UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from                         to

Commission File Number: 0-19065

Sandy Spring Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Maryland
     
52-1532952
(State of incorporation)
     
(I.R.S. Employer Identification Number)
         
17801 Georgia Avenue, Olney, Maryland
 
20832
 
301-774-6400
(Address of principal office)
 
(Zip Code)
 
(Telephone Number)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.
YES x NO ¨

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

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES ¨ NO x
 
The number of shares of common stock outstanding as of July 18, 2008 is 16,424,746 shares.



SANDY SPRING BANCORP, INC.
INDEX

 
Page
PART I - FINANCIAL INFORMATION
 
   
ITEM 1. FINANCIAL STATEMENTS
 
   
 
Consolidated Balance Sheets at June 30, 2008 (Unaudited) and December 31, 2007
1
     
 
Consolidated Statements of Income for the Three Month and Six Month Periods Ended June 30, 2008 and 2007 (Unaudited)
2
     
 
Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2008 and 2007 (Unaudited)
4
     
 
Consolidated Statements of Changes in Stockholders’ Equity for the Six Month Periods Ended June 30, 2008 and 2007 (Unaudited)
6
     
 
Notes to Consolidated Financial Statements
7
   
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19
   
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
32
   
ITEM 4. CONTROLS AND PROCEDURES
32
   
PART II - OTHER INFORMATION
 
   
ITEM 1A. RISK FACTORS
32
   
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
32
   
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECUITY HOLDERS
33
   
ITEM 6. EXHIBITS
33
   
SIGNATURES
34
 


PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
 
   
(Unaudited)
     
   
June 30,
 
December 31,
 
(Dollars in thousands)
 
2008
 
2007
 
ASSETS
             
Cash and due from banks
 
$
62,630
 
$
63,432
 
Federal funds sold
   
11,678
   
22,055
 
Interest-bearing deposits with banks
   
462
   
365
 
Cash and cash equivalents
   
74,770
   
85,852
 
               
Residential mortgage loans held for sale (at fair value)
   
12,087
   
7,089
 
Investments available-for-sale (at fair value)
   
218,323
   
186,801
 
Investments held-to-maturity — fair value of $184,540 (2008) and $240,995 (2007)
   
180,556
   
234,706
 
Other equity securities
   
28,353
   
23,766
 
Total loans and leases
   
2,428,948
   
2,277,031
 
Less: allowance for loan and lease losses
   
(33,435
)
 
(25,092
)
Net loans and leases
   
2,395,513
   
2,251,939
 
Premises and equipment, net
   
52,928
   
54,457
 
Accrued interest receivable
   
12,658
   
14,955
 
Goodwill
   
78,376
   
76,585
 
Other intangible assets, net
   
14,390
   
16,630
 
Other assets
   
96,169
   
91,173
 
Total assets
 
$
3,164,123
 
$
3,043,953
 
LIABILITIES
             
Noninterest-bearing deposits
 
$
480,861
 
$
434,053
 
Interest-bearing deposits
   
1,813,930
   
1,839,815
 
Total deposits
   
2,294,791
   
2,273,868
 
Short-term borrowings
   
421,881
   
373,972
 
Other long-term borrowings
   
67,070
   
17,553
 
Subordinated debentures
   
35,000
   
35,000
 
Accrued interest payable and other liabilities
   
25,163
   
27,920
 
Total liabilities
   
2,843,905
   
2,728,313
 
COMMITMENTS AND CONTINGENCIES
             
STOCKHOLDERS' EQUITY
             
Common stock — par value $1.00; shares authorized 50,000,000; shares issued and outstanding 16,373,681 (2008) and 16,349,317 (2007)
   
16,374
   
16,349
 
Additional paid in capital
   
84,759
   
83,970
 
Retained earnings
   
220,712
   
216,376
 
Accumulated other comprehensive loss
   
(1,627
)
 
(1,055
)
Total stockholders' equity
   
320,218
   
315,640
 
Total liabilities and stockholders' equity
 
$
3,164,123
 
$
3,043,953
 
 
See Notes to Consolidated Financial Statements.

