,248
3,963,662
885,192
563,816
5,239,920
813,601
4,097,988
3,849,186
798,733
550,926
1.02 %
9.66
4.08
0.77
3.31
3.55
58.68
54.59
9.24 %
10.84
10.84
11.85
9.04
10.51
1.05 %
0.68
0.58
0.04
177,267
21,004
156,236
6,711
5,546
144,006
51,042
123,058
71,990
23,740
48,250
2.00
2.00
0.98
22.32
49.00 %
5,091,383
779,648
3,927,808
3,577,544
945,119
533,572
4,743,375
740,519
3,677,662
3,460,804
717,542
527,524
1.02 %
9.15
3.96
0.68
3.28
3.49
61.35
58.66
10.14 %
11.01
11.74
12.80
9.07
11.12
1.12 %
0.81
0.66
0.06
$
$
$
$
164,790
20,113
144,677
6,478
5,371
132,828
49,901
115,347
67,382
22,027
45,355
1.84
1.84
0.90
21.58
48.91 %
4,655,380
841,650
3,495,370
3,263,730
829,145
524,427
4,486,453
883,143
3,276,610
3,184,359
735,474
519,671
1.01 %
8.73
3.91
0.70
3.21
3.44
61.32
61.09
10.60 %
12.17
13.13
14.25
9.66
11.58
1.17 %
0.99
0.80
0.07
$
$
$
$
153,558
18,818
134,740
5,192
(163)
129,711
46,871
120,800
55,782
17,582
38,200
1.53
1.52
0.76
20.83
50.00 %
4,397,132
933,619
3,127,392
3,066,509
764,432
521,751
4,194,206
977,730
2,917,514
2,986,213
662,111
514,207
0.91 %
7.43
3.93
0.69
3.24
3.45
68.47
62.48
11.26 %
n.a
13.95
15.06
10.15
12.26
1.21 %
1.09
0.85
0.03
154,639
19,433
135,206
5,292
(1,084)
130,998
47,511
111,524
66,985
22,563
44,422
1.78
1.77
0.64
19.98
36.16 %
4,106,100
1,016,609
2,784,266
2,877,225
703,842
499,363
4,007,411
1,063,247
2,642,872
2,889,875
595,842
487,836
1.11 %
9.11
4.15
0.74
3.41
3.63
62.86
60.06
11.32 %
n.a
14.42
15.65
10.37
12.17
1.39 %
1.44
1.01
0.12
(1) See the discussion of the efficiency ratio in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Operating Expense Performance.”
(2) See the discussion of tangible common equity in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “Tangible Common Equity.”
28
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Net income for Sandy Spring Bancorp, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2017 totaled $53.2 million ($2.20 per diluted share),
compared to net income of $48.3 million ($2.00 per diluted share) for the prior year. These results reflect the following events:
·
Net income for 2017 included $5.6 million of additional tax expense and $2.6 million of post-tax expenses associated with the acquisition of WashingtonFirst
Bankshares, resulting in a reduction of earnings per share of approximately $0.34 cents per share for 2017.
·
Total loans at December 31, 2017 increased 10% compared to the balance at December 31, 2016 due primarily to an 11% increase in commercial loans. Overall
the entire portfolio grew $386 million during the year.
·
The net interest margin increased to 3.55% in 2017 compared to 3.49% in 2016.
·
Combined noninterest-bearing and interest-bearing transaction account balances increased 10% to $1.9 billion at December 31, 2017 as compared to $1.8 billion at
December 31, 2016.
·
The provision for loan losses was $3.0 million for 2017 compared to $5.5 million for 2016. The provision for 2017 compared to 2016 decreased due to the effect
of the improvement in loan quality and a reduction in non-performing loans which offset the impact of loan growth during 2017.
·
Non-interest income increased 4% for 2017 compared to 2016 exclusive of investment securities gains and gains from the prior year’s debt extinguishment. The
increase was driven by increases in income from wealth management, insurance agency commissions and deposit service charges.
·
Non-interest expenses increased 5% for 2017 compared to the prior year. The current year’s expenses included $4.3 million in merger expenses. Excluding
penalties due to the prepayment of FHLB advances in 2017 and 2016 in addition to the merger expense, non-interest expense increased 3% due to increased
compensation cost and FDIC insurance.
In 2017, the Mid-Atlantic region in which the Company operates continued to experience continued improved regional economic performance. The national economy
improved as well throughout the year. Consumer confidence has been bolstered by certain positive economic trends such as lower unemployment, increased housing
metrics and solid performance in the financial markets. These positive trends have been tempered by international economic concerns together with concerns over a lack of
wage growth and the rise in interest rates. These factors can act to constrain economic activity on the part of both large and small businesses. Despite this challenging
business environment, the Company has experienced healthy loan growth while maintaining strong levels of liquidity, capital and credit quality.
The net interest margin increased to 3.55% in 2017 compared to 3.49% for 2016. Average loans increased 11%, compared to the prior year, while average total deposits
increased 11% compared to 2016. Liquidity continues to remain strong due to borrowing lines with the Federal Home Loan Bank of Atlanta and the Federal Reserve and the
size and composition of the investment portfolio. At December 31, 2017, the Bank remained above all “well-capitalized” regulatory requirement levels. In addition, tangible
book value per common share increased 6% to $20.18 from $18.98 at December 31, 2016. The Company’s credit quality remained strong as non-performing assets totaled
$31.6 million at December 31, 2017 compared to $33.8 million at December 31, 2016 due to a decrease in non-performing commercial loans. Non-performing assets
represented 0.58% of total assets at December 31, 2017 compared to 0.66% at December 31, 2016. The ratio of net charge-offs to average loans was 0.04% for 2017,
compared to 0.06% for the prior year.
Total assets at December 31, 2017 increased 7% compared to December 31, 2016. Loan balances increased 10% compared to the prior year end due to increases of 11% in
residential mortgage and construction loans and 11% in commercial loans. The growth in commercial loans was driven by double digit increases in owner-occupied real
estate and investor real estate loans while the increase in mortgage loans was due primarily to growth in residential construction loans. Customer funding sources, which
include deposits plus other short-term borrowings from core customers, increased 10% compared to balances at December 31, 2016. The increase in customer funding
sources was driven by increases of 18% in certificates of deposit, 11% in money market savings and 10% in checking accounts. The Company utilizes low cost FHLB
borrowings to assist in the management of the net interest margin. The effect on the net interest margin partially mitigates the increased rates offered on certificates of
deposit and money market accounts to retain these deposit relationships in the expectation of higher interest rates. During the same period, stockholders’ equity increased to
$563 million due to net income in 2017, which effect was somewhat offset by dividends paid to stockholders during 2017.
29
Net interest income increased 13% compared to the prior year due to the effects of an 11% growth in average interest-earning assets with an increase of 12 basis points in the
yield while the rate on interest-bearing liabilities which grew 10% from the prior year increased 9 basis points over the same period.
Non-interest income, exclusive of investment securities gains of $1.3 million in 2017 and $1.9 million in 2016, as well as the $1.2 million gain in the prior year’s from debt
extinguishment, increased 4% for 2017 compared to 2016. This was due to increases in income from wealth management, insurance agency commissions and deposit
service charges during 2017 as compared to 2016.
Non-interest expenses increased 5% to $129.1 million for the year ended December 31, 2017, compared to $123.1 million for the prior year. A primary driver of expenses in
2017 was $4.3 million in merger expenses related to the WashingtonFirst acquisition. This expense was partially offset by the decrease in prepayment penalties of $1.9
million for the early payoff of high-rate FHLB advances as compared to the year ended December 31, 2016. Excluding the impact of the FHLB prepayment penalties from
the current and prior year’s results and the exclusion of merger expenses for 2017, non-interest expense increased 3%.
The tax rate reduction associated with the recently enacted tax reform legislation caused a revaluation of net deferred tax assets and resulted in $5.6 million of additional
income tax expense in the fourth quarter of 2017. This additional income tax expense and merger expenses, net of tax, resulted in a reduction of earnings per share of
approximately $0.34 per share for 2017. Pre-tax, pre-provision income, which adjusts for these items, increased 23% from full-year 2016 to full-year 2017 to a record $95.2
million.
Critical Accounting Policies
The Company’s 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 banking industry. 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 more extensively on the use of estimates, assumptions, and judgments and as such may 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 value of assets required to be recorded at fair value will warrant an impairment write-down or valuation allowance to be established. Carrying assets and liabilities at fair
value inherently results in greater 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. Management believes the following accounting policies are the
most critical to aid in fully understanding and evaluating our reported financial results:
·
Allowance for loan losses;
·
Goodwill and other intangible asset impairment;
·
Accounting for income taxes;
·
Fair value measurements;
·
Defined benefit pension plan.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the probable losses that are inherent in the loan portfolio at the balance sheet date. The allowance is based on the basic
principle 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.
Management believes that the allowance for loan losses is adequate. However, the determination of the allowance requires significant judgment, and estimates of probable
losses in the lending portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future
additions or reductions to the allowance may be necessary based on changes in the composition of loans in the portfolio and changes in the financial condition of borrowers
as a result of 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 portfolio and the allowance. Such reviews may result in additional provisions based on their judgments of information
available at the time of each examination.
30
The Company’s allowance for loan losses has two basic components: a general allowance (ASC 450 reserves) reflecting historical losses by loan category, as adjusted by
several factors whose effects are not reflected in historical loss ratios, and specific allowances (ASC 310 reserves) for individually identified loans. Each of these
components, and the allowance methodology used to establish them, are described in detail in Note 1 of the Notes to the Consolidated Financial Statements included in this
report. The amount of the allowance is reviewed monthly by the Risk Committee of the board of directors and formally approved quarterly by that same committee of the
board.
General allowances are based upon historical loss experience by portfolio segment measured over the prior eight quarters and weighted equally. The historical loss
experience is supplemented by the inclusion of quantitative risk factors to address various risk characteristics of the Company’s loan portfolio including:
·
trends in delinquencies and other non-performing loans;
·
changes in the risk profile related to large loans in the portfolio;
·
changes in the categories of loans comprising the loan portfolio;
·
concentrations of loans to specific industry segments;
·
changes in economic conditions on both a local, regional and national level;
·
changes in the Company’s credit administration and loan portfolio management processes; and
·
quality of the Company’s credit risk identification processes.
The general allowance comprised 91% of the total allowance at December 31, 2017 and 89% at December 31, 2016. The general allowance is calculated in two parts based
on an internal risk classification of loans within each portfolio segment. Allowances on loans considered to be “criticized” and “classified” under regulatory guidance are
calculated separately from loans considered to be “pass” rated under the same guidance. This segregation allows the Company to monitor the allowance applicable to higher
risk loans separate from the remainder of the portfolio in order to better manage risk and ensure the sufficiency of the allowance for loan losses.
The portion of the allowance representing specific allowances is established on individually impaired loans. As a practical expedient, for collateral dependent loans, the
Company measures impairment based on fair value of the collateral less costs to sell the underlying collateral. For loans on which the Company has not elected to use a
practical expedient to measure impairment, the Company will measure impairment based on the present value of expected future cash flows discounted at the loan’s
effective interest rate. In determining the cash flows to be included in the discount calculation the Company considers the following factors that combine to estimate the
probability and severity of potential losses:
·
the borrower’s overall financial condition;
·
resources and payment record;
·
demonstrated or documented support available from financial guarantors; and
·
the adequacy of collateral value and the ultimate realization of that value at liquidation.
The specific allowance accounted for 9% of the total allowance at December 31, 2017 and 11% at December 31, 2016. The estimated losses on impaired loans can differ
substantially from actual losses.
Goodwill and Other Intangible Asset Impairment
Goodwill represents the excess purchase price paid over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is assessed for
impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment assessment requires that the fair value
of each of the Company’s reporting units be compared to the carrying amount of the reporting unit’s net assets, including goodwill. The Company’s reporting units were
identified based upon an analysis of each of its individual operating segments. If the fair values of the reporting units exceed their book values, no write-down of recorded
goodwill is required. If the fair value of a reporting unit is less than book value, an expense may be required to write-down the related goodwill to the proper carrying value.
The Company assesses for impairment of goodwill as of October 1 of each year using September 30 data 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, a significant deterioration in future operating results, adverse action by a regulator
or a loss of key personnel. Determining the fair value of a reporting unit requires the Company to use a degree of subjectivity.
31
Under current accounting guidance, the Company has the option to assess qualitative factors to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the assessment of these qualitative factors, if it is
determined that the fair value of a reporting unit is not less than the carrying value, then performing the two-step impairment process, previously required, is unnecessary.
However, if it appears that the carrying value exceeds the fair value based on the qualitative assessment, the first step of the two-step process must be performed. The
Company has elected this accounting guidance with respect to its Community Banking, Investment Management and Insurance segments. At December 31, 2017 there was
no evidence of impairment of goodwill or intangibles in any of the Company’s reporting units.
Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because
the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Other intangible assets have finite lives and are
reviewed for impairment annually. These assets are amortized over their estimated useful lives on a straight-line or sum-of-the-years basis over varying periods that initially
did not exceed 15 years.
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. 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 volatility in quarterly and annual effective income tax rates due to 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 Measurements
The Company measures certain financial assets and liabilities at fair value in accordance with applicable accounting standards. Significant financial instruments measured at
fair value on a recurring basis are investment securities available-for-sale, residential mortgages held for sale and commercial loan interest rate swap agreements. 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 nonrecurring basis.
The Company conducts a quarterly review for all investment securities that have potential impairment to determine whether unrealized losses are other-than-temporary.
Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not available, valuations are 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 the 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 20-Fair Value” to the Consolidated Financial Statements.
Defined Benefit Pension Plan
32
The Company has a qualified, noncontributory, defined benefit pension plan. The plan was frozen for existing entrants after December 31, 2007 and all benefit accruals for
employees were frozen as of December 31, 2007 based on past service. 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.
33
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands and tax-equivalent)
Assets
Residential mortgage loans
Residential construction loans
Total mortgage loans
Commercial AD&C loans
Commercial investor real estate loans
Commercial owner occupied real estate loans
Commercial business loans
Leasing
Total commercial loans
Consumer loans
Total loans (2)
Loans held for sale
Taxable securities
Tax-exempt securities (3)
Total investment securities
Interest-bearing deposits with banks
Federal funds sold
Total interest-earning assets
Less: allowance for loan losses
Cash and due from banks
Premises and equipment, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Interest-bearing demand deposits
Regular savings deposits
Money market savings deposits
Time deposits
Total interest-bearing deposits
Other borrowings
Advances from FHLB
Subordinated debentures
Total interest-bearing liabilities
Noninterest-bearing demand deposits
Other liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income and spread
Less: tax-equivalent adjustment
Net interest income
Interest income/earning assets
Interest expense/earning assets
Net interest margin
2017
(1)
Interest
Average
Balances
Annualized
Average
Yield/Rate
Average
Balances
Year Ended December 31,
2016
(1)
Interest
Annualized
Average
Yield/Rate
2015
(1)
Interest
Annualized
Average
Yield/Rate
Average
Balances
30,648
6,292
36,940
14,844
46,558
38,759
20,585
-
120,746
16,934
174,620
279
14,372
12,550
26,922
410
27
202,258
507
216
5,031
7,502
13,256
337
12,426
12
26,031
$
$
$
$
$
873,278
167,664
1,040,942
298,563
1,040,871
800,879
457,802
-
2,598,115
458,931
4,097,988
6,855
517,375
296,226
813,601
37,523
2,581
4,958,548
(44,557)
48,970
53,947
223,012
5,239,920
616,524
322,856
1,000,965
651,610
2,591,955
133,356
664,966
411
3,390,688
1,257,231
41,075
550,926
5,239,920
$
$
176,227
7,459
168,768
28,331
5,169
33,500
13,199
37,110
33,837
19,750
-
103,896
15,596
152,992
387
11,923
11,747
23,670
213
5
177,267
446
182
1,951
5,582
8,161
290
11,610
943
21,004
$
826,089
143,378
969,467
283,018
812,896
707,830
453,148
-
2,256,892
451,303
3,677,662
11,256
461,973
278,546
740,519
40,940
876
4,471,253
(42,487)
47,219
53,386
214,004
4,743,375
581,185
300,035
920,125
558,355
2,359,700
120,711
565,342
31,489
3,077,242
1,101,104
37,505
527,524
4,743,375
$
$
156,263
6,711
149,552
$
$
$
$
3.51 %
3.75
3.55
4.97
4.47
4.84
4.50
-
4.65
3.72
4.26
4.06
2.78
4.24
3.31
1.09
1.03
4.08
0.08 %
0.07
0.50
1.15
0.51
0.25
1.87
2.94
0.77
3.31 %
4.08 %
0.53
3.55 %
25,251
4,970
30,221
10,299
32,073
31,508
17,926
1
91,807
14,624
136,652
544
15,016
12,479
27,495
98
1
164,790
418
146
1,364
3,950
5,878
255
13,081
899
20,113
$
748,584
134,486
883,070
225,022
684,218
641,798
404,994
27
1,956,059
437,481
3,276,610
13,571
592,153
290,990
883,143
37,761
473
4,211,558
(38,732)
46,719
51,804
215,104
4,486,453
532,578
276,873
860,399
481,368
2,151,218
110,899
589,575
35,000
2,886,692
1,033,141
46,949
519,671
4,486,453
$
$
144,677
6,478
138,199
$
$
$
$
3.43 %
3.61
3.46
4.66
4.57
4.78
4.36
-
4.60
3.48
4.16
3.44
2.58
4.22
3.20
0.52
0.50
3.96
0.08 %
0.06
0.21
1.00
0.35
0.24
2.05
3.00
0.68
3.28 %
3.96 %
0.47
3.49 %
3.37 %
3.70
3.42
4.58
4.69
4.91
4.43
2.50
4.69
3.37
4.17
4.01
2.54
4.29
3.11
0.26
0.23
3.91
0.08 %
0.05
0.16
0.82
0.27
0.23
2.22
2.57
0.70
3.21 %
3.91 %
0.47
3.44 %
(1) Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 39.88% for 2017, 2016 and 2015. The annualized taxable-equivalent adjustments utilized in
the above table to compute yields aggregated to $7.5 million, $6.7 million and $6.5 million in 2017, 2016 and 2015, respectively.
(2) Non-accrual loans are included in the average balances.
(3) Includes only investments that are exempt from federal taxes.
34
Net Interest Income
The largest source of the Company’s operating revenue is net interest income, which is the difference between the interest earned on interest-earning assets and the interest
paid on interest-bearing liabilities. For purposes of this discussion and analysis, the interest earned on tax-advantaged loans and tax-exempt investment securities has been
adjusted to an amount comparable to interest subject to normal income taxes. The result is referred to as tax-equivalent interest income and tax-equivalent net interest
income. The following discussion of net interest income should be considered in conjunction with the review of the information provided in the preceding table.
2017 vs. 2016
Net interest income for 2017 was $168.8 million compared to $149.6 million for 2016 due to growth in earning assets coupled with the overall increase in the associated
yields on those assets. On a tax-equivalent basis, net interest income for 2017 was $176.2 million compared to $156.3 million for 2016. The preceding table provides an
analysis of net interest income performance that reflects a net interest margin that increased to 3.55% for 2017 compared to 3.49% for 2016. Net interest income for 2017
included $1.1 million in interest recoveries on previously charged-off loans. Exclusive of these recoveries the net interest margin would have been 3.53%. Average interest-
earning assets increased by 11% while average interest-bearing liabilities increased 10% in 2017. The growth and increased rates earned on the interest-earning assets
exceeded the growth and rates paid on interest-bearing liabilities, which resulted in the 13% in net interest income. Average noninterest-bearing deposits increased 14% in
2017 while the percentage of average noninterest-bearing deposits to total deposits increased to 33% for 2017 compared to 32% for 2016.
2016 vs. 2015
Net interest income for 2016 was $149.6 million compared to $138.2 million for 2015. On a tax-equivalent basis, net interest income for 2016 was $156.3 million compared
to $144.7 million for 2015. The preceding table provides an analysis of net interest income performance that reflects a net interest margin that increased to 3.49% for 2016
compared to 3.44% for 2015. Average interest-earning assets increased by 6% while average interest-bearing liabilities increased 7% in 2016. Average noninterest-bearing
deposits increased 7% in 2016 while the percentage of average noninterest-bearing deposits to total deposits also remained at 32% for 2016 compared to 2015.
35
Effect of Volume and Rate Changes on Net Interest Income
The following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income:
(Dollars in thousands and tax equivalent)
Interest income from earning assets:
Residential mortgage loans
Residential construction loans
Commercial AD&C loans
Commercial investor real estate loans
Commercial owner occupied real estate loans
Commercial business loans
Leasing
Consumer loans
Loans held for sale
Taxable securities
Tax-exempt securities
Interest-bearing deposits with banks
Federal funds sold
Total interest income
Interest expense on funding of earning assets:
Interest-bearing demand deposits
Regular savings deposits
Money market savings deposits
Time deposits
Other borrowings
Advances from FHLB
Subordinated debentures
Total interest expense
Net interest income
2017 vs. 2016
2016 vs. 2015
Increase
Or
Due to Change In Average:*
Increase
Or
Due to Change In Average:*
(Decrease)
Volume
Rate
(Decrease)
Volume
Rate
$
$
2,317
1,123
1,645
9,448
4,922
835
-
1,338
(108)
2,449
803
197
22
24,991
61
34
3,080
1,920
47
816
(931)
5,027
19,964
$
$
1,645
914
744
10,272
4,493
203
-
271
(170)
1,487
747
(19)
13
20,600
61
11
184
1,012
34
1,903
(906)
2,299
18,301
$
$
672
209
901
(824)
429
632
-
1,067
62
962
56
216
9
4,391
-
23
2,896
908
13
(1,087)
(25)
2,728
1,663
$
$
3,080
199
2,900
5,037
2,329
1,824
(1)
972
(157)
(3,093)
(732)
115
4
12,477
28
36
587
1,632
35
(1,471)
44
891
11,586
$
$
2,628
322
2,716
5,879
3,179
2,111
(1)
455
(86)
(3,328)
(530)
9
2
13,356
28
10
107
688
23
(514)
(97)
245
13,111
$
$
452
(123)
184
(842)
(850)
(287)
-
517
(71)
235
(202)
106
2
(879)
-
26
480
944
12
(957)
141
646
(1,525)
* Variances that are the combined effect of volume and rate, but cannot be separately identified, are allocated to the volume and rate variances
based on their respective relative amounts.
36
Interest Income
2017 vs. 2016
The Company's total tax-equivalent interest income increased 14% for 2017 compared to the prior year as average loans and investments and their associated yields
increased during the year. In 2017, the average balance of the loan portfolio increased 11% and average investments increased 10% compared to the prior year.
The growth in the loan portfolio was primarily in the commercial investor real estate and owner occupied portfolios. These increases were driven by organic loan growth as
the regional economy continued to improve. The yield on average loans increased by 10 basis points compared to the prior year due to higher yields on the entire loan
portfolio, as the commercial portfolio increased 5 basis points compared to the prior year. The yield on the portfolio benefited from the impact of multiple rate increases by
the Federal Reserve during the year. Exclusive of the $1.1 million in interest recoveries recognized during 2017, the yield on the average loan portfolio would have
increased 8 basis points.
The average yield on total investment securities increased 11 basis points while the average balance of the portfolio increased 10% in 2017 compared to 2016. The increase
in the yield on investments was driven primarily by the acquisition of higher yielding state and municipal securities during the year with excess available funding. As a
result, the average balance of the higher yielding state and municipal portfolio increased during the year as a percentage of the overall portfolio while the proportion of lower
yielding securities had decreased due to sales and normal amortization of mortgage-backed securities in 2016.
2016 vs. 2015
The Company's total tax-equivalent interest income increased 8% for 2016 compared to the prior year. The previous table shows that the increase in average loans more than
offset the decrease in earning asset yields with respect to the loan portfolio.
In 2016, the average balance of the loan portfolio increased 12% compared to the prior year. This increase was driven by organic loan growth as the regional economy
improved. Growth occurred primarily in the commercial investor real estate and residential mortgage portfolios. The yield on average loans decreased by 1 basis point
compared to the prior year due to lower yields on commercial loans.
The average yield on total investment securities increased 9 basis points while the average balance of the portfolio decreased 16% in 2016 compared to 2015. The increase in
the yield on investments was due primarily to a decline in the relative size of the lower-yielding mortgage-backed securities portfolio due in large part to the sale of $40
million of such securities to fund the prepayment of FHLB advances in the 2016. The average balance of the higher-yielding state and municipal portfolio reflected a decline
due to calls during 2016. This decline resulted in an increase to the relative size of this portfolio as a percentage of the overall portfolio.
Interest Expense
2017 vs. 2016
Interest expense increased by $5.0 million or 25% in 2017 compared to 2016. The increase in interest expense was driven by the increased cost of interest-bearing deposits
due to higher rates paid on money market savings deposits and the rates offered on certificates of deposit together combined with 10% growth in the average balances. The
increases in average deposits were mainly comprised of $191 million or 11% in average noninterest-bearing and interest-bearing checking accounts together with an increase
of $93 million or 17% in certificates of deposit as the Company offered higher rates on certificates of deposit to fund loan growth. Additionally, average balances of money
market accounts increased $81 million or 9% and average balances of regular savings accounts increased $23 million or 8% in 2017 compared to 2016. Average balances
of Federal Home Loan Bank advances increased 18% and the average rates paid decreased 18 basis points in 2017 compared to 2016 due to the redemption of high-rate
advances during 2017 and 2016, which had a beneficial impact on the cost of funds as the average rate decreased 18 basis points.
2016 vs. 2015
37
Interest expense increased by $0.9 million or 4% in 2016 compared to 2015. The increase in expense was due to the cost of interest-bearing deposits increasing primarily
due to higher rates offered on certificates of deposit together with growth in the average balances, while the average balances of Federal Home Loan Bank advances declined
4% and the average rates paid decreased 17 basis points due to the redemption of high-rate advances early in 2016. Average deposits increased 9% in 2016 compared to
2015. This increase was primarily due to increases of $117 million or 7% in average noninterest-bearing and interest-bearing checking accounts together with an increase of
$77 million or 16% in certificates of deposit as the Company offered higher rates on certificates of deposit to fund loan growth. Average balances of regular savings
accounts increased $23 million or 8% and average balances of money market accounts increased $60 million or 7% in 2016 compared to 2015.
Interest Rate Performance
2017 vs. 2016
The Company’s net interest margin increased to 3.55% for 2017 compared to 3.49% for 2016 while the net interest spread increased to 3.31% in 2017 compared to 3.28% in
2016. This increase is the result of interest-earning asset growth at increased yields which exceeded the increased rate paid on interest-bearing liabilities that grew at a lower
pace.
2016 vs. 2015
The Company’s net interest margin increased to 3.49% for 2016 compared to 3.44% for 2015 while the net interest spread increased to 3.28% in 2016 compared to 3.21% in
2015. This increase was driven by an increase in the yield on interest-earning assets as a result of loan growth and the migration of assets from lower-yielding investment
securities into higher-yielding loans.
38
Non-interest Income
Non-interest income amounts and trends are presented in the following table for the years indicated:
(Dollars in thousands)
2017
2016
2015
$ Change
% Change
$ Change
% Change
2017/2016
2017/2016
2016/2015
2016/2015
Securities gains
Service charges on deposit accounts
Mortgage banking activities
Service charges on deposit accountsWealth management income
Mortgage banking activities
Insurance agency commissions
Income from bank owned life insurance
Visa check fees
Letter of credit fees
Extension fees
Other income
Total non-interest income
$
1,273 $
1,932 $
36 $
8,298
2,734
19,146
6,231
2,403
4,827
847
568
7,953
4,049
17,805
5,408
2,462
4,674
888
559
7,607
3,114
19,931
5,176
2,571
4,652
790
503
$
4,916
51,243 $
5,312
51,042 $
5,521
49,901 $
(659)
345
(1,315)
1,341
823
(59)
153
(41)
9
(396)
201
(34.1) % $
4.3
(32.5)
7.5
15.2
(2.4)
3.3
(4.6)
1.6
(7.5)
0.4
$
1,896
346
935
(2,126)
232
(109)
22
98
56
(209)
1,141
N/M %
4.5
30.0
(10.7)
4.5
(4.2)
0.5
12.4
11.1
(3.8)
2.3
2017 vs. 2016
Total non-interest income was $51.2 million for 2017 compared to $51.0 million for 2016. The year ended December 31, 2017, included gains of $1.3 million on sales of
investment securities while the prior year included a $1.2 million gain on the extinguishment of subordinated debentures and $1.9 million in gains on the sales of investment
securities. Excluding these gains, non-interest income increased 4% compared to the prior year primarily due to increases in wealth management income, insurance agency
commissions and deposit service charges. Investment securities gains for the year were applied to offset penalties for prepayments of FHLB advances during the year as
part of the strategic management of the interest margin.
Service charges on deposits increased in 2017 compared to 2016 due to increases in commercial analysis fees, ATM and point of service fees. Income from mortgage
banking activities decreased in 2017 compared to 2016 due to lower origination volumes compared to the prior year as a result of higher average interest rates and lower
bulk sales activity during the year. Wealth management income is comprised of income from trust and estate services and investment management fees earned by West
Financial Services, the Company’s investment management subsidiary. Trust services fees increased 10% compared to the prior year, due to higher recurring fees while
assets under trust and estate management increased 14% over the prior year. Investment management fees in West Financial Services increased 12% for 2017 compared to
2016, due primarily to a 15% increase in assets under management from new client acquisitions and market activity. Overall total assets under management increased to
$2.8 billion at December 31, 2017 compared to $2.4 billion at December 31, 2016. Insurance agency commissions increased 15% in 2017 compared to 2016 due primarily
to higher commercial insurance income. The current year also contained a full year’s income from the acquisition of an agency that occurred after mid-2016. Income from
bank owned life insurance remained level in 2017 compared to the prior year. The Company invests in bank owned life insurance products in order to manage the cost of
employee benefit plans. Investments totaled $95.7 million at December 31, 2017 and $93.3 million at December 31, 2016 and were well diversified by carrier in accordance
with defined policies and practices. The average tax-equivalent yield on these insurance contract assets was 4.21% for 2017 compared to 4.44% for the prior year. Other
non-interest income decreased 7.5% during the current year compared to the prior year which contained the gain of $1.2 million on the extinguishment of $5 million in
subordinated debentures. The impact of the exclusion of this prior year gain was offset in the current year by increases in various miscellaneous fees and commissions.
39
2016 vs. 2015
Total non-interest income was $51.0 million for 2016 compared to $49.9 million for 2015. The drivers of non-interest income for 2016 were increases in securities gains and
income from mortgage banking activities. Income from mortgage banking activities increased in 2016 compared to 2015 due to higher volumes (including bulk sales) and
increased margins on loan sales compared to the prior year. Wealth management income decreased 11% from the prior year primarily due to the sale of a portion of the
portfolio of assets under management in 2016. This resulted in a decrease in fees on sales of investment products and services as compared to the prior year. However, trust
services fees increased 4% compared to the prior year, due to higher one-time fees while assets under management increased 4% over the prior year. Investment
management fees in West Financial Services increased 6% for 2016 compared to 2015, due to a 12% increase in assets under management due to new client acquisitions and
market activity. Overall total assets under management decreased to $2.4 billion at December 31, 2016 compared to $2.8 billion at December 31, 2015. Insurance agency
commissions increased in 2016 compared to 2015 as a result of higher income from commercial lines as a result of a late year agency acquisition and contingency fees that
more than offset a reduction from physicians’ liability policies. Service charges on deposits increased in 2016 compared to 2015 due increases in commercial fees and return
check charges. Income from bank owned life insurance decreased in 2016 compared to the prior year due to policy proceeds recognized in the prior year. Investment
securities gains increased in 2016 compared to the prior year due to the sale of mortgage-backed ARM securities. The proceeds of these transactions were applied to prepay
FHLB advances in the first quarter of 2016.
Non-interest Expense
Non-interest expense amounts and trends are presented in the following table for the years indicated:
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense of premises
Equipment expenses
Marketing
Outside data services
FDIC insurance
Amortization of intangible assets
Litigation expenses
Merger expenses
Professional fees
Other real estate owned
Postage and delivery
Communications
Loss on FHLB redemption
Other expenses
Total non-interest expense
2017
2016
2015
$
73,132 $
13,053
71,354 $
12,960
71,003 $
12,809
7,015
3,119
5,486
3,305
101
-
4,252
4,492
17
1,179
1,502
1,275
6,883
2,851
5,377
2,741
130
-
-
4,840
19
1,155
1,583
3,167
6,071
2,896
5,023
2,491
372
(3,869)
-
4,819
76
1,173
1,587
-
$
11,171
129,099 $
9,998
123,058 $
10,896
115,347 $
2017/2016
$ Change
2017/2016
% Change
2016/2015
$ Change
2016/2015
% Change
1,778
2.5 % $
93
132
268
109
564
(29)
-
4,252
(348)
(2)
24
(81)
(1,892)
1,173
6,041
0.7
1.9
9.4
2.0
20.6
(22.3)
N/M
N/M
(7.2)
(10.5)
2.1
(5.1)
(59.7)
11.7
4.9
$
351
151
812
(45)
354
250
(242)
3,869
-
21
(57)
(18)
(4)
3,167
(898)
7,711
0.5 %
1.2
13.4
(1.6)
7.0
10.0
(65.1)
N/M
N/M
0.4
(75.0)
(1.5)
(0.3)
N/M
(8.2)
6.7
2017 vs. 2016
Non-interest expenses totaled $129.1 million in 2017 compared to $123.1 million in 2016. This increase in expenses was driven by merger expenses and increased
compensation costs.
Salaries and employee benefits, the largest component of non-interest expenses, increased in 2017 due principally to higher compensation expenses as a result of merit
increases. The average number of full-time equivalent employees was 729 in 2017 compared to 728 for 2016. Occupancy expenses remained stable in 2017 compared to
2016 as increased rental expense was offset by lower building and grounds maintenance costs during the year. Equipment expenses increased in 2017 compared to 2016 due
to an increase in equipment service costs. Marketing expense for 2017 increased compared to 2016 as a result of focused marketing initiatives. Outside data services
expense increased in 2017 compared to 2016 due to the increased cost of contractual services. FDIC insurance expense increased in 2017 compared to 2016 due to loan
growth during the year. Merger expenses associated with the acquisition of WashingtonFirst. Other non-interest expenses increased in 2017 compared to 2016 driven by
the impact of asset dispositions related to the closure of two branch locations that occurred in late 2017. Expenses for postage, communications and other real estate owned
expenses remained relatively stable for 2017 compared to the prior year.
2016 vs. 2015
40
Non-interest expenses totaled $123.1 million in 2017 compared to $115.3 million in 2016. This increase in expenses was the result of prepayment penalties of $3.2 million
in 2016 for the early payoff of $75 million of FHLB advances together with the recapture in 2015 of $3.9 million in previously accrued litigation expenses and a $1.0
million charitable contribution to the Sandy Spring Bank Foundation, also in 2015. Excluding these transactions, non-interest expenses for the year ended December 31,
2016 increased 1% over the prior year. Salary and benefits expenses increased due higher compensation costs as a result of merit increases. Occupancy expenses increased
in 2015 compared to the prior year due to increased rental expenses. Equipment expenses increased due to higher software expense related to new systems implementations.
Outside data services increased due to new contract services to prevent bank card fraud. FDIC insurance expense increased in 2016 compared to 2015 due loan growth
during the year. Amortization of intangible assets decreased due to the costs of prior year acquisitions being fully amortized during the year. Litigation expenses decreased
due to the settlement of all claims that were the subject of an adverse jury verdict originally rendered in 2014. Other non-interest expenses increased in 2016 compared to
2015 after excluding the prepayment penalties of $3.2 million for the early payoff of high-rate FHLB advances in 2016 and the charitable contribution accrued in 2015.
Excluding these items, other non-interest expenses decreased due largely to lower EFT losses in 2016 compared to 2015. Expenses for marketing and other real estate
remained essentially unchanged for 2016 compared to the prior year.
Operating Expense Performance
Management views the GAAP efficiency ratio as an important financial measure of expense performance and cost management. The ratio expresses the level of non-interest
expenses as a percentage of total revenue (net interest income plus total non-interest income). Lower ratios indicate improved productivity.
Non-GAAP Financial Measures
The Company also uses a traditional efficiency ratio that is a non-GAAP financial measure of operating expense control and efficiency of operations. Management believes
that its traditional ratio better focuses attention on the operating performance of the Company over time than does a GAAP ratio, and is highly useful in comparing period-
to-period operating performance of the Company’s core business operations. It is used by management as part of its assessment of its performance in managing non-interest
expenses. However, this measure is supplemental, and is not a substitute for an analysis of performance based on GAAP measures. The reader is cautioned that the non-
GAAP efficiency ratio used by the Company may not be comparable to GAAP or non-GAAP efficiency ratios reported by other financial institutions.
In general, the efficiency ratio is non-interest expenses as a percentage of net interest income plus non-interest income. Non-interest expenses used in the calculation of the
non-GAAP efficiency ratio exclude goodwill impairment losses, the amortization of intangibles, and non-recurring expenses. Income for the non-GAAP ratio includes the
favorable effect of tax-exempt income, and excludes securities gains and losses, which vary widely from period to period without appreciably affecting operating expenses,
and non-recurring gains. The measure is different from the GAAP efficiency ratio, which also is presented in this report. The GAAP measure is calculated using non-
interest expense and income amounts as shown on the face of the Consolidated Statements of Income. The GAAP and non-GAAP efficiency ratios are reconciled and
provided in the following table. The GAAP efficiency ratio improved for 2017 compared to the prior year as a direct result of the increase in net interest income. The non-
GAAP efficiency ratio also improved in 2017 compared to the prior year as a result of the 13% growth in net interest income while non-interest expense increased 5%.
In addition, the Company excludes certain specific expenses from net income as a measure of the level of recurring income before taxes. Management believes this provides
financial statement users with a useful metric of the run-rate of revenues and expenses which is readily comparable to other financial institutions. This measure is calculated
by adding (subtracting) the provision (credit) for loan losses, the provision for income taxes and merger expenses back to net income.