1


Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(Dollars in thousands, except per share data)
 
2008
 
2007
 
2008
 
2007
 
Interest Income:
                         
Interest and fees on loans and leases
 
$
36,696
 
$
38,393
 
$
75,165
 
$
72,967
 
Interest on loans held for sale
   
122
   
272
   
218
   
467
 
Interest on deposits with banks
   
24
   
401
   
73
   
491
 
Interest and dividends on securities:
                         
Taxable
   
1,880
   
3,730
   
4,578
   
7,621
 
Exempt from federal income taxes
   
2,972
   
2,581
   
5,303
   
5,308
 
Interest on federal funds sold
   
151
   
617
   
430
   
1,054
 
TOTAL INTEREST INCOME
   
41,845
   
46,014
   
85,767
   
87,908
 
Interest Expense:
                         
Interest on deposits
   
10,583
   
15,577
   
23,605
   
29,365
 
Interest on short-term borrowings
   
3,063
   
3,586
   
6,342
   
7,067
 
Interest on long-term borrowings
   
1,080
   
652
   
2,122
   
1,262
 
TOTAL INTEREST EXPENSE
   
14,726
   
19,815
   
32,069
   
37,694
 
NET INTEREST INCOME
   
27,119
   
26,199
   
53,698
   
50,214
 
Provision for loan and lease losses
   
6,189
   
780
   
8,856
   
1,619
 
NET INTEREST INCOME AFTER PROVISION FOR LOAN AND LEASE LOSSES
   
20,930
   
25,419
   
44,842
   
48,595
 
Noninterest Income:
                         
Securities gains
   
79
   
4
   
653
   
6
 
Service charges on deposit accounts
   
3,202
   
2,630
   
6,232
   
4,938
 
Gains on sales of mortgage loans
   
653
   
773
   
1,375
   
1,411
 
Fees on sales of investment products
   
905
   
906
   
1,727
   
1,706
 
Trust and investment management fees
   
2,505
   
2,361
   
4,902
   
4,642
 
Insurance agency commissions
   
1,357
   
1,438
   
3,443
   
4,128
 
Income from bank owned life insurance
   
727
   
693
   
1,441
   
1,377
 
Visa check fees
   
761
   
717
   
1,457
   
1,307
 
Other income
   
1,506
   
1,351
   
3,161
   
2,264
 
TOTAL NONINTEREST INCOME
   
11,695
   
10,873
   
24,391
   
21,779
 
Noninterest Expenses:
                         
Salaries and employee benefits
   
13,862
   
13,776
   
27,625
   
27,210
 
Occupancy expense of premises
   
2,619
   
2,709
   
5,418
   
5,126
 
Equipment expenses
   
1,560
   
1,501
   
2,999
   
3,103
 
Marketing
   
488
   
675
   
985
   
1,204
 
Outside data services
   
1,081
   
1,077
   
2,203
   
2,003
 
Amortization of intangible assets
   
1,117
   
1,031
   
2,241
   
1,833
 
Other expenses
   
4,159
   
4,190
   
8,118
   
8,094
 
TOTAL NONINTEREST EXPENSES
   
24,886
   
24,959
   
49,589
   
48,573
 
Income Before Income Taxes
   
7,739
   
11,333
   
19,644
   
21,801
 
Income Tax Expense
   
2,088
   
3,164
   
5,788
   
6,087
 
NET INCOME
 
$
5,651
 
$
8,169
 
$
13,856
 
$
15,714
 

See Notes to Consolidated Financial Statements.

2


Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(Dollars in thousands, except per share data)
 
2008
 
2007
 
2008
 
2007
 
Basic Net Income Per Share
 
$
0.35
 
$
0.51
 
$
0.85
 
$
1.00
 
Diluted Net Income Per Share
   
0.34
   
0.51
   
0.84
   
1.00
 
Dividends Declared Per Share
   
0.24
   
0.23
   
0.48
   
0.46
 
 
See Notes to Consolidated Financial Statements.