41
GAAP and Non-GAAP Efficiency Ratios
(Dollars in thousands)
Pre-tax pre-provision pre-merger expense income:
Net income
Plus Non-GAAP adjustment:
Litigation expenses
Merger expenses
Income taxes
Provision (credit) for loan losses
Pre-tax pre-provision pre-merger expense income
Efficiency ratio - GAAP basis:
Non-interest expenses
Net interest income plus non-interest income
Efficiency ratio - GAAP basis
Efficiency ratio - Non-GAAP basis:
Non-interest expenses
Less Non-GAAP adjustment:
Amortization of intangible assets
Loss on FHLB redemption
Litigation expenses
Merger expenses
Non-interest expenses - as adjusted
Net interest income plus non-interest income
Plus Non-GAAP adjustment:
Tax-equivalent income
Less Non-GAAP adjustments:
Securities gains
Gain on redemption of subordinated debentures
Net interest income plus non-interest income - as adjusted
2017
2016
2015
2014
2013
Year ended December 31,
$
$
$
$
53,209
$
48,250
$
45,355
$
38,200
$
44,422
-
4,252
34,726
2,977
95,164
129,099
220,011
58.68%
$
$
$
-
-
23,740
5,546
77,536
123,058
200,594
$
$
$
(3,869)
-
22,027
5,371
68,884
115,347
188,100
$
$
$
6,519
-
17,582
(163)
62,138
120,800
176,419
-
-
22,563
(1,084)
65,901
111,524
177,425
$
$
$
61.35%
61.32%
68.47%
62.86%
$
129,099
$
123,058
$
115,347
$
120,800
$
111,524
101
1,275
-
4,252
123,471
220,011
7,459
1,273
-
226,197
$
$
$
130
3,167
-
-
119,761
200,594
6,711
1,932
1,200
204,173
$
$
$
372
-
(3,869)
-
118,844
188,100
6,478
36
-
194,542
$
$
$
821
-
6,519
-
113,460
176,419
5,192
5
-
181,606
$
$
$
1,845
-
-
-
109,679
177,425
5,292
115
-
182,602
$
$
$
Efficiency ratio - Non-GAAP basis
54.59%
58.66%
61.09%
62.48%
60.06%
Income Taxes
The Company had income tax expense of $34.7 million in 2017, compared to expense of $23.7 million in 2016 and $22.0 million in 2015. The current year’s results
included $5.6 million in additional income tax expense from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the
recently enacted Tax Cuts and Jobs Act. The resulting effective rates were 39% for 2017, 33% for 2016 and 33% for 2015. Exclusive of the impact of the additional tax
expense, the effective tax rate for 2017 would have been 33%.
FINANCIAL CONDITION
The Company's total assets were $5.4 billion at December 31, 2017, increasing $355 million or 7% compared to $5.1 billion at December 31, 2016. Interest-earning assets
increased $354 million to $5.2 billion at December 31, 2017 compared to December 31, 2016. The increase in interest-earning assets was primarily due to organic loan
growth and to a lesser extent an increase in investment securities during 2017.
42
Loans
A comparison of loan portfolio for the years indicated is presented in the following table:
(Dollars in thousands)
Residential real estate:
Residential mortgage
Residential construction
Commercial real estate:
Commercial owner occupied real estate
Commercial investor real estate
Commercial AD&C
Commercial Business
Consumer
Total loans
December 31,
2017
2016
Year-to-Year Change
Amount
%
Amount
%
$ Change
% Change
$
$
921,435
176,687
857,196
1,112,710
292,443
497,948
455,829
4,314,248
21.4 %
4.1
19.9
25.8
6.8
11.5
10.5
100.0 %
$
$
841,692
150,229
775,552
928,113
308,279
467,286
456,657
3,927,808
21.4 %
3.8
19.8
23.6
7.9
11.9
11.6
100.0 %
$
$
79,743
26,458
81,644
184,597
(15,836)
30,662
(828)
386,440
9.5 %
17.6
10.5
19.9
(5.1)
6.6
(0.2)
9.8
Total loans, excluding loans held for sale, increased $386 million or 10% at December 31, 2017 compared to December 31, 2016. The commercial loan portfolio increased
by 11% to $2.5 billion at December 31, 2017 compared to the prior year end due to double-digit increases in investor real estate loans and owner occupied real estate loans.
These increases reflect the improving economy and the Company’s increased emphasis on growth in its commercial portfolio.
The residential real estate portfolio, which is comprised of residential construction and permanent residential mortgage loans, increased 11% at December 31, 2017
compared to December 31, 2016. Permanent residential mortgages, most of which are 1-4 family, increased 10% due to lower bulk sales of mortgage loans. The Company
generally retains adjustable rate mortgages in its portfolio. The Company also retains a substantial portion of its fixed rate mortgage originations to low and moderate
income borrowers in its portfolio. The Company elected to sell $40 million and $32 million of these loans during 2017 and 2016, respectively. Residential construction
loans increased 18% at December 31, 2017 compared to the balance at December 31, 2016 due to higher volume of such loans. The consumer loan portfolio remained level
at December 31, 2017 compared to December 31, 2016.
Analysis of Loans
The trends in the composition of the loan portfolio over the previous five years are presented in following table:
December 31,
(Dollars in thousands)
Residential real estate:
Residential mortgage
Residential construction
Commercial real estate:
Commercial owner occupied
Commercial investor
Commercial AD&C loans
Commercial business
Leases
Consumer
Total loans
$
$
2017
%
2016
%
2015
%
2014
%
2013
%
921,435
176,687
21.4 %
4.1
$
841,692
150,229
21.4 %
3.8
$
796,358
129,281
22.8 %
3.7
$
717,886
136,741
22.9 %
4.4
$
618,381
129,177
22.2 %
4.7
857,196
1,112,710
292,443
497,948
-
455,829
4,314,248
19.9
25.8
6.8
11.5
-
10.5
100.0 %
$
775,552
928,113
308,279
467,286
-
456,657
3,927,808
19.8
23.6
7.9
11.9
-
11.6
100.0 %
43
$
678,027
719,084
255,980
465,765
-
450,875
3,495,370
19.4
20.6
7.3
13.3
-
12.9
100.0 %
$
611,061
640,193
205,124
390,781
54
425,552
3,127,392
19.5
20.5
6.6
12.5
-
13.6
100.0 %
$
592,823
552,178
160,696
356,651
703
373,657
2,784,266
21.3
19.8
5.8
12.8
-
13.4
100.0 %
Loan Maturities and Interest Rate Sensitivity
Loan maturities and interest rate characteristics for specific lending portfolios is presented in the following table:
(In thousands)
Residential construction loans
Commercial AD&C loans
Commercial business loans (1)
Total
Rate Terms:
Fixed
Variable or adjustable
Total
(1) Loans not secured by real estate
At December 31, 2017
Remaining Maturities of Selected Credits in Years
1 or less
Over 1-5
Over 5
Total
$
$
$
$
139,082
250,419
278,947
668,448
68,677
599,771
668,448
$
$
$
$
27,174
30,848
161,520
219,542
144,730
74,812
219,542
$
$
$
$
10,431
11,176
57,481
79,088
56,767
22,321
79,088
$
$
$
$
176,687
292,443
497,948
967,078
270,174
696,904
967,078
Investment Securities
The investment portfolio, consisting of available-for-sale and other equity securities, decreased 1% to $775 million at December 31, 2017, from $780 million at December
31, 2016.
Composition of Investment Securities
The composition of investment securities for the periods indicated is presented in the following table:
(Dollars in thousands)
Available-for-Sale: (1)
U.S. government agencies
State and municipal
Mortgage-backed (2)
Corporate debt
Trust preferred
Marketable equity securities
Total available-for-sale securities (3)
Held-to-Maturity and Other Equity
U.S. government agencies
State and municipal
Mortgage-backed (2)
Corporate debt
Other equity securities
Total held-to-maturity and other equity
2017
%
2016
%
2015
%
December 31,
$
106,568
312,253
300,040
9,432
1,002
212
729,507
-
-
13.8 %
40.3
$
38.7
1.2
0.1
0.0
94.1
-
-
121,790
287,684
312,711
9,134
1,012
1,223
733,554
-
-
15.6 %
36.9
$
40.1
1.2
0.1
0.2
94.1
-
-
108,400
164,707
316,696
-
1,023
1,223
592,049
56,460
149,537
-
-
45,518
45,518
775,025
-
-
5.9
5.9
100.0 %
-
-
46,094
46,094
779,648
-
-
5.9
5.9
100.0 %
168
2,100
41,336
249,601
841,650
12.9 %
19.6
37.6
-
0.1
0.1
70.3
6.7
17.8
-
0.3
4.9
29.7
100.0 %
Total Securities (3)
(1) At estimated fair value.
(2) Issued by a U. S. Government Agency or secured by U.S. Government Agency collateral.
(3) The outstanding balance of no single issuer, except for U.S. Government Agency securities, exceeded ten percent of stockholders' equity at December 31, 2017, 2016 or 2015.
$
$
$
The investment portfolio from December 31, 2016 to December 31, ##D 90 days
Total past due
Non-accrual loan
Current loans
Total loans
(In thousands)
Past due loans
31-60 days
61-90 days
> 90 days
Total past due
Non-accrual loans
Current loans
Total loans
Commercial Real Estate
Residential Real Estate
2017
Commercial
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
Consumer
Residential
Mortgage
Residential
Construction
Total
$
$
$
$
6,703
$
136
$
5,575
$
3,582
$
2,967
$
7,196
$
177
$
-
1,402
8,105
39
8,144
$
-
-
136
365
501
-
-
5,575
-
$
5,575
$
-
-
2,967
-
$
2,967
$
225
890
8,311
1,449
9,760
$
-
-
177
-
177
$
-
496
4,078
400
4,478
2016
26,336
225
2,788
29,349
2,253
31,602
Commercial Real Estate
Residential Real Estate
Commercial
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
Consumer
Residential
Mortgage
Residential
Construction
Total
5,833
$
137
$
8,107
$
4,823
$
2,859
$
7,257
$
195
$
29,211
-
1,185
7,018
39
7,057
$
-
-
137
365
502
$
-
-
8,107
395
8,502
$
-
-
2,859
-
$
2,859
$
232
560
8,049
475
8,524
$
-
-
195
-
195
-
744
5,567
637
6,204
2017
Commercial Real Estate
Residential Real Estate
Commercial
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
Consumer
Residential
Mortgage
Residential
Construction
$
$
$
$
587
$
-
-
587
6,703
490,658
497,948
Commercial
663
672
-
1,335
5,833
460,118
467,286
$
$
$
-
-
-
-
136
292,307
292,443
$
$
-
-
775
5,575
1,106,360
1,112,710
$
-
-
414
3,582
853,200
857,196
2016
775
$
414
$
2,107
$
106
-
2,213
2,967
6,100
3,103
225
9,428
7,196
$
$
-
-
-
-
177
176,510
176,687
450,649
455,829
$
904,811
921,435
$
Commercial Real Estate
Residential Real Estate
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
Consumer
Residential
Mortgage
Residential
Construction
896
$
850
$
1,479
$
808
$
-
-
896
137
1,206
-
2,056
8,107
744
-
2,223
4,823
1,104
-
1,912
2,859
3,969
2,139
232
6,340
7,257
307,246
308,279
$
917,950
928,113
$
768,506
775,552
$
451,886
456,657
$
828,095
841,692
$
$
-
-
-
-
195
150,034
150,229
86
232
2,489
31,932
1,911
33,843
Total
9,983
3,209
225
13,417
26,336
4,274,495
4,314,248
Total
8,665
5,865
232
14,762
29,211
3,883,835
3,927,808
$
$
$
$
$
Loans are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial
loans and non-commercial loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.
The credit quality indicators for commercial loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually
with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented based on the most recent credit review
performed. These credit quality indicators are defined as follows:
Pass - A pass rated credit is not adversely classified because it does not display any of the characteristics for adverse classification.
Special mention – A special mention credit has potential weaknesses that deserve management’s close attention. If uncorrected, such weaknesses may result in deterioration
of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.
Substandard – A substandard loan is inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans
classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct
possibility of loss if the deficiencies are not corrected.
Doubtful – A loan that is classified as doubtful has all the weaknesses inherent in a loan classified as substandard with added characteristics that the weaknesses make
collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.
Loss – Loans classified as a loss are considered uncollectible and of such little value that their continuing to be carried as a loan is not warranted. This classification is not
necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected
in the future.
The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio at December 31 for the years indicated:
(In thousands)
Pass
Special Mention
Substandard
Doubtful
Total
(In thousands)
Pass
Special Mention
Substandard
Doubtful
Total
2017
Commercial Real Estate
Commercial
Commercial
AD&C
Commercial
Investor R/E
$
$
$
$
482,924
2,443
12,581
-
497,948
Commercial
442,725
10,010
14,551
-
467,286
$
$
$
$
292,307
-
136
-
292,443
$
$
1,103,480
3,517
5,713
-
1,112,710
2016
Commercial Real Estate
Commercial
AD&C
Commercial
Investor R/E
308,142
-
137
-
308,279
$
$
87
917,255
2,395
8,463
-
928,113
Commercial
Owner
Occupied R/E
845,102
5,505
6,589
-
857,196
Commercial
Owner
Occupied R/E
758,651
9,255
7,646
-
775,552
$
$
$
$
Total
2,723,813
11,465
25,019
-
2,760,297
Total
2,426,773
21,660
30,797
-
2,479,230
$
$
$
$
Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to these pools is based on their delinquency
status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at December 31 for the years indicated:
(In thousands)
Performing
Non-performing:
90 days past due
Non-accruing
Restructured loans
Total
(In thousands)
Performing
Non-performing:
90 days past due
Non-accruing
Restructured loans
Total
2017
Residential Real Estate
Consumer
Residential
Mortgage
Residential
Construction
Total
452,862
$
913,124
$
176,510
$
1,542,496
-
2,967
-
455,829
$
225
7,196
890
921,435
$
-
177
-
176,687
$
225
10,340
890
1,553,951
2016
Residential Real Estate
Consumer
Residential
Mortgage
Residential
Construction
Total
453,798
$
833,643
$
150,034
$
1,437,475
-
2,859
-
456,657
$
232
7,257
560
841,692
$
-
195
-
150,229
$
232
10,311
560
1,448,578
$
$
$
$
During the year ended December 31, 2017, the Company restructured $2.1 million in loans that were designated as troubled debt restructurings. Modifications consisted
principally of interest rate concessions. No modifications resulted in the reduction of the principal in the associated loan balances. Restructured loans are subject to periodic
credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan.
Loans restructured during 2017 have specific reserves of $0.2 million at December 31, 2017. For the year ended December 31, 2016, the Company restructured $0.6 million
in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan
balances. Loans restructured during 2016 did not have significant specific reserves at December 31, 2016.
The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:
(In thousands)
Troubled debt restructurings
Restructured accruing
Restructured non-accruing
Balance
Specific allowance
Restructured and subsequently defaulted
For the Year Ended December 31, 2017
Commercial Real Estate
Commercial
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
All
Other
Loans
Total
$
$
$
$
492
1,019
1,511
247
-
$
$
$
$
-
-
-
-
-
$
$
$
$
88
-
-
-
-
-
$
$
$
$
-
540
540
-
-
$
$
$
$
-
-
-
-
-
$
$
$
$
492
1,559
2,051
247
-
(In thousands)
Troubled debt restructurings
Restructured accruing
Restructured non-accruing
Balance
Specific allowance
Restructured and subsequently defaulted
For the Year Ended December 31, 2016
Commercial Real Estate
Commercial
Commercial
AD&C
Commercial
Investor R/E
Commercial
Owner
Occupied R/E
All
Other
Loans
Total
$
$
$
$
42
-
42
39
-
$
$
$
$
-
-
-
-
-
$
$
$
$
-
-
-
-
479
$
$
$
$
508
-
508
-
-
$
$
$
$
-
-
-
-
-
$
$
$
$
550
-
550
39
479
Other Real Estate Owned
Other real estate owned totaled $2.3 million and $1.9 million at December 31, 2017 and 2016, respectively. At December 31, 2017, $1.5 million of the other real estate
owned was comprised of consumer mortgage loans.
89
NOTE 6 – PREMISES AND EQUIPMENT
Presented in the following table are the components of premises and equipment at December 31:
(In thousands)
Land
Buildings and leasehold improvements
Equipment
Total premises and equipment
Less: accumulated depreciation and amortization
Net premises and equipment
2017
2016
$
$
10,160
64,278
37,452
111,890
(57,129)
54,761
$
$
10,160
62,215
35,152
107,527
(53,965)
53,562
Depreciation and amortization expense for premises and equipment amounted to $5.3 million, $5.3 million and $4.6 million for each of the years ended December 31, 2017,
2016 and 2015, respectively.
Total rental expense of premises and equipment, net of rental income, for the years ended December 31, 2017, 2016 and 2015 was $7.9 million, $7.6 million, and $7.3
million, respectively. Lease commitments entered into by the Company bear initial terms varying from 3 to 15 years, or they are 20-year ground leases, and are associated
with premises.
Future minimum lease payments, including any additional rents due to escalation clauses, for all non-cancelable operating leases within the years ending December 31 are
presented in the table below:
(In thousands)
2018
2019
2020
2021
2022
Thereafter
Total minimum lease payments
$
$
NOTE 7 – GOODWILL AND OTHER INTANGIBLE ASSETS
The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at December 31 in the following table:
(Dollars in thousands)
Amortizing intangible assets:
Other identifiable intangibles
Total amortizing intangible assets
Goodwill
Gross
Carrying
Amount
2017
Accumulated
Amortization
Net
Carrying
Amount
$
$
$
786
786
$
$
(206)
(206)
85,768
$
$
$
580
580
85,768
90
Weighted
Average
Remaining
Life
13.1 years
Gross
Carrying
Amount
2016
Accumulated
Amortization
$
$
$
786
786
$
$
(106)
(106)
85,768
Net
Carrying
Amount
$
$
$
680
680
85,768
Operating
Leases
6,490
6,375
6,042
5,339
4,519
15,479
44,244
Weighted
Average
Remaining
Life
13.8 years
The following table presents the net carrying amount of goodwill by segment for the periods indicated:
(In thousands)
Balance December 31, 2015
Purchase of insurance agency
Balance December 31, 2016
No Activity
Balance December 31, 2017
Community
Banking
Insurance
Investment
Management
Total
$
$
69,991
-
69,991
-
69,991
$
$
5,191
1,597
6,788
-
6,788
$
$
The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:
(In thousands)
2018
2019
2020
2021
Thereafter
Total amortizing intangible assets
$
$
8,989
-
8,989
-
8,989
$
$
Amount
84,171
1,597
85,768
-
85,768
95
83
66
60
276
580
NOTE 8 – DEPOSITS
The following table presents the composition of deposits at December 31 for the years indicated:
(In thousands)
Noninterest-bearing deposits
Interest-bearing deposits:
Demand
Money market savings
Regular savings
Time deposits of less than $100,000
Time deposits of $100,000 or more
Total interest-bearing deposits
Total deposits
2017
2016
1,264,392
$
1,138,139
658,716
1,030,432
321,171
293,201
395,750
2,699,270
3,963,662
$
615,058
927,837
310,471
258,621
327,418
2,439,405
3,577,544
$
$
Demand deposit overdrafts reclassified as loan balances were $2.0 million and $1.3 million at December 31, 2017 and 2016, respectively. Overdraft charge-offs and
recoveries are reflected in the allowance for loan losses.