3


Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
   
Six Months Ended
June 30,
 
(Dollars in thousands)
 
2008
 
2007
 
Cash flows from operating activities:
             
Net income
 
$
13,856
 
$
15,714
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
5,480
   
5,024
 
Provision for loan and lease losses
   
8,856
   
1,619
 
Stock compensation expense
   
392
   
561
 
Deferred income taxes (benefits)
   
(3,615
)
 
(1,909
)
Origination of loans held for sale
   
(100,250
)
 
(169,398
)
Proceeds from sales of loans held for sale
   
96,490
   
163,530
 
Gains on sales of loans held for sale
   
(1,238
)
 
(1,411
)
Securities gains
   
(653
)
 
(6
)
Gains on sales of premises and equipment
   
(66
)
 
0
 
Net decrease in accrued interest receivable
   
2,297
   
125
 
Net increase in other assets
   
(4,971
)
 
(3,091
)
Net decrease in accrued expenses and other liabilities
   
1,220
   
648
 
Other – net
   
(1,758
)
 
(1,103
)
Net cash provided by operating activities
   
16,040
   
10,303
 
Cash flows from investing activities:
             
Purchases of other equity securities
   
(4,587
)
 
(567
)
Purchases of investments available-for-sale
   
(174,975
)
 
(6,741
)
Proceeds from the sales of other real estate owned
   
34
   
192
 
Proceeds from maturities, calls and principal payments of investments held-to-maturity
   
54,218
   
22,322
 
Proceeds from maturities, calls and principal payments of investments available-for-sale
   
142,424
   
94,349
 
Net increase in loans and leases
   
(152,842
)
 
(64,767
)
Proceeds from redemption of VISA stock
   
429
   
0
 
Contingent consideration payout
   
(1,620
)
 
(1,491
)
Acquisition of business activity, net
   
0
   
(16,587
)
Expenditures for premises and equipment
   
(1,101
)
 
(1,797
)
Net cash (used) provided in investing activities
   
(138,020
)
 
24,913
 
Cash flows from financing activities:
             
Net increase in deposits
   
20,923
   
55,327
 
Net increase in short-term borrowings
   
47,426
   
1,011
 
Proceeds from issuance of long-term borrowings
   
50,000
   
0
 
Repayment of long-term borrowings
   
0
   
(64
)
Proceeds from issuance of common stock
   
422
   
948
 
Dividends paid
   
(7,873
)
 
(7,386
)
Net cash provided by financing activities
   
110,898
   
49,836
 
Net (decrease) increase in cash and cash equivalents
   
(11,082
)
 
85,052
 
Cash and cash equivalents at beginning of period
   
85,852
   
106.897
 
Cash and cash equivalents at end of period
 
$
74,770
 
$
191,949
 
 
4


Sandy Spring Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
 
   
Six Months Ended
June 30,
 
(Dollars in thousands)
 
2008
 
2007
 
Supplemental Disclosures:
             
Interest payments
 
$
31,895
 
$
37,192
 
Income tax payments
   
13,424
   
9,622
 
Transfers from loans to other real estate owned
   
925
   
0
 
Reclassification of borrowings from long-term to short-term
   
483
   
323
 
Details of acquisition:
             
Fair value of assets acquired
   
0
 
$
417,434
 
Fair value of liabilities assumed
   
0
   
(365,709
)
Stock issued for acquisition
   
0
   
(58,916
)
Purchase price in excess of net assets acquired
   
0
   
63,458
 
Cash paid for acquisition
   
0
   
56,267
 
Cash and cash equivalents acquired with acquisition
   
0
   
(39,680
)
Acquisition of business activity, net
 
$
0
 
$
16,587
 
 
See Notes to Consolidated Financial Statements.

5

 
Sandy Spring Bancorp, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

(Dollars in thousands, except per share data)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (loss)
 
Total
Stockholders’
Equity
 
Balances at December 31, 2007
 
$
16,349
 
$
83,970
 
$
216,376
 
$
(1,055
)
$
315,640
 
Adjustment to reflect adoption of EITF Issue 06-04 effective January 1, 2008
               
(1,647
)
       
(1,647
)
Balance as of January 1, 2008 following adoption of EITF Issue 06-04
   
16,349
   
83,970
   
214,729
 
$
(1,055
)
 
313,993
 
Comprehensive income:
                               
Net income
               
13,856
         
13,856
 
Other comprehensive income, net of tax effects and reclassification adjustment
                     
(572
)
 
(572
)
Total comprehensive income
                           
13,284
 
Cash dividends - $0.48 per share
               
(7,873
)
       
(7,873
)
Stock compensation expense
         
392
               
392
 
Common stock issued pursuant to:
                               
Director stock purchase plan – 1,479 shares
   
2
   
38
               
40
 
Stock option plan – 9,127 shares (16,837 shares issued less 7,710 shares retired)
   
9
   
53
               
62
 
Employee stock purchase plan – 13,758 shares
   
14
   
306
               
320
 
Balances at June 30, 2008
 
$
16,374
 
$
84,759
 
$
220,712
 
$
(1,627
)
$
320,218
 
                                 
Balances at January 1, 2007
 
$
14,827
 
$
27,869
 
$
199,102
 
$
(4,021
)
$
237,777
 
Comprehensive income:
                               
                             
Net income
               
15,714
         
15,714
 
Other comprehensive loss, net of tax effects
                     
(275
)
 
(275
)
                                 
Total comprehensive income
                         
15,439
 
Cash dividends - $0.46 per share
               
(7,386
)
       
(7,386
)
Stock Compensation Expense
         
561
               
561
 
Common stock issuance pursuant to:
                               
Acquisition of Potomac Bank - 886,989 shares
   
887
   
32,190
               
33,077
 
Acquisition of County National Bank - 690,047 shares
   
690
   
25,149
               
25,839
 
Director stock purchase plan – 2,402 shares
   
2
   
75
               
77
 
Stock option plan – 35,462 shares (38,870 shares issued less 3,408 shares retired)
   
36
   
542
           
578
 
Employee stock purchase plan - 9,916 shares
   
10
   
283
               
293
 
Balances at June 30, 2007
 
$
16,452
 
$
86,669
 
$
207,430
 
$
(4,296
)
$
306,255
 

See Notes to Consolidated Financial Statements.  

6

 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 General

The accompanying financial statements are unaudited. In the opinion of Management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. These statements should be read in conjunction with the financial statements and accompanying notes included in Sandy Spring Bancorp's 2007 Annual Report on Form 10-K. There have been no significant changes to the Company’s accounting policies as disclosed in the 2007 Annual Report on Form 10-K. The results shown in this interim report are not necessarily indicative of results to be expected for the full year 2008.

The accounting and reporting policies of Sandy Spring Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Sandy Spring Bank (the “Bank”), together with its subsidiaries, Sandy Spring Insurance Corporation, The Equipment Leasing Company, and West Financial Services, Inc., conform to accounting principles generally accepted in the United States of America and to general practices within the financial services industry. Certain reclassifications have been made to amounts previously reported to conform to current classifications.
 
Consolidation has resulted in the elimination of all significant intercompany accounts and transactions.

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks and federal funds sold (which have original maturities of three months or less).

Note 2 – Acquisitions

On February 15, 2007, the Company completed the acquisition of Potomac Bank of Virginia (“Potomac”), a bank headquartered in Fairfax, Virginia. Potomac operated five branch offices in the Northern Virginia metropolitan market at the time of the acquisition. The primary reason for the merger with Potomac was to gain entry into the northern Virginia high growth market. The total consideration paid to Potomac shareholders in connection with the acquisition was $68.2 million. The results of Potomac’s operations have been included in the Company’s consolidated financial results subsequent to February 15, 2007. The assets and liabilities of Potomac were recorded on the Consolidated Balance Sheet at their respective fair values. The fair values were determined as of February 15, 2007. The transaction resulted in total assets acquired as of February 15, 2007 of $252.5 million, including approximately $196.0 million of loans and leases; liabilities assumed were $225.0 million, including $197.0 million of deposits. Additionally, the Company recorded $39.9 million of goodwill, $5.1 million of core deposit intangibles (“CDI”) and $0.3 million of other intangibles. CDI is subject to amortization and is being amortized over seven years on a straight-line basis.

On May 31, 2007, the Company completed the acquisition of CN Bancorp Inc. (“CNB”) and it’s wholly owned subsidiary, County National Bank (“County”). County was headquartered in Glen Burnie, Maryland, and had four full-service branches located in Anne Arundel County, Maryland at the time of acquisition. The total consideration paid to CNB shareholder’s and related merger costs in connection with the acquisition was $46.1 million. The results of CNB’s operations have been included in the Company’s financial results subsequent to May 31, 2007. The assets and liabilities of CNB were recorded on the Consolidated Balance Sheet at their respective fair values. The fair values were determined as of May 31, 2007. The transaction resulted in total assets acquired as of May 31, 2007 of $164.9 million, including approximately $98.7 million of loans; liabilities assumed were $141.4 million, including $138.4 million of deposits. Additionally, the Company recorded $22.9 million of goodwill, $4.6 million of CDI and $0.1 million of other intangibles. CDI is subject to amortization and is being amortized over seven years on a straight-line basis.