91
The following table presents the maturity schedule for time deposits maturing within years ending December 31:
(In thousands)
2018
2019
2020
2021
Thereafter
Total time deposits
Amount
$
$
365,533
187,407
71,325
28,914
35,772
688,951
The Company's time deposits of $100,000 or more represented 9.0% of total deposits at December 31, 2017 and are presented by maturity in the following table:
(In thousands)
Time deposits--$100 thousand or more
3 or
Less
Over 3
to 6
Over 6
to 12
Over
12
Total
$
33,046
$
68,127
$
111,421
$
183,156
$
395,750
Months to Maturity
Interest expense on time deposits of $100,000 or more amounted to $4.5 million, $3.2 million and $2.2 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
Deposits received in the ordinary course of business from the directors and officers of the Company amounted to $29.9 million and $26.7 million for the years ended
December 31, 2017 and 2016, respectively
NOTE 9 – BORROWINGS
Information relating to retail repurchase agreements and other short-term borrowings is presented in the following table at and for the years ending December 31:
2017
2016
2015
(Dollars in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Retail repurchase agreements
Average for the Year:
Retail repurchase agreements
Maximum Month-end Balance:
Retail repurchase agreements
$
$
$
119,359
0.24 %
133,356
0.25 %
147,459
$
$
$
125,119
0.24 %
120,711
0.24 %
139,325
$
$
$
109,145
0.23 %
110,776
0.23 %
128,511
The Company pledges U.S. Agencies and Corporate securities, based upon their market values, as collateral for 102.5% of the principal and accrued interest of its retail
repurchase agreements.
At December 31, 2017, the Company has an available line of credit for $1.6 billion with the Federal Home Loan Bank of Atlanta (the "FHLB") under which its borrowings
are limited to $1.6 billion based on pledged collateral at prevailing market interest rates with $765.8 million borrowed against it at December 31, 2017 . At December 31,
2016, lines of credit totaled $1.4 billion under which $1.4 billion was available based on pledged collateral with $790.0 million borrowed against it as of December 31,
2016. Under a blanket lien, the Company has pledged qualifying residential mortgage loans amounting to $805.7 million, commercial loans amounting to $1.2 billion, home
equity lines of credit (“HELOC”) amounting to $281.0 million and multifamily loans amounting to $83.0 million at December 31, 2017 as collateral under the borrowing
agreement with the FHLB. At December 31, 2016 the Company had pledged collateral of qualifying mortgage loans of $725.1 million, commercial loans of $1.0 billion,
HELOC loans of $307.2 million and multifamily loans of $60.4 million under the FHLB borrowing agreement. The Company also had lines of credit available from the
Federal Reserve and correspondent banks of $359.7 million and $369.4 million at December 31, 2017 and 2016, respectively, collateralized by loans and state and municipal
securities. In addition, the Company had unsecured lines of credit with correspondent banks of $70.0 million and $70.0 million at December 31, 2017 and 2016. At
December 31, 2017 there were no outstanding borrowings against these lines of credit.
Advances from FHLB and the respective maturity schedule at December 31 for the years indicated consisted of the following:
92
(Dollars in thousands)
Maturity:
One year
Two years
Three years
Four years
Five years
After five years
Total advances from FHLB
2017
2016
Amounts
$
$
575,000
80,000
100,833
10,000
-
-
765,833
Weighted
Average
Rate
Amounts
Weighted
Average
Rate
1.43 %
3.50
3.13
3.49
-
-
1.89
$
$
470,000
150,000
80,000
80,000
10,000
-
790,000
0.65 %
2.40
3.50
3.54
3.49
-
1.60
NOTE 10 – SUBORDINATED DEBENTURES
The Company formed Sandy Spring Capital Trust II (“Capital Trust”) to facilitate the pooled placement issuance of $35.0 million of trust preferred securities on August 10,
2004. In conjunction with this issuance, the Company issued subordinated debt to the Capital Trust. In the second quarter of 2016, the Company repurchased $5 million
liquidation value of the trust preferred securities issued by the Capital Trust, which allowed the Company to retire $5 million of the subordinated debt. The Company
recognized a gain of $1.2 million on this transaction. On January 6, 2017, the Company repurchased the remaining $30 million in subordinated debentures at par value. In
conjunction with this transaction, the Capital Trust redeemed its balance of $30 million of trust preferred securities that were outstanding at December 31, 2016.
NOTE 11 – STOCKHOLDERS’ EQUITY
The Company’s Articles of Incorporation authorize 50,000,000 shares of capital stock (par value $1.00 per share). Issued shares have been classified as common stock. The
Articles of Incorporation provide that remaining unissued shares may later be designated as either common or preferred stock.
The Company has a director stock purchase plan (the “Director Plan”) which commenced on May 1, 2004. Under the Director Plan, members of the board of directors may
elect to use a portion (minimum 50%) of their annual retainer fee to purchase shares of Company stock. The Company has reserved 45,000 authorized but unissued shares
of common stock for purchase under the plan. Purchases are made at the fair market value of the stock on the purchase date. At December 31, 2017, there were 25,291
shares available for issuance under the plan.
The Company has an employee stock purchase plan (the “Purchase Plan”) which was authorized on July 1, 2011. The Company has reserved 300,000 authorized but
unissued shares of common stock for purchase under the current version of the plan. Shares are purchased at 85% of the fair market value on the exercise date through
monthly payroll deductions of not less than 1% or more than 10% of cash compensation paid in the month. The Purchase Plan is administered by a committee of at least
three directors appointed by the board of directors. At December 31, 2017, there were 138,577 shares available for issuance under this plan.
The Company’s 2015 stock repurchase plan expired on August 31, 2017. The program permitted the repurchase of up to 5% of the Company’s outstanding shares of
common stock or approximately 1,200,000 shares. Under the recently expired repurchase program a total of 736,139 shares of common stock were repurchased for a total
cost of $19.2 million.
The Company has a dividend reinvestment plan that is sponsored and administered by Computershare Shareholder Services as independent agent, which enables current
shareholders as well as first-time buyers to purchase and sell common stock of Sandy Spring Bancorp, Inc. directly through Computershare at low commissions.
Participants may reinvest cash dividends and make periodic supplemental cash payments to purchase additional shares.
93
Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit
and transfers of assets between the Bank and the Company. At December 31, 2017, the Bank could have paid additional dividends of $34.8 million to its parent company
without regulatory approval. In conjunction with the Company’s long-term borrowing from Capital Trust, the Bank issued a note to Bancorp for $35.0 million, of which $30
million was outstanding at December 31, 2016. The loan was fully repaid during 2017. There were no other loans outstanding between the Bank and the Company at
December 31, 2017 and 2016, respectively.
NOTE 12 – SHARE BASED COMPENSATION
At December 31, 2017, the Company had two share-based compensation plans in existence, the 2005 Omnibus Stock Plan (“Omnibus Stock Plan”) and the 2015 Omnibus
Incentive Plan (“Omnibus Incentive Plan”). The Omnibus Stock Plan expired during the second quarter of 2015 but has outstanding options that may still be exercised. The
Omnibus Incentive Plan is described in the following paragraph.
The Company’s Omnibus Incentive Plan was approved on May 6, 2015 and provides for the granting of non-qualifying stock options to the Company’s directors, and
incentive and non-qualifying stock options, stock appreciation rights, restricted stock grants, restricted stock units and performance awards to selected key employees on a
periodic basis at the discretion of the board. The Omnibus Incentive Plan authorizes the issuance of up to 1,500,000 shares of common stock, of which 1,340,359 shares are
available for issuance at December 31, 2017, has a term of ten years, and is administered by a committee of at least three directors appointed by the board of directors.
Options granted under the plan have an exercise price which may not be less than 100% of the fair market value of the common stock on the date of the grant and must be
exercised within 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 board committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased upon the exercise of such
options. The Company generally issues authorized but previously unissued shares to satisfy option exercises.
The fair values of all of the options granted for the periods indicated have been estimated using a binomial option-pricing model with the weighted-average assumptions for
the years ended December 31 are presented in the following table:
Dividend yield
Weighted average expected volatility
Weighted average risk-free interest rate
Weighted average expected lives (in years)
Weighted average grant-date fair value
2017
2016
2015
2.45 %
40.27 %
2.14 %
5.67
$13.42
3.48 %
41.54 %
1.42 %
5.71
$7.75
3.40 %
42.98 %
1.42 %
5.42
$7.63
The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury
yield curve in effect at the time of the grant. Expected volatilities are generally based on historical volatilities. The expected term of share options granted is generally
derived from historical experience. The Company recognized forfeitures as they occur.
Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. Compensation expense of $2.1
million, $1.9 million, and $1.9 million was recognized for the years ended December 31, 2017, 2016 and 2015, respectively, related to the awards of stock options and
restricted stock grants. The intrinsic value for the stock options exercised was $0.7 million, $0.6 million, and $0.5 million in the years ended December 31, 2017, 2016 and
2015, respectively. The total of unrecognized compensation cost related to stock options was approximately $0.2 million as of December 31, 2017. That cost is expected to
be recognized over a weighted average period of approximately 1.8 years. The total of unrecognized compensation cost related to restricted stock was approximately $4.3
million as of December 31, 2017. That cost is expected to be recognized over a weighted average period of approximately 3.0 years. The fair value of the options vested
during the years ended December 31, 2017, 2016 and 2015, was $0.2 million, $0.2 million and $0.2 million, respectively.
94
In the first quarter of 2017, 12,941 stock options were granted, subject to a three year vesting schedule with one third of the options vesting on April 1 st of each year. The
Company granted 48,338 shares of restricted stock in the first quarter of 2017, which are subject to a five year vesting schedule with one fifth of the shares vesting on April
1 st of each year. An additional 6,873 shares of performance based restricted stock grants were also approved as part of the restricted shares granted in the first quarter. The
performance shares are subject to cliff vesting after three years based on the relative performance of the Company’s stock in comparison to a selected peer group. Vesting
can vary from 0-150% of the target grant based on the results of the Company’s stock performance. There were no additional stock options or shares of restricted stock
granted during the remainder of 2017.
A summary of share option activity for the period indicated is reflected in the following table:
Balance at January 1, 2017
Granted
Exercised
Forfeited or expired
Balance at December 31, 2017
Exercisable at December 31, 2017
Weighted average fair value of options
granted during the year
Number
of
Common
Shares
108,503
12,941
(30,567)
(3,577)
87,300
56,815
Weighted
Average
Exercise
Share Price
$
$
$
$
$
$
22.46
42.48
19.39
30.07
26.22
22.42
$
13.42
Weighted
Average
Contractual
Remaining
Life(Years)
Aggregate
Intrinsic
Value
(in thousands)
$
$
$
$
3.5
2.5
1,902
669
1,160
943
A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:
(In dollars, except share data):
Restricted stock at January 1, 2017
Granted
Vested
Forfeited
Restricted stock at December 31, 2017
Number
of
Common
Shares
212,646
55,211
(70,382)
(8,440)
189,035
Weighted
Average
Grant-Date
Fair Value
$
$
$
$
$
25.19
42.48
23.77
27.42
30.67
NOTE 13 – PENSION, PROFIT SHARING, AND OTHER EMPLOYEE BENEFIT PLANS
Defined Benefit Pension Plan
The Company has a qualified, noncontributory, defined benefit pension plan (the “Plan”) covering substantially all employees. All benefit accruals for employees were
frozen as of December 31, 2007 based on past service and 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.
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.
95
The Plan’s funded status at December 31 is as follows:
(In thousands)
Reconciliation of Projected Benefit Obligation:
Projected obligation at January 1
Interest cost
Actuarial loss (gain)
Benefit payments
Increase related to change in assumptions
Projected obligation at December 31
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets at January 1
Actual return on plan assets
Contribution
Benefit payments
Fair value of plan assets at December 31
Funded status at December 31
Accumulated benefit obligation at December 31
Unrecognized net actuarial loss
Net periodic pension cost not yet recognized
2017
2016
$
$
$
$
$
40,783
1,640
(32)
(1,945)
2,995
43,441
36,020
4,971
2,200
(1,945)
41,246
(2,195)
43,441
12,487
12,487
$
$
$
$
$
39,416
1,657
251
(1,248)
707
40,783
30,683
755
5,830
(1,248)
36,020
(4,763)
40,783
13,689
13,689
Weighted-average assumptions used to determine benefit obligations at December 31 are presented in the following table:
Discount rate
Rate of compensation increase
2017
3.65%
N/A
2016
4.15%
N/A
2015
4.26%
N/A
The components of net periodic benefit cost for the years ended December 31 are presented in the following table:
(In thousands)
Interest cost on projected benefit obligation
Expected return on plan assets
Recognized net actuarial loss
Net periodic benefit cost
2017
2016
2015
$
$
1,640
(1,985)
1,181
836
$
$
1,657
(1,614)
1,164
1,207
$
$
1,629
(1,622)
1,032
1,039
96
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are presented in the following table:
Discount rate
Expected return on plan assets
Rate of compensation increase
2017
4.15%
6.00%
N/A
2016
4.26%
5.00%
N/A
2015
3.91%
5.00%
N/A
The expected rate of return on assets of 6.00% reflects the Plan’s predominant investment of assets in equity securities and an analysis of the average rate of return of the
S&P 500 index and 10 year U. S. Treasury bonds over the past 10 years.
The following table reflects the components of the net unrecognized benefits costs that is reflected in accumulated other comprehensive income (loss) for the periods
indicated. Additions represent the growth in the unrecognized actuarial loss during the period. Reductions represent the portion of the unrecognized benefits that are
recognized each period as a component of the net periodic benefit cost.
(In thousands)
Included in accumulated other comprehensive loss at January 1, 2015
Additions during the year
Reclassifications due to recognition as net periodic pension cost
Decrease related to change in assumptions
Included in accumulated other comprehensive loss as of December 31, 2015
Additions during the year
Reclassifications due to recognition as net periodic pension cost
Increase related to change in assumptions
Included in accumulated other comprehensive loss as of December 31, 2016
Reductions during the year
Reclassifications due to recognition as net periodic pension cost
Increase related to change in assumptions
Included in accumulated other comprehensive loss as of December 31, 2017
Applicable tax effect
Included in accumulated other comprehensive loss net of tax effect at December 31, 2017
Amount expected to be recognized as part of net periodic pension cost in the next fiscal year
There are no plan assets expected to be returned to the employer in the next twelve months.
The following items have not yet been recognized as a component of net periodic benefit cost at December 31:
Unrecognized
Net
Loss
14,774
1,955
(1,032)
(2,659)
13,038
1,108
(1,164)
707
13,689
(3,016)
(1,181)
2,995
12,487
(4,943)
7,544
679
$
$
$
(In thousands)
Net actuarial loss
Net periodic benefit cost not yet recognized
2017
2016
2015
$
$
12,487
12,487
$
$
13,689
13,689
$
$
13,038
13,038
97
Pension Plan Assets
The Company’s pension plan weighted average allocations at December 31 are presented in the following table:
Asset Category:
Cash and certificates of deposit
Equity Securities
Mutual Funds
Total pension plan assets
2017
2016
- %
15.6
84.4
100.0 %
2.6 %
71.2
26.2
100.0 %
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 uses outside third parties to advise 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. During 2017, management initiated a shift in target allocations for plan assets towards
fixed income securities in order to more closely align expected cash outflows with its funding source. This 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 70% 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 December 31, 2017, management is of the opinion that 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 the activities of the investment managers to ensure adherence with the Investment Policy
Statement.
98
Fair Values
The fair values of the Company’s pension plan assets by asset category at December 31 are presented in the following tables:
(In thousands)
Asset Category:
Money market funds
Mutual funds:
Large cap U.S. equity funds
Small/Mid cap U.S. equity funds
International equity funds
Short-term fixed income funds
Fixed income funds
Total mutual funds
Total pension plan assets
(In thousands)
Asset Category:
Money market funds
Mutual funds:
Large cap U.S. equity funds
Small/Mid cap U.S. equity funds
International equity funds
Short-term fixed income funds
Total mutual funds
Total pension plan assets
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
2017
$
$
-
$
-
$
1,299
-
2,980
-
4,574
8,853
8,853
$
1,309
867
-
1,220
28,997
32,393
32,393
2016
$
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
-
$
925
$
7,189
2,288
2,053
-
11,530
11,530
99
$
10,168
2,140
1,806
9,451
23,565
24,490
$
$
$
Total
Total
-
2,608
867
2,980
1,220
33,571
41,246
41,246
925
17,357
4,428
3,859
9,451
35,095
36,020
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
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. After consideration
of these factors, the Company made a contribution of $2.2 million in 2017. Management continues to monitor the funding level of the pension plan and may make
contributions as necessary during 2018.
Estimated Future Benefit Payments
Benefit payments, which reflect expected future service, as appropriate, that are expected to be paid for the years ending December 31 are presented in the following table:
(In thousands)
2018
2019
2020
2021
2022
2023 - 2027
Pension
Benefits
$
2,510
2,000
1,800
2,560
2,450
13,890
Cash and Deferred Profit Sharing Plan
The Sandy Spring Bank 401(k) 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 matching contribution 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. The Company’s matching contribution
to the 401(k) Plan that are included in non-interest expenses totaled $2.0 million, $2.0 million, and $2.0 million in 2017, 2016 and 2015, respectively.
Executive Incentive Retirement Plan
The Executive Incentive Retirement Plan is a non-qualified deferred compensation defined contribution plan that provides for contributions to be made to the participants’
plan accounts based on the attainment of a level of financial performance compared to a selected group of peer banks. This level of performance is determined annually by
the board of directors. Benefit costs related to the Plan included in non-interest expense for 2017, 2016 and 2015 were $0.4 million, $0.3 million, and $0.2 million,
respectively.
100
NOTE 14 – OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSE
Selected components of other non-interest income and other non-interest expense for the years ended December 31 are presented in the following table:
(In thousands)
Letter of credit fees
Extension fees
Other income
Total other non-interest income
(In thousands)
Professional fees
Other real estate owned
Postage and delivery
Communications
Loss on FHLB redemption
Other expenses
Total other non-interest expense
2017
2016
2015
847
568
4,916
6,331
$
$
888
559
5,312
6,759
$
$
2017
2016
2015
4,492
$
4,840
$
17
1,179
1,502
1,275
11,171
19,636
$
19
1,155
1,583
3,167
9,998
20,762
$
$
$
$
$
NOTE 15 – INCOME TAXES
The following table provides the components of income tax expense for the years ended December 31:
(In thousands)
Current income taxes:
Federal
State
Total current
Deferred income taxes:
Federal
State
Total deferred
Total income tax expense
2017
2016
2015
$
$
22,355
5,146
27,501
6,973
252
7,225
34,726
$
$
18,699
4,692
23,391
516
(167)
349
23,740
$
$
The Company does not have uncertain tax positions that are deemed material, and did not recognize any adjustments for unrecognized tax benefits.