The acquisition of Potomac and CNB, individually and in the aggregate, are considered immaterial for purposes of the disclosures required by SFAS No. 141, “Business Combinations.”
 
7

 
Note 3 – New Accounting Pronouncements

Adopted Accounting Pronouncements
 
In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”  This interpretation applies to all tax positions accounted for in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109. FIN 48 prescribes a recognition threshold and measurement standard for the financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. In addition, the Statement provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition for tax positions.  This interpretation is effective for fiscal years beginning after December 15, 2006.  The adoption of this Statement did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
At its September 2006 meeting, the Emerging Issues Task Force ("EITF") reached a final consensus on Issue 06-04, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The consensus stipulates that an agreement by an employer to share a portion of the proceeds of a life insurance policy with an employee during the postretirement period is a postretirement benefit arrangement required to be accounted for under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” or Accounting Principles Board Opinion ("APB") No. 12, "Omnibus Opinion - 1967." The consensus concludes that the purchase of a split-dollar life insurance policy does not constitute a settlement under SFAS No. 106 and, therefore, a liability for the postretirement obligation must be recognized under SFAS No. 106 if the benefit is offered under an arrangement that constitutes a plan or under APB No. 12, if it is not part of a plan. Issue 06-04 is effective for annual or interim reporting periods beginning after December 15, 2007. The Company has endorsement split-dollar life insurance policies totaling $21.3 million as of June 30, 2008 and recorded a liability and a corresponding reduction of retained earnings of $1.6 million on January 1, 2008.

In September 2006, the FASB issued Statement No. 158, (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R).” SFAS No. 158 requires a company that sponsors a postretirement benefit plan to fully recognize, as an asset or liability, the over-funded or under-funded status of its benefit plan in its balance sheet. The funded status is measured as the difference between the fair value of the plan’s assets and its benefit obligation (projected benefit obligation for pension plans and accumulated postretirement benefit obligation for other postretirement benefit plans). In years prior to 2006, the funded status of such plans was reported in the notes to the financial statements. This provision is effective for public companies for fiscal years ending after December 15, 2006. In addition, SFAS No. 158 also requires a company to measure its plan assets and benefit obligations as of its year-end balance sheet date. Currently, a company is permitted to choose a measurement date up to three months prior to its year-end to measure the plan assets and obligations. This provision is now effective for all companies for fiscal years ending after December 15, 2008. The Company adopted SFAS No. 158 as of December 31, 2006. At December 31, 2006, the projected benefit obligation of its defined benefit pension plan exceeded the fair value of plan assets by $1.9 million and such amount is included in “Accrued interest payable and other liabilities” in the Consolidated Balance Sheet as of that date. Due primarily to a plan curtailment effective December 31, 2007, the fair value of plan assets exceeded the projected benefit obligation of the defined benefit plan by $0.9 million at December 31, 2007. Accordingly, such amount is included in “Other Assets” in the Consolidated Balance Sheet as of December 31, 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. This Statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for fiscal years beginning after November 15, 2007, with earlier adoption permitted. In February 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No.157.” This FSP defers the effective date of SFAS No.157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this Statement did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
8

 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits companies to elect to follow fair value accounting for certain financial assets and liabilities in an effort to mitigate volatility in earnings without having to apply complex hedge accounting provisions. The Statement also establishes presentation and disclosure requirements designed to facilitate comparison between entities that choose different measurement attributes for similar types of assets and liabilities. The effective date of SFAS No. 159 is for fiscal years beginning after November 15, 2007. The adoption of this Statement did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
In March 2007, the FASB ratified EITF Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.” EITF 06-11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for nonvested equity-classified employee share-based payment awards as an increase to additional paid-in-capital. EITF 06-11 is effective for fiscal years beginning after September 15, 2007. The adoption of this issue did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
In December 2007, the Securities and Exchange Commission staff released Staff Accounting Bulletin (“SAB”) 109, “Written Loan Commitments Recorded at Fair Value Through Earnings.” This SAB supersedes SAB 105 and expresses the current view that, consistent with the guidance in SFAS No. 156 and SFAS No. 159, the expected net future cash flows related to the associated servicing of a loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. The staff expects registrants to apply the views of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The adoption of this SAB did not have a material impact on the Company’s financial position, results of operations or cash flows.
 