101
790
503
5,521
6,814
4,819
76
1,173
1,587
-
10,896
18,551
17,890
4,140
22,030
10
(13)
(3)
22,027
Temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities result in deferred taxes. Deferred tax assets and
liabilities, shown as the sum of the appropriate tax effect for each significant type of temporary difference, are presented in the following table at December 31 for the years
indicated:
(In thousands)
Deferred Tax Assets:
Allowance for loan losses
Employee benefits
Pension plan OCI
2016
2017
$
$
Deferred loan fees and costs
Non-qualified stock option expense
Losses on other real estate owned
Other than temporary impairment
Loan and deposit premium/discount
Reserve for recourse loans
Merger Expenses
Other
Gross deferred tax assets
Deferred Tax Liabilities:
Unrealized gains on investments available-for-sale
Pension plan costs
Depreciation
Intangible assets
Bond accretion
Other
Gross deferred tax liabilities
Net deferred tax asset
12,024
1,398
3,318
416
429
42
217
91
133
299
7
18,374
17,517
2,034
5,433
457
555
43
322
187
199
-
9
26,756
(307)
(2,735)
(1,852)
(1,264)
(146)
(204)
(6,508)
11,866
$
(1,065)
(3,550)
(1,179)
(1,721)
(133)
(155)
(7,803)
18,953
$
The reconcilements between the statutory federal income tax rate and the effective rate for the years ended December 31 are presented in the following table:
(Dollars in thousands)
2017
2016
2015
Income tax expense at federal statutory rate
Increase (decrease) resulting from:
Tax exempt income, net
Bank-owned life insurance
State income taxes, net of federal income tax benefits
Federal tax rate change
Other, net
Total income tax expense and rate
$
Percentage of
Pre-Tax
Income
Amount
Percentage of
Pre-Tax
Income
Percentage of
Pre-Tax
Income
Amount
Amount
$
30,776
35.0 %
$
25,194
35.0 %
$
23,584
35.0 %
(3,929)
(841)
3,508
5,544
(332)
34,726
(4.5)
(0.9)
4.0
6.3
(0.4)
39.5 %
$
(3,606)
(862)
2,965
-
49
23,740
(5.0)
(1.1)
4.1
-
-
33.0 %
$
(3,457)
(900)
2,687
-
113
22,027
(5.1)
(1.3)
4.0
-
0.1
32.7 %
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21 % for years beginning on or
after January 1, 2018. The Company recorded a provisional amount to deferred tax expense of $5.5 million, which was primarily due to a re-measurement of deferred tax
assets and liabilities at the newly enacted rate. Certain deferred tax assets and liabilities were re-measured based on the rates at which they are expected to reverse in the
future, which is generally 21%. The Company is analyzing certain aspects of the Act along with the recently issued FASB guidance on reclassification of the tax effects
stranded in OCI, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts.
102
NOTE 16 – NET INCOME PER COMMON SHARE
The calculation of net income per common share for the years ended December 31 is presented in the following table:
(Dollars and amounts in thousands, except per share data)
2017
2016
2015
Net income
Basic:
Basic weighted average EPS shares
Basic net income per share
Diluted:
Basic weighted average EPS shares
Dilutive common stock equivalents
Dilutive EPS shares
Diluted net income per share
Anti-dilutive shares
$
$
$
53,209
$
48,250
$
45,355
24,175
24,120
2.20
$
2.00
$
24,175
32
24,207
24,120
29
24,149
2.20
$
2.00
$
3
3
24,609
1.84
24,609
89
24,698
1.84
7
NOTE 17 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For financial statements
presented for the Company, non-equity 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. The following table presents the activity in net accumulated other comprehensive income (loss)
for the periods indicated:
(In thousands)
Balance at January 1, 2015
Period change, net of tax
Balance at December 31, 2015
Period change, net of tax
Balance at December 31, 2016
Period change, net of tax
Balance at December 31, 2017
Unrealized Gains
(Losses) on
Investments
Available-for-Sale
Defined Benefit
Pension Plan
Total
8,078
$
(1,512)
6,566
(4,924)
1,642
(955)
687
$
(8,901)
1,038
(7,863)
(393)
(8,256)
712
(7,544)
$
$
(823)
(474)
(1,297)
(5,317)
(6,614)
(243)
(6,857)
$
$
103
The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income (loss) for the periods indicated:
(In thousands)
Unrealized gains/(losses) on investments available-for-sale
Affected line item in the Statements of Income:
Investment securities gains
Income before taxes
Tax expense
Net income
Amortization of defined benefit pension plan items
Affected line item in the Statements of Income:
Recognized actuarial gain (loss) (1)
Income before taxes (benefit)
Tax expense (benefit)
Net income (loss)
Year Ended December 31,
2017
2016
2015
$
$
$
$
1,273
1,273
504
769
(1,181)
(1,181)
(467)
(714)
$
$
$
$
1,932
1,932
770
1,162
(651)
(651)
(258)
(393)
$
$
$
$
36
36
14
22
1,736
1,736
698
1,038
(1)This amount is included in the computation of net periodic benefit cost, see Note 13
NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND DERIVATIVES
In the normal course of business, the Company has various outstanding credit commitments that are not reflected in the financial statements. These commitments are made
to satisfy the financing needs of the Company's clients. The associated credit risk is controlled by subjecting such activity to the same credit and quality controls as exist for
the Company's lending and investing activities. The commitments involve diverse business and consumer customers and are generally well collateralized. Collateral held
varies, but may include residential real estate, commercial real estate, property and equipment, inventory and accounts receivable. Commitments do not necessarily
represent future cash requirements as a portion of the commitments have some reduced likelihood of being exercised. Additionally, many of the commitments are subject to
annual reviews, material change clauses or requirements for inspections prior to draw funding that could result in a curtailment of the funding commitments.
A summary of the financial instruments with off-balance sheet credit risk is as follows at December 31 for the years indicated:
(In thousands)
Commercial real estate development and construction
Residential real estate-development and construction
Real estate-residential mortgage
Lines of credit, principally home equity and business lines
Standby letters of credit
Total Commitments to extend credit and available credit lines
2017
2016
$
$
390,646
$
130,751
18,238
1,044,949
62,937
1,647,521
$
334,552
97,524
22,970
949,939
68,748
1,473,733
The Company has entered into interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs. These swaps qualify as derivatives, but are
not designated as hedging instruments. Interest rate swap contracts involve the risk of dealing with counterparties and their ability to meet contractual terms. When the fair
value of a derivative instrument contract is positive, this generally indicates that the counterparty or customer owes the Company, and results in credit risk to the Company.
When the fair value of a derivative instrument contract is negative, the Company owes the customer or counterparty and therefore, has no credit risk. The swap positions are
offset to minimize the potential impact on the Company’s financial statements. Credit risk exists if the borrower’s collateral or financial condition indicates that the
underlying collateral or financial condition of the borrower makes it probable that amounts due will be uncollectible. Any amounts due to the Company will be expected to
be collected from the borrower. Management reviews this credit exposure on a monthly basis. At December 31, 2017 and 2016, all loans associated with the swap
agreements were determined to be “pass” rated credits as provided by regulatory guidance and therefore no component of credit loss was factored into the valuation of the
swaps. A summary of the Company’s interest rate swaps at December 31 for the years indicated is included in the following table:
104
(Dollars in thousands)
Interest Rate Swap Agreements:
Pay Fixed/Receive Variable Swaps
Pay Variable/Receive Fixed Swaps
Total Swaps
(Dollars in thousands)
Interest Rate Swap Agreements:
Pay Fixed/Receive Variable Swaps
Pay Variable/Receive Fixed Swaps
Total Swaps
Notional
Amount
Estimated
Fair Value
2017
Years to
Maturity
Receive
Rate
Pay
Rate
$
$
$
$
8,894
8,894
17,788
Notional
Amount
9,433
9,433
18,866
$
$
$
$
(707)
707
-
5.2
5.2
5.2
2.54 %
5.42 %
3.98 %
5.42 %
2.54 %
3.98 %
Estimated
Fair Value
2016
Years to
Maturity
Receive
Rate
Pay
Rate
(1,010)
1,010
-
6.3
6.3
6.3
1.86 %
5.38 %
3.62 %
5.38 %
1.86 %
3.62 %
The estimated fair value of the swaps at December 31 for the periods indicated in the table above were recorded in other assets and other liabilities. The associated net gains
and losses on the swaps are recorded in other non-interest income.
NOTE 19 - LITIGATION
The Company and its subsidiaries are subject in the ordinary course of business to various pending or threatened legal proceedings in which claims for monetary damages
are asserted. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these legal matters will have a material
adverse effect on the Company’s financial condition, operating results or liquidity.
In 2014, as a result of an adverse jury verdict the Company accrued $ 6.5 million for litigation expenses associated with the actions of an employee from an institution that
was acquired in 2012. During 2015, as a result of a settlement of all claims, including claims for a contribution from its insurer relating to this litigation, the Company
reversed $ 4.5 million in previously accrued litigation expenses.
NOTE 20 – FAIR VALUE
Generally accepted accounting principles provide 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 on residential mortgage loans held for sale. The fair value option on residential mortgage loans
allows the recognition of gains on sale of mortgage loans to more accurately reflect the timing and economics of the transaction.
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;
105
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.
Changes to interest rates may result in changes in the cash flows due to prepayments or extinguishments. Accordingly, this could result in higher or lower measurements of
the fair values.
Assets and Liabilities
Mortgage loans held for sale
Mortgage loans held for sale are valued based on quotations from the secondary market for similar instruments and are classified as Level 2 of the fair value hierarchy.
Investments available-for-sale
U.S. government agencies and mortgage-backed securities
Valuations are based on active market data and use of evaluated broker pricing models that vary based by asset class and includes available trade, bid, and other
market information. Generally, the methodology includes broker quotes, proprietary models, descriptive terms and conditions databases coupled with extensive
quality control programs. Multiple quality control evaluation processes review available market, credit and deal level information to support the evaluation of the
security. If there is a lack of objectively verifiable information available to support the valuation, the evaluation of the security is discontinued. Additionally,
proprietary models and pricing systems, mathematical tools, actual transacted prices, integration of market developments and experienced evaluators are used to
determine the value of a security based on a hierarchy of market information regarding a security or securities with similar characteristics. The Company does not
adjust the quoted price for such securities. Such instruments are generally classified within Level 2 of the fair value hierarchy.
State and municipal securities
Proprietary valuation matrices are used for valuing all tax-exempt municipals that can incorporate changes in the municipal market as they occur. Market
evaluation models include the ability to value bank qualified municipals and general market municipals that can be broken down further according to insurer, credit
support, state of issuance and rating to incorporate additional spreads and municipal curves. Taxable municipals are valued using a third party model that
incorporates a methodology that captures the trading nuances associated with these bonds. Such instruments are generally classified within Level 2 of the fair value
hierarchy.
Trust preferred securities
In active markets, these types of instruments are valued based on quoted market prices that are readily accessible at the measurement date and are classified within
Level 1 of the fair value hierarchy. Positions that are not traded in active markets or are subject to transfer restrictions are valued or 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 3 – Investments. Positions that are not traded in active
markets or are subject to transfer restrictions are classified within Level 3 of the fair value hierarchy.
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 in order to arrive at a fair market value. These
characteristics classify interest rate swap agreements as Level 2.
106
Assets Measured at Fair Value on a Recurring Basis
The following tables set forth the Company’s financial assets and liabilities at the December 31 for the years 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:
(In thousands)
Assets
Residential mortgage loans held for sale
Investments available-for-sale:
U.S. government agencies
State and municipal
Mortgage-backed
Corporate debt
Trust preferred
Marketable equity securities
Interest rate swap agreements
Liabilities
Interest rate swap agreements
(In thousands)
Assets
Residential mortgage loans held for sale
Investments available-for-sale:
U.S. government agencies
State and municipal
Mortgage-backed
Corporate debt
Trust preferred
Marketable equity securities
Interest rate swap agreements
Liabilities
Interest rate swap agreements
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
2017
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
$
-
-
-
-
-
-
-
-
$
9,848
$
-
$
9,848
106,568
312,253
300,040
-
-
212
707
-
-
-
9,432
1,002
-
-
106,568
312,253
300,040
9,432
1,002
212
707
-
$
(707)
$
-
$
(707)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
2016
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
-
-
-
-
-
-
-
-
$
13,222
$
121,790
287,684
312,711
-
-
1,223
1,010
-
-
-
-
9,134
1,012
-
-
Total
$
13,222
121,790
287,684
312,711
9,134
1,012
1,223
1,010
-
$
(1,010)
$
-
$
(1,010)
107
$
$
The fair value of investments transferred or that are purchased and placed in Level 3 is estimated by discounting the expected future cash flows using the current rates for
investments with similar credit ratings and similar remaining maturities. Expected cash flows were projected based on contractual cash flows.
The following table provides activity of assets reported as Level 3 for the period indicated:
(In thousands)
Investments available-for-sale:
Balance at January 1, 2017
Sales of Level 3 assets
Total unrealized gains included in accumulated other comprehensive loss
Balance at December 31, 2017
Significant
Unobservable
Inputs
(Level 3)
$
$
10,146
(158)
446
10,434
Assets Measured at Fair Value on a Nonrecurring Basis
The following table sets forth the Company’s financial assets subject to fair value adjustments (impairment) on a nonrecurring basis at December 31 for the year indicated
that 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:
(In thousands)
Impaired loans (1)
Other real estate owned
Total
$
$
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
2017
Significant
Unobservable
Inputs (Level 3)
Total
Total Losses
-
-
-
$
$
-
-
-
$
$
8,474
2,253
10,727
$
$
8,474
2,253
10,727
$
$
(11,806)
(158)
(11,964)
(1) Amounts represent the fair value of collateral for impaired loans allocated to the allowance for loan losses. Fair values are determined using actual market prices
(Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).
(In thousands)
Impaired loans (1)
Other real estate owned
Total
$
$
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
Significant
Other
Observable
Inputs (Level 2)
2016
Significant
Unobservable
Inputs (Level 3)
Total
Total Losses
-
-
-
$
$
-
-
-
$
$
8,981
1,911
10,892
$
$
8,981
1,911
10,892
$
$
(10,600)
(107)
(10,707)
(1) Amounts represent the fair value of collateral for impaired loans allocated to the allowance for loan losses. Fair values are determined using actual market prices
(Level 2), independent third party valuations and borrower records, discounted as appropriate (Level 3).
At December 31, 2017, impaired loans totaling $20.8 million were written down to fair value of $16.8 million as a result of specific loan loss allowances of $4.0 million
associated with the impaired loans which was included in the allowance for loan losses. Impaired loans totaling $24.1 million were written down to fair value of $19.3
million at December 31, 2016 as a result of specific loan loss allowances of $4.8 million associated with the impaired loans.
108
Loan impairment is measured using 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. 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 factors identified above. Valuation techniques are consistent with those techniques applied in prior periods.
Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value.
The estimated fair value for other real estate owned included in Level 3 is determined by independent market based appraisals and other available market information, less
cost to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial
recognition, the Company records the OREO as a non-recurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.
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.
109
The carrying amounts and fair values of the Company’s financial instruments at December 31 for the year indicated are presented in the following table:
(In thousands)
Financial Assets
Other equity securities
Loans, net of allowance
Other assets
Financial Liabilities
Time deposits
Securities sold under retail repurchase agreements and
federal funds purchased
Advances from FHLB
(In thousands)
Financial Assets
Investments held-to-maturity and other equity securities
Loans, net of allowance
Other assets
Financial Liabilities
Time deposits
Securities sold under retail repurchase agreements and
federal funds purchased
Advances from FHLB
Subordinated debentures
2017
Estimated
Fair
Value
Carrying
Amount
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Fair Value Measurements
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
$
$
$
$
45,518
$
4,268,991
95,730
45,518
4,320,719
95,730
688,951
$
684,139
119,359
765,833
119,359
769,860
$
$
2016
Estimated
Fair
Value
Carrying
Amount
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
46,094
$
3,883,741
93,328
46,094
3,933,700
93,328
586,039
$
584,868
125,119
790,000
30,000
125,119
800,756
29,985
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
45,518
$
-
95,730
684,139
$
119,359
769,860
$
$
46,094
$
-
93,328
584,868
$
125,119
800,756
-
Fair Value Measurements
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
-
4,320,719
-
-
-
-
-
3,933,700
-
-
-
-
29,985
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: The carrying amounts of cash and cash equivalents approximate their fair value and have been excluded from the table above.
Investments: The fair value of marketable securities is based on quoted market prices, prices quoted for similar instruments, and prices obtained from independent pricing
services.
Loans: For certain categories of loans, such as mortgage, installment and commercial loans, the fair value is estimated by discounting the expected future cash flows using
the current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities. Expected cash flows were projected based
on contractual cash flows, adjusted for estimated prepayments.
Accrued interest receivable: The carrying value of accrued interest receivable approximates fair value due to the short-term duration and has been excluded from the table
above.
Other assets: The investment in bank-owned life insurance represents the cash surrender value of the policies at December 31, 2017 and 2016, respectively, as determined
by each insurance carrier. The carrying value of accrued interest receivable approximates fair values due to the short-term duration.
110
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.
Short-term borrowings: The carrying values of short-term borrowings, including overnight, securities sold under agreements to repurchase and federal funds purchased
approximates the fair values due to the short maturities of those instruments.
Long-term borrowings: 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. The Company's credit risk is not material to calculation of fair value
because these borrowings are collateralized. The Company classifies advances from the Federal Home Loan Bank of Atlanta within Level 2 of the fair value hierarchy since
the fair value of such borrowings is based on rates currently available for borrowings with similar terms and remaining maturities. Subordinated debentures were classified
as Level 3 in the fair value hierarchy due to the lack of market activity of such instruments.
Accrued interest payable: The carrying value of accrued interest payable approximates fair value due to the short-term duration and has been excluded from the previous
table.
NOTE 21 – PARENT COMPANY FINANCIAL INFORMATION
Financial statements for Sandy Spring Bancorp, Inc. (Parent Only) for the periods indicated are presented in the following tables:
Statement of Condition
(In thousands)
Assets
Cash and cash equivalents
Investments available-for-sale (at fair value)
Investment in subsidiary
Loan to subsidiary
Other assets
Total assets
Liabilities
Subordinated debentures
Accrued expenses and other liabilities
Total liabilities
Stockholders’ Equity
Common stock
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2017
2016
13,237
9,644
541,062
-
304
564,247
-
431
431
23,996
168,188
378,489
(6,857)
563,816
564,247
$
$
$
$
10,869
10,357
513,083
30,000
515
564,824
30,000
1,252
31,252
23,901
165,871
350,414
(6,614)
533,572
564,824
$
$
$
$
111
Statements of Income
(In thousands)
Income:
Cash dividends from subsidiary
Other income
Total income
Expenses:
Interest
Other expenses
Total expenses
Income before income taxes and equity in undistributed income of subsidiary
Income tax expense (benefit)
Income before equity in undistributed income of subsidiary
Equity in undistributed income of subsidiary
Net income
Statements of Cash Flows
(In thousands)
Cash Flows from Operating Activities:
Year Ended December 31,
2017
2016
2015
$
$
25,420
1,832
27,252
12
970
982
26,270
331
25,939
27,270
53,209
$
$
43,975
2,476
46,451
944
1,139
2,083
44,368
78
44,290
3,960
48,250
$
$
42,580
995
43,575
899
1,123
2,022
41,553
(308)
41,861
3,494
45,355
Year Ended December 31,
2017
2016
2015
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
53,209
$
48,250
$
45,355
Equity in undistributed income-subsidiary
Decrease in receivable from subsidiary bank
Share based compensation expense
Tax benefit from stock options exercised
Other-net
Net cash provided by operating activities
Cash Flows from Investing Activities:
Proceeds (purchases) of investment available-for-sale
Net cash provided/ (used) by investing activities
Cash Flows from Financing Activities:
Retirement of subordinated debt
Proceeds from issuance of common stock
Stock tendered for payment of withholding taxes
Repurchase of common stock
Dividends paid
Net cash used by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(27,270)
30,000
2,164
-
(4,028)
54,075
3,179
3,179
(30,000)
1,200
(952)
-
(25,134)
(54,886)
2,368
10,869
13,237
$
(3,960)
-
2,139
125
3,213
49,767
(7,000)
(7,000)
(5,000)
1,580
(683)
(13,273)
(23,676)
(41,052)
1,715
9,154
10,869
$
(3,494)
-
1,979
350
10
44,200
(2,600)
(2,600)
-
1,174
(687)
(22,624)
(22,397)
(44,534)
(2,934)
12,088
9,154
$
112
NOTE 22 – REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
The Company and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established and defined by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total,
Tier 1 and Common Equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 2017 and 2016, the capital levels of the
Company and the Bank substantially exceeded all applicable capital adequacy requirements.
As of December 31, 2017, the most recent notification from the Bank’s primary regulator categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's
category.
The Company's and the Bank's actual capital amounts and ratios at December 31 for the years indicated are presented in the following table :
113
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Actual
For Capital
Adequacy Purposes
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
As of December 31, 2017:
Total Capital to risk-weighted assets
Company
Sandy Spring Bank
Tier 1 Capital to risk-weighted assets
Company
Sandy Spring Bank
Common Equity Tier 1 Capital to risk-
weighted assets
Company
Sandy Spring
Tier 1 Leverage
Company
Sandy Spring Bank
As of December 31, 2016:
Total Capital to risk-weighted assets
Company
Sandy Spring Bank
Tier 1 Capital to risk-weighted assets
Company
Sandy Spring Bank
Common Equity Tier 1 Capital to risk-
weighted assets
Company
Sandy Spring
Tier 1 Leverage
Company
Sandy Spring Bank
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
531,070
508,514
485,814
463,257
485,814
463,257
485,814
463,257
529,990
508,593
485,923
434,526
455,923
434,526
485,923
434,526
11.85 %
11.38 %
10.84 %
10.37 %
10.84 %
10.37 %
9.24 %
8.82 %
12.80 %
12.33 %
11.74 %
10.53 %
11.01 %
10.53 %
10.14 %
9.09 %
114
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
358,501
357,352
268,875
268,014
201,657
201,011
210,407
210,006
331,177
330,023
248,383
247,517
186,287
185,638
191,776
191,304
8.00 %
8.00 %
6.00 %
6.00 %
4.50 %
4.50 %
4.00 %
4.00 %
8.00 %
8.00 %
6.00 %
6.00 %
4.50 %
4.50 %
4.00 %
4.00 %
$
$
$
$
$
$
$
$
N/A
446,690
N/A
357,352
N/A
290,349
N/A
262,508
N/A
412,529
N/A
330,023
N/A
268,144
N/A
239,130
N/A
10.00 %
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
N/A
10.00 %
N/A
8.00 %
N/A
6.50 %
N/A
5.00 %
N OTE 23 - SEGMENT REPORTING
Currently, the Company conducts business in three operating segments—Community Banking, Insurance and Investment Management. Each of the operating segments is a
strategic business unit that offers different products and services. The Insurance and Investment Management segments were businesses that were acquired in separate
transactions where management of acquisition was retained. The accounting policies of the segments are the same as those of the Company. However, the segment data
reflect 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. Parent company income is included in the Community Banking segment, as the majority of effort of these functions
is 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. Non-cash charges associated with amortization of
intangibles related to the acquired entities was not significant for the years ended December 31, 2017, 2016 and 2015, 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 Sandy Spring Insurance, 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 associated with amortization of intangibles related to the acquired entities was not significant for the years ended
December 31, 2017, 2016 and 2015, respectively.
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 $1.4 billion in
assets under management. Major revenue sources include non-interest income earned on the above services. Expenses include personnel and support charges. Non-cash
charges associated with amortization of intangibles related to the acquired entities was not significant for the years ended December 31, 2017, 2016 and 2015, respectively.
115
Information for the operating segments and reconciliation of the information to the consolidated financial statements for the years ended December 31 is presented in the
following tables:
(In thousands)
Interest income
Interest expense
Provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Income tax expense
Net income
Assets
(In thousands)
Interest income
Interest expense
Provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Income tax expense
Net income
Assets
(In thousands)
Interest income
Interest expense
Provision (credit) for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Income tax expense
Net income
Assets
Community
Banking
Insurance
2017
Investment
Mgmt.
Inter-Segment
Elimination
Total
$
$
$
$
$
$
$
$
$
194,798
26,039
2,977
37,447
119,607
83,622
33,684
49,938
5,446,056
Community
Banking
170,556
21,012
5,546
38,769
114,368
68,399
22,337
46,062
5,092,283
Community
Banking
158,313
20,119
5,371
53,398
122,183
64,038
20,710
43,328
4,656,573
$
$
$
$
$
$
$
$
$
2
-
-
6,233
5,533
702
(399)
1,101
8,873
Insurance
3
-
-
5,418
5,097
324
130
194
7,732
Insurance
1
-
-
5,516
5,189
328
141
187
5,542
116
$
$
$
$
$
$
$
$
$
7
-
-
8,335
4,731
3,611
1,441
2,170
13,126
$
$
$
(8)
(8)
-
(772)
(772)
-
-
-
(21,380)
2016
Investment
Mgmt.
Inter-Segment
Elimination
5
-
-
7,568
4,306
3,267
1,273
1,994
13,650
$
$
$
(8)
(8)
-
(713)
(713)
-
-
-
(22,282)
2015
Investment
Mgmt.
Inter-Segment
Elimination
4
-
-
7,104
4,092
3,016
1,176
1,840
12,658
$
$
$
(6)
(6)
-
(16,117)
(16,117)
-
-
-
(19,393)
$
$
$
$
$
$
$
$
$
194,799
26,031
2,977
51,243
129,099
87,935
34,726
53,209
5,446,675
Total
170,556
21,004
5,546
51,042
123,058
71,990
23,740
48,250
5,091,383
Total
158,312
20,113
5,371
49,901
115,347
67,382
22,027
45,355
4,655,380
NOTE 24 – QUARTERLY FINANCIAL RESULTS (UNAUDITED)
A summary of selected consolidated quarterly financial data for the years ended December 31 is provided in the following tables:
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Basic net income per share
Diluted net income per share
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Basic net income per share
Diluted net income per share
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2017
$
$
$
$
$
$
$
$
45,958
5,705
40,253
194
12,632
29,981
22,710
7,598
15,112
0.63
0.63
First
Quarter
41,653
5,531
36,122
1,236
13,363
32,317
15,932
5,119
10,813
0.45
0.45
117
$
$
$
$
$
$
$
$
48,576
6,250
42,326
1,322
13,571
32,868
21,707
6,966
14,741
0.61
0.61
2016
Second
Quarter
41,803
5,071
36,732
2,957
12,751
30,871
15,655
5,008
10,647
0.45
0.44
$
$
$
$
$
$
$
$
49,589
6,892
42,697
934
12,746
31,191
23,318
8,229
15,089
0.62
0.62
Third
Quarter
42,857
5,126
37,731
781
12,584
29,326
20,208
6,734
13,474
0.56
0.56
$
$
$
$
$
$
$
$
50,676
7,184
43,492
527
12,294
35,059
20,200
11,933
8,267
0.34
0.34
Fourth
Quarter
44,243
5,276
38,967
572
12,344
30,544
20,195
6,879
13,316
0.55
0.55
NOTE 25 – 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 $452 million in the aggregate, based on the Company’s volume-weighted average share price of $39.5051. Volume-weighted average share price represents a
volume-weighted average price of the Company’s common stock on the Nasdaq Global Select Market, for the twenty trading day period ending on the fifth trading day
before the closing of the acquisition. 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.
The Company issued an aggregate of 11,446,441 shares of the Company’s common stock in the transaction. At the effective date of the acquisition, Sandy Spring
shareholders owned approximately 67.7% of the combined company and WashingtonFirst’s shareholders owned approximately 32.3% of the combined company.
WashingtonFirst was 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. Due to complexity of the fair value analysis and relatively short time frame
between the Acquisition Date and financial statements issuance date, the valuation of acquired assets and assumed liabilities was not final as of the financial statements
issuance date. The provisional amount of goodwill recognized was approximately $264 million. The estimated fair values of the acquired assets and assumed liabilities will
be 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. We anticipate to finalize the valuation by the end of the first quarter of 2018.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Fourth Quarter 2017 Changes In Internal Controls Over Financial Reporting
No change occurred during the fourth quarter of 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Disclosure Controls and Procedures
As required by SEC rules, the Company’s management evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) as of December 31, 2017. The Company’s chief executive officer and chief financial officer participated in the evaluation. Based on this
evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of
December 31, 2017.
Management’s annual report on internal control over financial reporting is located on page 59 of this report.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
118
The material labeled “Information About Nominees and Incumbent Directors,” “Corporate Governance and Other Matters,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Shareholder Proposals and Communications,” and “Report of the Audit Committee” in the Proxy Statement is incorporated in this Report by reference.
Information regarding executive officers is included under the caption “Executive Officers” on page 14 of this Report.
Item 11. EXECUTIVE COMPENSATION
The material labeled "Corporate Governance and Other Matters," "Compensation Discussion and Analysis," and "Compensation Committee Report" in the Proxy Statement
is incorporated in this Report by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The material labeled “Owners of More than 5% of Bancorp’s Common Stock” and, "Stock Ownership of Directors and Executive Officers" in the Proxy Statement is
incorporated in this Report by reference. Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference from “Equity
Compensation Plans” on page 27.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The material labeled “Director Independence” and "Transactions and Relationships with Management" in the Proxy Statement is incorporated in this Report by reference.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The material labeled “Audit and Non-Audit” Fees in the Proxy Statement is incorporated in this Report by reference.
PART IV.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following financial statements are filed as a part of this report:
Consolidated Statements of Condition at December 31, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2017, 2016 and 2015
Notes to the Consolidated Financial Statements
Reports of Registered Public Accounting Firm
All financial statement schedules have been omitted, as the required information is either not applicable or included in the Consolidated Financial Statements or related
Notes.
119
Exhibit No.
3(a)
Description
Articles of Incorporation of Sandy Spring Bancorp, Inc., as amended (incorporated by reference to Exhibit 3.1 to Form 10-Q for the quarter
ended June 30, 1996, SEC File No. 0-19065)
3(b)
3(c)
4(a)
10(a)*
10(b)*
10(c)*
10(d)*
10(e)*
10(f)*
10(g)*
10(h)*
10(i)*
10(j)*
10(k)*
10(l)*
10(m)*
Articles of Amendment to the Articles of Incorporation of Sandy Spring Bancorp, Inc. (incorporated by reference to Exhibit 3(b) to Form 10-K
for the year ended December 31, 2011, SEC File No. 0-19065)
Bylaws of Sandy Spring Bancorp, Inc. (incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-3, SEC File No. 333-
222910)
No long-term debt instrument issued by the Company exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii)
of Item 601(b) of Regulation S-K, the Company will furnish the SEC copies of all long-term debt instruments and related agreements upon
request.
Sandy Spring Bancorp, Inc. 2005 Omnibus Stock Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 27, 2005, SEC File
No. 0-19065)
Form of Director Fee Deferral Agreement, August 26, 1997, as amended (incorporated by reference to Exhibit 10(h) to Form 10-K for the year
ended December 31, 2003, SEC File No. 0-19065)
Form of Amendment to Directors’ Fee Deferral Agreement (incorporated by reference to Exhibit 10(o) to Form 10-K for the year ended
December 31, 2008, SEC File No. 0-19065)
Sandy Spring Bank Directors’ Deferred Fee Plan (incorporated by reference to Exhibit 10(d) to Form 10-K for the year ended December 31,
2016, SEC File No. 0-19065)
Employment Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Philip J. Mantua (incorporated by reference to
Exhibit 10.1 to Form 8-K filed on January 17, 2012, SEC File No. 0-19065)
Employment Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Daniel J. Schrider (incorporated by reference to
Exhibit 10(h) to Form 10-K for the year ended December 31, 2008, SEC File No. 0-19065)
Form of Sandy Spring National Bank of Maryland Officer Group Term Replacement Plan (incorporated by reference to Exhibit 10(r) to Form 10-
K for the year ended December 31, 2001, SEC File No. 0-19065)
Sandy Spring Bancorp, Inc. Directors’ Stock Purchase Plan (incorporated by reference to Exhibit 4 to Registration Statement on Form S-8, File
No. 333-166808)
Sandy Spring Bank Executive Incentive Retirement Plan (incorporated by reference to Exhibit 10(v) to Form 10-K for the year ended December
31, 2007, SEC File No. 0-19065)
Sandy Spring Bancorp, Inc. 2011 Employee Stock Purchase Plan (incorporated by reference to Appendix A of the Definitive Proxy Statement
filed on March 28, 2011, SEC File No. 0-19065)
Change in Control Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and R. Louis Caceres (incorporated by reference
to Exhibit 10(m) to Form 10-K for the year ended December 31, 2011, SEC File No. 0-19065)
Employment Agreement by and among Sandy Spring Bancorp, Inc., Sandy Spring Bank, and Joseph J. O’Brien, Jr. (incorporated by reference to
Exhibit 10.2 to Form 8-K filed on January 17, 2012, SEC File No. 0-19065)
Second Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Daniel J. Schrider dated January
1, 2009 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065)
120
10(n)*
10(o)*
10(p)*
10(q)*
10(r)*
10(s)*
10(t)*
10(u)*
21
23(a)
31(a)
31(b)
32(a)
32(b)
101
Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Philip J. Mantua dated January 13, 2012
(incorporated by reference to Exhibit 10.2 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065)
Amendment to Employment Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Joseph J. O’Brien, Jr. dated January 13,
2012 (incorporated by reference to Exhibit 10.3 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065)
Amendment to Change in Control Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and R. Louis Caceres dated March 9,
2012 (incorporated by reference to Exhibit 10.4 to Form 8-K filed on March 7, 2013, SEC File No. 0-19065)
Change in Control Agreement Between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Ronald E. Kuykendall dated March 7, 2013
(incorporated by reference to Exhibit 10(t) to Form 10-K for the year ended December 31, 2013, SEC File No. 0-19065)
Sandy Spring Bancorp, Inc. 2015 Omnibus Incentive Plan (incorporated by reference to Appendix A of the Definitive Proxy Statement filed on
March 31, 2015, SEC File No. 0-19065)
Separation and Consulting Agreement by and between Sandy Spring Bancorp, Inc., Sandy Spring Bank and Shaza L. Andersen dated December
29, 2017 (incorporated by reference to Exhibit 10.1 to Form 8-K filed on January 2, 2018, SEC File No. 0-19065)
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective October 1, 2014 between WashingtonFirst Bank and Joseph S.
Bracewell (incorporated by reference to Exhibit 10.17 to Form 8-K filed by WashingtonFirst Bankshares, Inc. on October 17, 2014, SEC File No.
001-35768)
WashingtonFirst Bank Supplemental Executive Retirement Agreement effective October 1, 2014 between WashingtonFirst Bank and Shaza L.
Andersen (incorporated by reference to Exhibit 10.13 to Form 8-K filed by WashingtonFirst Bankshares, Inc. on April 29, 2014, SEC File No.
001-35768)
Subsidiaries
Consent of Ernst and Young LLP
Rule 13a-14(a)/15d-14(a) Certification
Rule 13a-14(a)/15d-14(a) Certification
18 U.S.C. Section 1350 Certification
18 U.S.C. Section 1350 Certification
The following materials from the Sandy Spring Bancorp, Inc. Annual Report on Form 10-K for the year ended December 31, 2017 formatted in
Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition; (ii) the Consolidated Statements of Income;
(iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements
of Changes in Stockholders’ Equity; and (vi) related notes.
* Management Contract or Compensatory Plan or Arrangement filed pursuant to Item 15(b) of this Report.
121
Item 16. FORM 10-K SUMMARY
None.
122
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SANDY SPRING BANCORP, INC.
(Registrant)
By:
/s/ Daniel J. Schrider
Daniel J. Schrider
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as of February 23, 2018.
Principal Executive Officer and Director:
/s/ Daniel J. Schrider
Daniel J. Schrider
President and Chief Executive Officer
Principal Financial and Accounting Officer:
/s/ Philip J. Mantua
Philip J. Mantua
Executive Vice President and Chief Financial Officer
Signature
/s/ Shaza L. Andersen
Shaza L. Andersen
/s/ Joseph S. Bracewell
Joseph S. Bracewell
/s/ Ralph F. Boyd, Jr.
Ralph F. Boyd, Jr.
/s/ Mark E. Friis
Mark E. Friis
/s/ Robert E. Henel, Jr.
Robert E. Henel, Jr.
/s/ Pamela A. Little
Pamela A. Little
/s/ James J. Maiwurm
James J. Maiwurm
/s/ Mark C. Michael
Mark C. Michael
/s/ Gary G. Nakamoto
Gary G. Nakamoto
/s/ Robert L. Orndorff
Robert L. Orndorff
/s/ Joe R. Reeder
Joe R. Reeder
/s/ Craig A. Ruppert
Craig A. Ruppert
/s/ Mona Abutaleb Stephenson
Mona Abutaleb Stephenson
/s/ Dennis A. Starliper
Dennis A. Starliper
Title
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
123
124
Exhibit 3(c)
BYLAWS
OF
SANDY SPRING BANCORP, INC.
PRINCIPAL OFFICE
The principal office of Sandy Spring Bancorp, Inc. (herein the “Corporation”) shall be at 17801 Georgia Avenue, Olney, Maryland,
20832.
MEETING OF SHAREHOLDERS
Place of Meetings. All annual and special meetings of shareholders shall be held at the principal office of the Corporation or at such
other place within or without the State of Maryland as the Board of Directors may determine and as designated in the notice of such meeting.
Annual Meeting . A meeting of the shareholders of the Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the Board of Directors may determine.
Special Meetings . Special meetings of the shareholders for any purpose or purposes may be called at any time by the President, the
Chairman of the Board of Directors, or a majority of the Board of Directors in accordance with the provisions of the Corporation’s Articles
of Incorporation, or a special meeting may be called by the Secretary of the Corporation upon the written request of the holders of not less
than twenty-five percent (25 %) of all votes entitled to be cast at the meeting. Such written request shall state the purpose or purposes of the
meeting and the matters proposed to be acted on at the meeting and shall be delivered at the principal office of the Corporation addressed to
the Chairman of the Board of Directors, the President or the Secretary. The Secretary shall inform the shareholders who make the request of
the reasonably estimated costs of preparing and mailing a notice of the meeting and, upon payment of these costs to the Corporation, the
Secretary shall then notify each shareholder entitled to notice of the meeting.
Conduct of Meetings . Annual and special meetings shall be conducted in accordance with the rules and procedures established by
the Board of Directors. The Board of Directors shall designate, when present, either the Chairman of the Board of Directors or the President
to preside at such meetings.