Pending Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). This Statement replaces SFAS No. 141, “Business Combinations” (“SFAS 141”). SFAS No.141(R), among other things, establishes principles and requirements for how the acquirer in a business combination (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company is required to adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after January 1, 2009. Earlier adoption is prohibited. The Statement will change the Company’s accounting treatment for business combinations on a prospective basis.
 
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51.” This Statement establishes accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. Minority interests will be recharacterized as noncontrolling interests and classified as a component of equity. The Statement also establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary and requires expanded disclosures. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an Amendment of FASB Statement No. 133.” This Statement amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The Statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.
 
9

 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Principles.” This statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (“GAAP”) in the United States. The Statement is directed to entities rather than auditors because entities are responsible for the selection of accounting principles for financial statements that are presented in conformity with GAAP. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect that the adoption of this Statement will have a material impact on its financial position, results of operations or cash flows.
 
Note 4 – Stock Based Compensation

At June 30, 2008, the Company had three stock-based compensation plans in existence, the 1992 and 1999 stock option plans (both expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.

The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the Board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 1,242,310 are available for issuance at June 30, 2008, 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 Stock Option Committee has the discretion when making a grant of stock options to impose restrictions on the shares to be purchased in exercise of such options. Outstanding options granted under the expired 1992 and 1999 Stock Option Plans will continue until exercise or expiration.

Effective March 26, 2008, the Board of Directors approved the granting of 116,360 stock options, subject to a three year vesting schedule with one third of the options vesting each year as of March 26, 2009, 2010, and 2011, respectively. In addition, on March 26, 2008, the Board of Directors granted 28,675 restricted shares subject to a five year vesting schedule with one fifth of the shares vesting each year as of March 26, 2009, 2010, 2011, 2012, and 2013, respectively. Compensation expense is recognized on a straight-line basis over the stock option or restricted stock vesting period. The fair value based method for expense recognition of employee awards resulted in expense of approximately $0.2 million, net of a tax benefit of approximately $9 thousand and $0.3 million, net of tax benefit of $15 thousand, for the three month periods ended June 30, 2008 and 2007, respectively and $0.4 million , net of a tax benefit of approximately $13 thousand and $0.5 million, net of a tax benefit of approximately $29 thousand, for the six month periods ended June 30, 2008 and 2007, respectively.

No options or restricted stock grants were awarded during the six month period ended June 30, 2007.

The fair values of all of the options granted have been estimated using a binomial option-pricing model.

The total intrinsic value of options exercised during the six months ended June 30, 2008 and 2007 was $0.2 million and $0.6 million, respectively

A summary of share option activity for the six month period ended June 30, 2008 follows:

10

 
           
Weighted
     
       
Weighted
 
Average
     
   
Number
 
Average
 
Remaining
 
Aggregate
 
   
of
 
Exercised
 
Contractual
 
Intrinsic
 
(Dollars in thousands, except per share data):
 
Shares
 
Share Price
 
Life(Years)
 
Value
 
                   
Balance at January 1, 2008
   
996,365
 
$
33.72
   
5.3
 
$
1,588
 
Granted
   
116,360
   
27.96
   
6.8
       
Exercised
   
(16,837
)
 
16.55
   
4.6
       
Forfeited or expired
   
(38,531
)
 
35.77
   
5.4
       
Balance at June 30, 2008
   
1,057,357
 
$
33.28
   
5.0
 
$
125
 
                           
Exercisable at June 30, 2008
   
877,368
 
$
33.69
       
$
125
 

A summary of the status of the Company’s nonvested options as of June 30, 2008, and changes during the six month period then ended, is presented below:

       
Weighted
 
       
Average
 
   
Number
 
Grant-Date
 
   
Of Shares
 
Fair Value
 
Nonvested at January 1, 2008
   
72,221
 
$
8.11
 
Granted
   
116,360
   
4.47
 
Vested
   
0
   
0
 
Forfeited
   
(8,592
)
 
6.60
 
Nonvested at June 30, 2008
   
179,989
 
$
5.83
 

       
Weighted
 
       
Average
 
   
Number
 
Grant-Date
 
   
Of Shares
 
Fair Value
 
Restricted stock at January 1, 2008
   
24,746
 
$
37.14
 
Granted
   
28,675
   
27.96
 
Vested
   
0
   
0
 
Forfeited
    (2,356 )   33.99  
Restricted stock at June 30, 2008
    51,065   $ 32.11  
 
The number of options, exercise prices, and fair values has been retroactively restated for all stock dividends occurring since the date the options were granted.

The total of unrecognized compensation cost related to nonvested share-based compensation arrangements was approximately $2.2 million as of June 30, 2008. That cost is expected to be recognized over a weighted average period of approximately 3.4 years.

The Company generally issues authorized but previously unissued shares to satisfy option exercises.
 
11


Note 5 - Per Share Data

The calculations of net income per common share for the three month periods ended June 30, 2008 and 2007 are shown in the following table. Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and does not include the impact of any potentially dilutive common stock equivalents. The diluted earnings per share calculation method is derived by dividing net income available to common stockholders by the weighted average number of common shares outstanding adjusted for the dilutive effect of outstanding stock options and restricted stock, the unamortized compensation cost of stock options, and the accumulated tax benefit or shortfall that would be credited or charged to additional paid in capital.
 
(Dollars and amounts in thousands, except
 
Three Months Ended
 
Six Months Ended
 
per share data)
 
June 30,
 
June 30,
 
   
2008
 
2007
 
2008
 
2007
 
Basic:
                         
Net income available to common stockholders
 
$
5,651
 
$
8,169
 
$
13,856
 
$
15,714
 
Average common shares outstanding
   
16,367
   
15,974
   
16,361
   
15,623
 
Basic net income per share
 
$
0.35
 
$
0.51
 
$
0.85
 
$
1.00
 
Diluted:
                         
Net income available to common stockholders
 
$
5,651
 
$
8,169
 
$
13,856
 
$
15,714
 
                           
Average common shares outstanding
   
16,367
   
15,974
   
16,361
   
15,623
 
Stock option and restricted stock adjustment
   
60
   
96
   
57
   
112
 
Average common shares outstanding-diluted
   
16,427
   
16,070
   
16,418
   
15,735
 
Diluted net income per share
 
$
0.34
 
$
0.51
 
$
0.84
 
$
1.00
 

Options for 1,047,087 shares and 698,322 shares of common stock were not included in computing diluted net income per share for the six month periods ended June 30, 2008 and 2007, respectively, because their effects are antidilutive. For the three months ended June 30, 2008 and 2007, options for 1,047,087 shares and 698,322 shares of common stock were not included, respectively.

Note 6 - Pension, Profit Sharing, and Other Employee Benefit Plans

Defined Benefit Pension Plan

The Company has a qualified, noncontributory, defined benefit pension plan covering substantially all employees. Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. On November 14, 2007, the Company informed employees that the plan would be frozen for new and existing entrants after December 31, 2007. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus future salary increases will no longer affect the defined benefit provided by the plan, although additional vesting may continue to occur.

The Company’s funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company contributes additional amounts as it deems appropriate based on benefits attributed to service prior to the date of the plan freeze. The Plan invests primarily in a diversified portfolio of managed fixed income and equity funds. The Company, with input from its actuaries, estimates that the 2008 contribution will be approximately $1.0 million.

Net periodic benefit cost for the three and six month periods ended June 30 includes the following components:
 
   
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
(In thousands)
 
2008
 
2007
 
2008
 
2007
 
                           
Service cost for benefits earned
 
$
0
 
$
320
 
$
0
 
$
640
 
Interest cost on projected benefit obligation
   
355
   
341
   
710
   
682
 
Expected return on plan assets
   
(326
)
 
(379
)
 
(652
)
 
(758
)
Amortization of prior service cost
   
(44
)
 
(44
)
 
(88
)
 