Notice of Meeting . Written or printed notice stating the place, day and hour of the meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called shall be given either personally or by mail by or at the direction of the President,
Chairman of the Board of Directors, Secretary, or Directors calling the meeting, not less than ten (10) days nor more than sixty (60) days
before the date of the meeting to each shareholder of record entitled to vote at such meeting and to each other shareholder entitled to notice
of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder
at his address as it appears on the stock transfer books of the Corporation as of the record date prescribed in Section 6 of this Article II, with
postage thereon prepaid. If a shareholder be present at a meeting, or in writing waives notice thereof before or after the
meeting and such waiver is filed with the records of the meeting of shareholders, notice of the meeting to such shareholder shall be
unnecessary. When any shareholders’ meeting, either annual or special, is adjourned for more than thirty (30) days, notice of the adjourned
meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting
adjourned for thirty (30) or fewer days or of the business to be transacted at such adjourned meeting, other than an announcement at the
meeting at which such adjournment is taken.
Fixing of Record Date . For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of
shareholders, or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination
of shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination
of shareholders. Such date in any case shall be not more than sixty (60) days and, in case of a meeting of shareholders, not less than ten (10)
days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any
adjournment thereof.
Quorum . Unless otherwise provided in the Corporation’s Articles of Incorporation, a majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority
of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time
without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
Proxies . At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly
authorized attorney in fact. All proxies shall be filed with the Secretary of the meeting before being voted. Proxies solicited on behalf of the
management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the Board of
Directors. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy.
Voting . At each election for directors, every shareholder entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided by the Corporation’s Articles of Incorporation, these Bylaws, or the General Laws of the
State of Maryland, a majority of those votes cast by shareholders at a lawful meeting shall be sufficient to pass on any transaction or matter.
Informal Action by Shareholders . Any action required or permitted to be taken at a meeting of shareholders may be taken without a
meeting if a unanimous written consent to the action is signed by each shareholder entitled to vote on the matter and a written waiver of any
rights to dissent is signed by each shareholder entitled to notice but not entitled to vote at the meeting. The unanimous written consent and
the written waiver, if any, shall be filed with the records of the shareholders’ meetings.
Voting of Shares in the Name of Two or More Persons . When ownership of stock stands in the name of two or more persons, in the
absence of written directions to the Corporation to the contrary, at any meeting of the shareholders of the Corporation any one or more of
such shareholders may cast, in person or
by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a
majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority
cannot agree.
Voting of Shares by Certain Holders . Shares standing in the name of another corporation may be voted by any officer, agent or
proxy as the bylaws of such corporation may provide, or, in the absence of such provision, as the Board of Directors of such corporation
may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy,
but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a
receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the
transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such
receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of
the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred.
Treasury shares of its own stock held by the Corporation shall not be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
Inspectors of Election. In advance of any meeting of shareholders, the Board of Directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one
or three. If the Board of Directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If
inspectors of election are not so appointed, the Chairman of the Board of Directors or the President may make such appointment at the
meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the
Board of Directors in advance of the meeting or at the meeting by the Chairman of the Board of Directors or the President.
Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock
and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and
effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the
election or vote with fairness to all shareholders.
Nomination Procedures. The Board of Directors shall act as a nominating committee for selecting the management nominees for
election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the
nominating committee shall deliver written nominations to the Secretary at least twenty (20) days prior to the date of the annual meeting.
Nominations for the election of directors may also be made by any shareholder of the Corporation entitled to vote generally in the
election of directors. Such nominations by a shareholder must be made in writing and delivered to the Secretary not later than ninety (90)
days prior to the month and day one year
subsequent to the date that the proxy materials regarding the last election of directors to the Board of Directors were mailed to shareholders.
Each such notice of nomination by a shareholder must set forth (a) the full name, age and date of birth of each nominee proposed in the
notice, (b) the business and residence addresses and telephone numbers of each such nominee, (c) the educational background and business
experience of each such nominee, including a list of positions held for at least the preceding five years, and (d) a signed representation by
each such nominee that the nominee will timely provide any other information reasonably requested by the Corporation for the purpose of
preparing its disclosures in regard to the solicitation of proxies for the election of directors. The name of each such candidate for director
must be placed in nomination at the annual meeting by a shareholder present in person and the nominee must be present in person at the
meeting for the election of directors. Any vote cast for a person who has not been duly nominated pursuant to this Article II, Section 14,
shall be void.
New Business at Annual Meeting. At an annual meeting of the shareholders, only such business shall be conducted as shall have
been properly brought before the meeting. To be properly brought before an annual meeting, proposals for new business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a
shareholder.
For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the secretary of the Corporation. To be timely, a shareholder’s notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than thirty (30) nor more than ninety (90) days before the date of any such annual
meeting of shareholders; provided, however, that if less than forty-five (45) days’ notice of the date of the meeting is given to shareholders,
such notice by a shareholder must be received by the Secretary not later than the close of business on the fifteenth (15th) day following the
day on which notice of the date of the meeting was mailed to shareholders or two (2) days before the date of the meeting, whichever is
earlier. Each such notice given by a shareholder to the Secretary with respect to business proposals to be brought before a meeting shall set
forth (a) a brief description of the business and the reasons for conducting such business at the meeting, (b) the name and address, as they
appear on the Corporation’s books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation that
are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Shareholder proposals that do
not satisfy the requirements of this Article II, Section 15, may be considered and discussed but not acted upon at an annual meeting.
BOARD OF DIRECTORS
General Powers . The business and affairs of the Corporation shall be under the direction of its Board of Directors. In addition to
other powers specifically set out in these Bylaws or that apply under the General Laws of the State of Maryland, the Board of Directors and
any committees thereof shall have the power to manage and administer the affairs of the Corporation and to do and perform all lawful acts
with respect to the affairs of the Corporation except those that may be specifically reserved to the shareholders under the General Laws of
the State of Maryland. The Board of Directors shall annually elect a Chairman of the Board of Directors and a President from among its
members and shall designate, when present, either the Chairman of the Board of Directors or the President to preside at its meetings.
Qualification of Directors . Each director must be the holder of unencumbered or unhypothecated shares of common stock of the
Corporation having an aggregate par value of $1,000 or a fair market value of $1,000. A director of the Corporation may not serve as
attorney for any other financial institution or bank or savings and loan holding company, and may not be a member of the Board of Directors
of any other financial institution or bank or savings and loan holding company. The requirements shall not apply to a person serving as an
advisory director or a director emeritus.
Age Limitation . No person shall be eligible for election or appointment to the Board of Directors if such person is under twenty-one
(21) or over seventy (70) years of age at the time of his or her election or appointment. No director shall serve beyond the annual meeting of
shareholders immediately following his or her seventieth (70th) birthday. This limitation shall not apply to a person serving as an advisory
director or a director emeritus.
Number, Term and Election . The maximum number of directors is fixed by the Corporation’s Articles of Incorporation and may be
altered only by amendment thereto. The minimum number of directors shall be the minimum required under the General Laws of the State
of Maryland now or hereafter in force. The Board of Directors may, by a vote of a majority of the directors then in office, between annual
meetings of shareholders, increase or decrease the membership of the Board of Directors within such limits, provided that no decrease in the
number of directors shall have the effect of shortening the term of any incumbent director. The Board of Directors shall be classified in
accordance with the provisions of the Corporation’s Articles of Incorporation,
Regular Meetings . The annual meeting of the Board of Directors shall be held without other notice than this Bylaw within two
weeks after the annual meeting of shareholders. The Board of Directors may provide, by resolution, the time and place for the holding of
additional regular meetings without other notice than such resolution.
Special Meetings . Special meetings of the Board of Directors may be called by or at the request of any one director or any two
directors of the Corporation, or by a majority of the directors. The persons authorized to call special meetings of the Board of Directors may
fix any place as the place for holding any special meeting of the Board of Directors called by such persons.
Members of the Board of Directors may participate in special meetings by means of conference telephone or similar communications
equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person.
Notice of Special Meetings . Notice of any special meeting shall be given to each director at least one hour previous thereto. Notice
of a special meeting need not be in writing. Any director may waive notice of any meeting by a writing filed with the Secretary. The
attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business
to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such
meeting.
Quorum . A majority of the directors shall constitute a quorum for the transaction of business at any meeting of the Board of
Directors. If less than such majority is present at a meeting, a majority of the
directors present may adjourn the meeting from time to time. Notice of an adjourned meeting need not be given if the time and place to
which the meeting is adjourned are fixed at the meeting at which the adjournment is taken.
Voting . The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of
Directors, unless the vote of a greater number is required by the Corporation’s Articles of Incorporation, these Bylaws, or the General Laws
of the State of Maryland.
Action by Written Consent . Any action required or permitted to be taken by the Board of Directors, or any committee thereof, at a
meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors and
filed with the Secretary of the Corporation for inclusion hi the corporate minute book.
Resignation . Any director may resign at any time by sending a written notice of such resignation to the principal office of the
Corporation addressed to the Chairman of the Board of Directors, the President, or the Secretary. Unless otherwise specified therein, such
resignation shall take effect upon acceptance thereof by the Board of Directors.
Vacancies . Any vacancy occurring in the Board of Directors shall be filled in accordance with the provisions of the Corporation’s
Articles of Incorporation. The term of such director shall be in accordance with the provisions of the Corporation’s Articles of Incorporation.
Removal of Directors . Any director or the entire Board of Directors may be removed only in accordance with the provisions of the
Corporation’s Articles of Incorporation.
Compensation . Directors, as such, may receive a stated salary for their services. By resolution of the Board of Directors, a
reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting
of the Board of Directors. Members of either standing or special committees may be allowed such compensation for actual attendance at
committee meetings as the Board of Directors may determine. Nothing herein shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving remuneration therefor.
Presumption of Assent . A director of the Corporation who is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the Secretary of the meeting before
the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action.
Advisory Directors and Directors Emeritus. The Board of Directors may by resolution appoint persons to serve as advisory directors,
who may also serve as directors emeritus, and shall have such authority and receive such compensation and reimbursement as the Board of
Directors shall provide. No advisory director or director emeritus shall have the authority to participate by vote in the transaction of
business.
Contracts with Interested Directors. No contract or other transaction between this Corporation and any other corporation shall be
affected by the fact that any director of this Corporation is interested in, or is
a director or officer of, such other corporation, and any director, individually or jointly, may be a party to, or may be interested in, any
contract or transaction of this Corporation or in which this Corporation is interested; and no contract, or other transaction, of this
Corporation with any person, firm, or corporation, shall be affected by the fact that any director of this Corporation is a party to, or is
interested in, such contract, act or transaction, or is in any way connected with such person, firm, or corporation, and every person who may
become a director of this Corporation is hereby relieved from any liability that might otherwise exist from contracting with the Corporation
for the benefit of himself or any firm, association, or corporation in which he may be in any way interested.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, as they may
determine to be necessary or appropriate for the conduct of the business of the Corporation, and may prescribe the duties, constitution and
procedures thereof. The Board of Directors may delegate to an executive committee the power to exercise all the authority of the Board of
Directors in the management of the affairs and property of the Corporation, except such authority as may be specifically reserved to the full
Board of Directors by the General Laws of the State of Maryland. Each committee shall consist of one or more directors of the Corporation.
In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified
from voting, whether or not a quorum exists, may unanimously appoint another member of the Board of Directors to act at the meeting in
the place of the disqualified or absent member.
The Board of Directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to
change the members of, to fill vacancies in, and to discharge any committee of the Board. Any member of any committee of the Board of
Directors may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of
directors at any meeting of the Board called for that purpose.
Officers
Positions . The officers of the Corporation shall be a Chairman of the Board of Directors, a President, one or more Vice Presidents, a
Secretary, a Treasurer, and such other officers as the Board of Directors shall from time to time deem necessary for the conduct of the
business of the Corporation. Any two or more offices may be held by the same person. The Board of Directors may designate one or more
Vice Presidents as Executive Vice President or Senior Vice President. The officers shall have such authority and perform such duties as the
Board of Directors may from time to time authorize or determine by resolution. In the absence of action by the Board of Directors, the
officers shall have such powers and duties as are generally incident to their respective offices.
Election and Term of Office . The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting
of the Board of Directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such
election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and
qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of
an officer, employee or agent shall not of itself create contract rights. The Board of Directors may authorize the Corporation to enter into an
employment contract with any officer in accordance with state law; but no such contract shall impair the right of the Board of Directors to
remove any officer at any time in accordance with Section 4 of this Article V.
Resignation . Any officer may resign at any time by giving written notice to the Chairman of the Board of Directors, the President, or
the Secretary. Any such resignation shall take effect at the time specified therein or, if no time is specified, upon its acceptance by the Board
of Directors.
Removal . Any officer may be removed by vote of a majority of the Board of Directors whenever, in its judgment, the best interests
of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of
the person so removed.
Remuneration. The remuneration of the officers shall be fixed from time to time by the Board of Directors and no officer shall be
prevented from receiving such salary by reason of the fact that he is also a director of the Corporation.
Certificates for Shares and Their Transfer
Certificates for Shares . The shares of the Corporation shall be represented by certificates signed by the Chairman of the Board of
Directors or by the President or a Vice President and by the Treasurer or an assistant treasurer or by the Secretary or an assistant secretary of
the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate
may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an
employee of the Corporation. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have
ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer
at the date of its issue.
Form of Certificates. All certificates representing shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a full statement of the designations, preferences, limitations,
and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares
of each such series so far as the same have been fixed and determined, and the authority of the Board of Directors to fix and determine the
relative rights and preferences of subsequent series.
Each certificate representing shares shall state upon the face thereof: that the Corporation is organized under the laws of the State of
Maryland; the name of the person to whom issued; the number and class of shares; the date of issue; the designation of the series, if any,
which such certificate represents; the par value of each share represented by such certificate, or a statement that the shares are without par
value. Other matters in regard to the form of the certificates shall be determined by the Board of Directors.
Payment for Shares . No certificate shall be issued for any shares until such share is fully paid. The consideration for the issuance of
shares shall be paid in accordance with the provisions of the Corporation’s Articles of Incorporation.
Transfer of Shares . Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority
for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such
authority, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be
made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the
books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.
Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the shareholders entitled to examine the
stock ledger or the books of the Corporation or to vote in person or by proxy at any meeting of shareholders.
Lost Certificates . The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal
representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
Beneficial Owners . The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as
otherwise provided by law.
The fiscal year of the Corporation shall end on the 31 st day of December of each year. The Corporation shall be subject to an annual
audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the Board of Directors.
Fiscal Year; Annual Audit
Subject to the provisions of the Corporation’s Articles of Incorporation and applicable law, the Board of Directors may, at any
regular or special meeting, declare dividends on the Corporation’s outstanding capital stock. Dividends may be paid in cash, in property or
in the Corporation’s own stock.
Dividends
The corporate seal of the Corporation shall be in such form as the Board of Directors shall prescribe.
Corporate Seal
Amendments
In accordance with the Corporation’s Articles of Incorporation, the Board of Directors of the Corporation may repeal, alter, amend or
rescind these Bylaws by a majority vote of the Board of Directors at a legal meeting held in accordance with the provisions of these Bylaws.
In addition, these Bylaws may be repealed, altered, amended or rescinded by the shareholders of the Corporation by vote of not less than
eighty percent (80%) of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) cast at a meeting of the shareholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such meeting).
* * *
SANDY SPRING BANCORP, INC.
FIRST AMENDMENT TO BYLAWS
Article III, Section 5 of Bancorp’s bylaws is hereby deleted in its entirety. The following is inserted in its place:
“Section 5. Regular Meetings. The annual meeting of the Board of Directors shall be held without other notice than this
Bylaw within four weeks after the annual meeting of shareholders. The board of directors may provide, by resolution, the
time and place for the holding of additional regular meetings without other notice than such resolution.”
Approved by the Board of Directors: May 29, 2013.
* * * *
Article III, Section 3 of Bancorp’s bylaws is hereby amended by deleting the same and inserting the following:
SECOND AMENDMENT TO BYLAWS
“Section 3. Age Limitation . No person shall be eligible for election or appointment to the board of directors if such person is
under twenty-one (21) or over seventy-two (72) years of age at the time of his or her election or appointment. No director
shall serve beyond the annual meeting of shareholders immediately following his or her seventy-second (72 nd ) birthday.
This limitation shall not apply to a person serving as an advisory director or a director emeritus.”
Approved by the Board of Directors: January 27, 2016.
* * * *
Article II, Section 5 of Bancorp’s bylaws is hereby amended by deleting the same and inserting the following:
THIRD AMENDMENT TO BYLAWS
“SECTION 5. Notice of Meeting . Not less than ten (10) nor more than ninety (90) days before each shareholders
meeting, the Secretary of the Corporation shall give notice in writing or by electronic transmission of the meeting to each
shareholder entitled to vote at the meeting and each other shareholder entitled to notice of the meeting. The notice shall state
(1) the time of the meeting, the place of the meeting, if any, and the means of remote communication, if any, by which
shareholders and proxy holders may be deemed to be present in person and may vote at the meeting; and (2) the purpose of
the meeting, if the meeting is a special meeting or notice of the purpose is required by any other provision of the General
Laws of the State of Maryland.
Any notice given to a shareholder is effective if given by a single notice in writing or by electronic transmission to all
shareholders who share an address unless the Corporation has received a request from a shareholder in writing or by
electronic transmission that a single notice not be given. If a shareholder be present at a meeting, or in writing waives notice
thereof before or after the meeting and such waiver is filed with the records of the meeting of shareholders, notice of the
meeting to such shareholder shall be unnecessary.
When any shareholders meeting, either annual or special, is adjourned for more than thirty (30) days, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time
and place of any meeting adjourned for thirty (30) or fewer days or of the business to be transacted at such adjourned
meeting, other than an announcement at the meeting at which such adjournment is taken.”
Approved by the Board of Directors: October 26, 2016.
* * * *
Exhibit 10(d)
SANDY SPRING BANK DIRECTORS’ DEFERRED FEE PLAN
Amended and Restated January 1, 2009 Purpose
The purpose of this Sandy Spring Bank Directors’ Deferred Fee Plan (the “Plan”) is to provide a deferred compensation opportunity to
directors of Sandy Spring Bank (the “Bank”). The Plan is intended to be unfunded for tax purposes and to comply with the
requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). This Plan is also the successor to
certain Directors’ Fee Deferral Agreements previously entered into with certain directors (collectively referred to as the “Prior
Agreements”). Specifically, this document (the “409A Program”) amends and restates the Prior Agreements, effective as of January 1,
2005, and it sets forth the terms of the Prior Agreements that are applicable to deferrals that are subject to Section 409A of the Code,
i.e., deferrals (and earnings thereon) credited after December 31, 2004. Other deferrals (i.e., deferrals prior to December 31,2004) under
the Non-Qualified Deferred Compensation Agreements shall be governed by separate documents that set forth the terms of the pre-409A
terms.
Article 1 Definition
Whenever used in this Plan, the following words and phrases shall have the meanings specified:
Bank means Sandy Spring Bank.
Change in Control means a “change in ownership,” a “change in effective control” or a “change in ownership of a substantial portion of
assets,” as such terms are defined for purposes of Section 409A of the Code.
Code means the Internal Revenue Code of 1986, as amended.
Director means a member of the Board of Directors of the Bank.
Deferral Account means the Bank’s accounting of the Participant’s accumulated Deferrals plus accrued earnings.
Deferral Election Form means the Form attached as Exhibit 1.
Deferrals means the amount of Fees that a Participant elects to defer according to this Plan.
Fees means the total director fees payable to a Director. Participant means Director who participates in
the Plan. Effective Date means January 1, 2005.
Plan Year means the calendar year.
Separation from Service means, the Participant’s death or the effective date of the Participant’s “Separation from Service” within the
meaning of Section 409A of the Code.
Article 2 Deferral Election
2.1 Timing of Election; Deferral Amount . A Participant shall make a deferral election under the Plan by filing with
the Bank a signed Deferral Election Form within the deadlines established by the Bank, provided that, except as provided below, in
no event shall such an election be made after the last day of the Plan Year preceding the Plan Year in which the services giving
rise to the Fees to be deferred are to be performed. A Participant may elect to defer up to one hundred (100) percent of Fees
expected to be earned during a Plan Year.
2.2 First Year of Eligibility; Deferral of Bonuses . Notwithstanding Section 2.1 of the Plan, if and to the extent
permitted by the Bank, in the case of the first Plan Year in which a Participant becomes eligible to participate in the Plan, the
Participant may make a deferral election at times other than those permitted above, provided that such election is made no later than
thirty (30) days after the date the Participant becomes eligible to participate in the Plan. Such election will apply only with respect
to Fees attributable to services performed after the date the election is made.
2.3 Election Changes . A Participant may not change his or her deferral election that is in effect for a Plan Year,
unless permitted by the Bank in compliance with Section 409A of the Code.
2.4 Validity of Elections . The Bank reserves the right to determine the validity of all deferral elections made under the
Plan in accordance with the requirements of applicable law, including Section 409A of the Code. If the Bank, in its sole discretion,
determines that an election is not valid under applicable law, the Bank may treat the deferral election as null and void, and cause the
Bank to pay Compensation to the affected Participant without regard to the Participant’s deferral election. By way of example and not
limitation, if the Bank determines that a deferral election should have been made at a time that is earlier than the time it is actually
made (even if such election would otherwise comply with the terms of the Plan), the Bank will have the right to disregard such
election and to have the Bank pay the Compensation to the affected Participant without regard to the Participant’s deferral election.
Article 3 Deferral Account
3.1 Establishing and Crediting . The Bank shall establish a Deferral Account on its books for each participating
Participant and shall credit to the Deferral Account the following amounts:
3.1.1 Deferrals . The Fees deferred by the Participant as of the time the Fees would have otherwise been paid to
the Participant.
3.1.2. Interest . Interest is to be accrued on the account balance at a rate of interest that is equal to 120% of the
long-term Applicable Federal Rate, adjusted monthly, as published each month by the Internal Revenue Service and available at
www.irs.gov .
1
3.2 Statement of Accounts . The Bank shall provide to the Participant, within one hundred twenty (120) days after the
end of each Plan Year, a statement setting forth the Deferral Account balance as of the end of such Plan Year.
3.3 Accounting Device Only . The Deferral Account is solely a device for measuring amounts to be paid under this
Plan. The Deferral Account is not a trust fund of any kind. The Participant is a general unsecured creditor of the Bank for the
payment of benefits. The benefits represent the mere
1
As amended by resolution of the board of directors on February 25, 2009.
promise of the Bank to pay such benefits. The Participant’s rights are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Participant’s creditors.
Article 4 Payment of Benefits
4.1 Separation from Service Benefit . Upon Separation from Service for any reason, the Bank shall pay to the
Participant the benefit described in this Section 4.1 in lieu of any other benefit under the Plan.
4.1.1 Amount of Benefit . The benefit under this Section 4.1 is the Deferral Account balance at the Participant’s
Separation from Service.
4.1.2 Payment of Benefit . The Bank shall pay the benefit under this Section 4.1 to the Participant on the Bank’s
first payroll date after the six month anniversary of the Participant’s Separation from Service.
4.2 Change of Control Benefit . Upon a Change in Control, the Bank shall pay to the Participant the benefit
described in this Section 4.2.
4.2.1 Amount of Benefit . The benefit under this Section 4.2 is the Deferral Account balance at the Change of
Control.
4.2.2 Payment of Benefit . The Bank shall pay the benefit under this Section 4.2 to the Participant in a lump sum
within ten (10) days following a change in control.
4.3 Death During Active Service . If the Participant dies while in active service of the Bank, the Bank shall pay to
the participant’s beneficiary the benefit described in this Section 4.3.
4.3.1 Amount of Benefit . The benefit under this Section 4.3 is the Deferral Account balance at the date of the
Participant’s death.
4.3.2 Payment of Benefit . The Bank shall pay the benefit to the beneficiary in a single lump sum payment
within sixty (60) days of the Participant’s death.
4.4 Unforeseeable Emergency Distribution . Upon the Bank’s determination (following petition by the Participant) that
the Participant has suffered an unforeseeable emergency as described below, the Bank shall (i) terminate the then effective deferral
election of the Participant to the extent permitted under Section 409A of the Code, and (ii) distribute to the Participant all or a
portion of the Deferral Account balance as determined by the Bank, but in no event shall the distribution be greater than the amount
determined by the Bank that is necessary to satisfy the unforeseeable emergency plus amounts necessary to pay taxes reasonably
anticipated as a result of the distribution, after taking into account the extent to which the unforeseeable emergency is or may be
relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant’s assets (to the extent
the liquidation of assets would not itself cause severe financial hardship); provided, however, that such distribution shall be permitted
solely to the extent permitted under Section 409A of the Code. For purposes of this Section, “unforeseeable emergency” means a
severe financial hardship to the Participant resulting from (a) an illness or accident of the Participant, the Participant’s spouse or a
dependent (as defined in Section 152(a) of the Code) of the Participant, (b) a loss of the Participant’s property due to casualty,
or (c) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the
Participant, each as determined to exist by the Bank.
Article 5
Claims and Review Procedures
5.1 Claims Procedure . The Bank shall notify any person or entity that makes a claim against the Agreement (the
“Claimant”) in writing within ninety (90) days of Claimant’s written application for benefits, of his or her eligibility or non-eligibility
for benefits under the Agreement. If the Bank determines that the Claimant is not eligible for benefits or full benefits, the notice shall
set forth (1) the specific reasons for such denial, (2) specific reference to the provisions of the Agreement on which the denial is
based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim and a
description of why it is needed and (4) an explanation of the Agreement’s claims review procedure and other appropriate information
as to the steps to be taken if the Claimant wishes to have the claim reviewed. If the Bank determines that there are special
circumstances requiring additional time to make a decision, the Bank shall notify the Claimant of the special circumstances and the
date by which a decision is expected to be made, and may extend the time for up to ninety (90) days.
5.2 Review Procedure . If the Claimant is determined by the Bank not to be eligible for benefit, or if the Claimant
believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim
reviewed by the Bank by filing a petition for review with the Bank within sixty (60) days after receipt of the notice issued by the
Bank. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or
different benefits. Within sixty (60) days after receipt by the Bank of the petition, the Bank shall afford the Claimant (and counsel,
if any) an opportunity to present his of her position to the Bank verbally or in writing, and the Claimant (or counsel) shall have the
tight to review the pertinent documents. The Bank shall notify the Claimant of its decision in writing within the 60-day period
stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific
provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the 60- day period is not
sufficient, the decision may be deferred for up to another sixty (60) days at the election of the Bank, but notice of this deferral
shall be given to the Claimant.
Article 6 Amendments and Termination
6.1 Termination . Although the Bank anticipates that it will continue the Plan for an indefinite period of time, there is
no guarantee that the Bank will continue the Plan or will not terminate the Plan at any time in the future. Accordingly, the Bank
reserves the right to discontinue its sponsorship of the Plan and/or to terminate the Plan at any time with respect to any or all of the
Participants, by action of its full Board of Directors. The termination of the Plan shall not adversely affect any Participant’s or
beneficiary’s right to receive the payment of any benefits under the Plan as of the date of termination, including the right of the
Participant or beneficiary to be paid Plan benefits accrued through the date of termination in accordance with the Plan terms and the
Participant’s distribution elections in effect at the time of termination.
6.2 Amendment . The Bank may, at any time, amend or modify the Plan in whole or in part, by action of its full
Board of Directors; provided, however, that no amendment or modification shall be effective to decrease or restrict the rights of a
Participant is his or her Deferral Account in existence at the time the amendment or modification is made, including the right to be
paid Plan benefits accrued through the date of the amendment or modification in accordance with the Plan terms and the Participant’s
distribution elections in effect at the time of the amendment or modification.
Article 7 Miscellaneous
7.1 Binding Effect . This Plan shall bind each participating Participant and the Bank and their respective beneficiaries,
survivors, executors, administrators and transferees.
7.2 No Guarantee of Service . This Plan is not a contract for service. It does not give a Participant the right to
remain in the service of the Bank, nor does it interfere with the Bank’s right to replace a Participant. It also does not require a
Participant to remain in the service of the Bank nor interfere with the Participant’s right to terminate service at any time.
7.3 Non-Transferability . Benefits under this Plan cannot be sold, transferred, assigned, pledged, attached or
encumbered in any manner.
7.4 Tax Withholding . The Bank shall withhold any taxes that are required to be withheld from the benefits
provided under this Plan.
7.5 Applicable Law . The Plan and all rights hereunder shall be governed by the laws of Maryland, except to the
extent preempted by federal law.
7.6 Unfunded Arrangement . Each Participant and any beneficiary of such Participant are general unsecured creditors
of the Bank for the payment of benefits under this Plan. The benefits represent the mere promise by the Bank to pay such benefits.
The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
attachment, or garnishment by creditors. Any insurance on a Participant’s life is a general asset of the Bank to which the Participant
and the Participant’s beneficiary have no preferred or secured claim.
7.7 Reorganization . The Bank shall not merge or consolidate into or with another entity, or reorganize, or sell
substantially all of its assets to another entity, firm, or person unless such succeeding or continuing entity, firm, or person agrees to
assume and discharge the obligations of the Bank under this Plan. Upon the occurrence of such event, the term “Bank” as used in
this Plan shall be deemed to refer to the successor or survivor entity.
7.8 Entire Agreement . This Plan constitutes the entire agreement between the Bank and a participating Participant as
to the subject matter hereof. No rights are granted to a Participant by virtue of this Plan other than those specifically set forth
herein.
7.9 Administration . The Board of Directors of the Bank shall have powers which are necessary to administer
this Plan, including but not limited to:
(a) Interpreting the provisions of the Plan;
(b) Establishing and revising the method of accounting for the Plan;
(c) Maintaining a record of benefit payments; and
(d) Establishing rules and prescribing any forms necessary or desirable to administer the Plan.
7.10 Prohibited Acceleration/Distribution Timing . This Section shall take precedence over any other provision of the
Plan to the contrary. No provision of this Plan shall be followed if following the provision would result in the acceleration of the
time or schedule of any payment from the Plan (i) as would require income tax to a Participant prior to the date on which the
amount is distributable to or on behalf of the Participant under
Article 4 or (ii) which would result in penalties to the Participant under
Section 409A of the Code. In addition, if the timing of any distribution election would result in any tax or other penalty (other than
ordinarily payable Federal, state or local income or payroll taxes), which tax or penalty can be avoided by payment of the distribution
at a later time, then the distribution shall be made (or commence, as the case may be) on (or as soon as practicable after) the first
date on which such distributions can be made (or commence) without such tax or penalty.
7.11 Aggregation of Employers . To the extent required under Section 409A of the Code, if the Bank is a member of a
controlled group of corporations or a group of trades or business under common control (as described in Section 414(b) or (c) of the
Code), all members of the group shall be treated as a single employer for purposes of whether there has occurred a Separation from
Service and for any other purposes under the Plan as Section 409A of the Code shall require.
7.12 Designation of Beneficiary(ies) . Each Participant shall have the right to designate a beneficiary or beneficiaries
(including contingent beneficiaries) to receive any benefits payable upon the death of a Participant. No such designation shall be
effective unless completed and submitted in accordance with rules and procedures established by the Bank for this purpose. In the
absence of an effective beneficiary designation, the Participant’s designated beneficiary shall be assumed to be the Participant’s
surviving spouse or, if none, the Participant’s estate.
7.13 Special Transition Rule for Certain Participants . This Plan is also intended as the successor to the Prior
Agreements (for amounts deferred after December 31, 2004). The opening Deferral Account balance of each such Participant who
participates in this Plan shall be equal to the Participant’s account balance under the Prior Agreement as of the date immediately
preceding the Effective Date. Accordingly, a Participant’s first deferral election under this Plan, if any, shall be for the Plan Year
ending December 31, 2009.
7.14 Compliance with Section 409A of the Code . Despite any contrary provision of this Agreement, if, when a
Participant’s service terminates, the Participant is a “specified employee,” as defined in Section 409A of the Code, and if any
payments under this Plan will result in additional tax or interest to the Participant because of Section 409A of the Code, the
Participant shall not be entitled to the such payments until the earliest of (i) the date that is at least six months after termination of
the Participant’s employment for reasons other than the Participant’s death, (ii) the date of the Participant’s death, or (iii) any earlier
date that does not result in additional tax or interest to the Participant under Section 409A of the Code. If any provision of this
Agreement would subject the Participant to additional tax or interest under Section 409A of the Code, the Bank shall reform the
provision. However, the Bank shall maintain to the maximum extent practicable the original intent of the applicable provision without
subjecting the Participant to additional tax or interest.
EXHIBIT 1
SANDY SPRING BANK DIRECTORS’ DEFERRED FEE PLAN
DEFERRAL ELECTION FORM
Deadline for Completion:
PARTICIPANT INFORMATION (Please Print)
Name: Social
Security Number:
Address:
Telephone Number:
ELECTION TO DEFER
I hereby elect to reduce my Compensation to be earned during the period January 1, , through December 31, , by the percentage(s)
and/or amount(s) indicated below. I understand that the amount indicated below will be credited to my Deferral Account under the
Plan.
Bank Board Fees: (up to 100%)
I acknowledge that I have been offered an opportunity to participate in the Plan. I will participate in the Plan in accordance with my
elections on this form.
I understand that any election under this Plan is subject to all of the applicable terms of the Plan. I acknowledge that the election made
herein will continue until the end of the above indicated calendar year, unless subsequently changed by me, pursuant to rules contained
in the Plan. I hereby acknowledge
(a) that my Plan benefits are subject to the claims of the Bank’s creditors should the Bank become bankrupt or insolvent, and (b) that
a copy of the Plan document and has been provided to me. All capitalized terms not defined in this Deferral Election Form shall have
the same meaning as indicated in the Plan.
Date: Signature:
EXHIBIT 2
SANDY SPRING BANK DIRECTORS’ DEFERRED FEE PLAN
BENEFICIARY DESIGNATION
PARTICIPANT INFORMATION (Please Print)
Name: Social
Security Number:
Address:
Telephone Number:
BENEFICIARY DESIGNATION
I hereby revoke any prior designations of death benefit beneficiary/ies under the Plan, and I hereby designate the following
beneficiary/ies to receive any benefit payable on account of my death under the Plan, subject to my right to change this designation
and subject to the terms of the Plan:
A. Primary Beneficiary/ies
Name/Address/Telephone
Relationship to Participant
% of Plan Benefit Date of Birth
Social Security Number
B. Contingent Beneficiary/ies (Will receive indicated portions of Plan benefit if no Primary Beneficiary/ies survive the
Participant)
Name/Address/Telephone
Relationship to Participant
% of Plan Benefit Date of Birth
Social Security Number
I acknowledge that I have been given a copy of the Plan and I agree that the above elections and designations are subject to all of the
terms of the Plan. All capitalized terms not defined in this Benefit Election Form shall have the same meaning as indicated in the
Plan.
Date: Signature:
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries of the Registrant
Name
Sandy Spring Capital Trust II
Sandy Spring Bank
Sandy Spring Insurance Corporation*
The Equipment Leasing Company* (non-operating)
West Financial Services, Inc.*
Sandy Spring Mortgage Corporation* (non-operating)
*Direct subsidiaries of Sandy Spring Bank
Jurisdiction of
Incorporation
Delaware
Maryland
Maryland
Maryland
Maryland
Maryland
Exhibit 23
We consent to the incorporation by reference in the following Registration Statements:
Consent of Independent Registered Public Accounting Firm
(1)
Registration Statement (Form S-8 No. 333-126701) pertaining to the Sandy Spring Bancorp, Inc. 2005 Omnibus Stock Plan,
(2)
(3)
(4)
(5)
Registration Statement (Form S-3 No. 333-166808) pertaining to the Sandy Spring Bancorp, Inc. Director Stock Purchase Plan, as amended and restated,
Registration Statement (Form S-3 No. 333-174664) pertaining to the Sandy Spring Bancorp, Inc. 2011 Employee Stock Purchase Plan,
Registration Statement (Form S-8 No. 333-204746) pertaining to the Sandy Spring Bancorp, Inc. 2015 Omnibus Incentive Plan and Sandy Spring Bank
401(k) Plan;
Registration Statement (Form S-3 No. 333-000000) pertaining to the Sandy Spring Bancorp, Inc. shelf registration.
of our reports dated February 23, 2018, with respect to the consolidated financial statements of Sandy Spring Bancorp, Inc., and the effectiveness of internal control over
financial reporting of Sandy Spring Bancorp, Inc., included in this Annual Report (Form 10-K) of Sandy Spring Bancorp, Inc. for the year ended December 31, 2017.
/s/ Ernst & Young LLP
Tysons, Virginia
February 23, 2018
Exhibit 31 (a)
CERTIFICATION
Rule 13a-14(a) / 15d-14(a) Certifications
I, Daniel J. Schrider, Chief Executive Officer of Sandy Spring Bancorp, Inc. (“Bancorp”), certify that:
1. I have reviewed this annual report on Form 10-K of Sandy Spring Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d--15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 23, 2018 /s/Daniel J. Schrider
Daniel J. Schrider
Chief Executive Officer
Exhibit 31 (b)
CERTIFICATION
I, Philip J. Mantua, Executive Vice President and Chief Financial Officer of Sandy Spring Bancorp, Inc. (“Bancorp”), certify that:
1. I have reviewed this annual report on Form 10-K of Sandy Spring Bancorp, Inc.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d--15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures as of the end of the period covered by this report based upon such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial
reporting.
Date: February 23, 2018 /s/Philip J. Mantua
Philip J. Mantua
Executive Vice President and
Chief Financial Officer
Exhibit 32(a)
18 U.S.C. Section 1350 Certification
I hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that
the accompanying Form 10-K of Sandy Spring Bancorp, Inc. (“Bancorp”) for the period ended December 31, 2017, fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934(15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of Bancorp.
By: /s/ Daniel J. Schrider
Daniel J. Schrider
Chief Executive Officer
Date: February 23, 2018
Exhibit 32(b)
18 U.S.C. Section 1350 Certification
I hereby certify pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that the
accompanying Form 10-K of Sandy Spring Bancorp, Inc. ("Bancorp") for the period ended December 31, 2017, fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and that the information contained in this Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of Bancorp.
By: /s/ Philip J. Mantua
Philip J. Mantua
Executive Vice President and Chief Financial Officer
Date: February 23, 2018