(88
)
Recognized net actuarial loss
   
99
   
136
   
198
   
272
 
Net periodic benefit cost
 
$
84
 
$
374
 
$
168
 
$
748
 
 
12


Cash and Deferred Profit Sharing Plan

The Company has a qualified Cash and Deferred Profit Sharing Plan that includes a 401(k) provision with a Company match. Effective January 1, 2007 the Company revised the Plan to eliminate the deferral option and require an all-cash payout of any profit sharing distributions beginning in 2007. 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 match vests immediately. The Plan permits employees to purchase shares of Sandy Spring Bancorp, Inc. common stock with their 401(k) contributions, Company match, and other contributions under the Plan. Profit sharing contributions and the Company match are included in noninterest expenses and totaled $0.7 million and $0.8 million for the six month periods ended June 30, 2008 and 2007, respectively, and $0.3 million and $0.4 million for the three month periods ended June 30, 2008 and 2007, respectively.

The Company also had a performance based compensation benefit in 2007 that at one time was integrated with the Cash and Deferred Profit Sharing Plan and provided incentives to employees based on the Company’s financial results as measured against key performance indicator goals set by management. Payments were made annually and amounts included in noninterest expense under the plan amounted to $0.0 million for the three and six month periods ended June 30, 2007. For 2008, this incentive plan has been replaced with a new short-term incentive plan named the Sandy Spring Leadership Incentive Plan. It will provide a cash bonus to key members of management based on the Company’s financial results using a weighted formula. The expense for this plan is included in noninterest expenses and totaled $0.2 million and $0.4 million for the three and six month periods ended June 30, 2008, respectively.

Supplemental Executive Retirement Agreements

In past years, the Company had Supplemental Executive Retirement Agreements ("SERAs") with its executive officers providing for retirement income benefits as well as pre-retirement death benefits. Retirement benefits payable under the SERAs, if any, were integrated with other pension plan and Social Security retirement benefits expected to be received by the executive. The Company accrued the present value of these benefits over the remaining number of years to the executives' retirement dates. Effective January 1, 2008, these agreements were replaced with a defined contribution plan, the “Executive Incentive Retirement Plan” or “the Plan”. Benefits under the SERAs were reduced to a fixed amount as of December 31, 2007, and those amounts accrued were transferred to the new plan on behalf of each participant. Additionally, under the new Plan, officers designated by the board of directors earn a deferral bonus which is accrued annually based on the Company’s financial performance compared to a selected group of peer banks. For current participants, accruals after January 1, 2008 vest immediately. Amounts transferred to the plan from the SERAs on behalf of each participant continue to vest based on years of service. The Company had expenses related to the new Plan of $0.2 million and $0.4 million for the three and six month periods ended June 30, 2008, respectively and $0.2 million and $0.5 million for the SERAs for the three and six month periods ended June 30, 2007.
 
Executive Health Insurance Plan
 
In past years, the Company had an Executive Health Insurance Plan that provided for payment of defined medical and dental expenses not otherwise covered by insurance for selected executives and their families. Benefits, which were paid during both employment and retirement, were subject to a $6,500 limitation for each executive per year. Effective January 1, 2008 this plan was eliminated with respect to all active executives and liabilities accrued for such payments upon retirement by such executives were reversed which resulted in income in 2007 of $0.4 million. Currently retired executives who retired while the Plan was in effect will continue to receive this benefit. The Company had expenses related to the Executive Health Insurance Plan of $0 and $56 thousand for the six month periods ended June 30, 2008 and 2007, and $0 and $28 thousand for the three month periods ended June 30, 2008 and 2007, respectively.


Note 7 - Unrealized Losses on Investments

Shown below is information that summarizes the gross unrealized losses and fair value for the Company’s available-for-sale and held-to-maturity investment portfolios.

Gross unrealized losses and fair value by length of time that the individual available-for-sale securities have been in a continuous unrealized loss position at June 30, 2008 and December 31, 2007 are as follows:

13

 
(In thousands)
     
Continuous unrealized losses
existing for:
     
 
Available for sale as of June 30, 2008
 
Fair Value
 
Less than 12
months
 
More than 12
months
 
Total Unrealized
Losses
 
                   
U.S. Agencies and Corporations
 
$
64,634
 
$
338
 
$
0
 
$
338
 
Mortgage-backed
   
79,226
   
540
   
6
   
546
 
CMO
   
666
   
4
   
0
   
4
 
State and municipal
   
368
   
8
   
0
   
8
 
   
$
144,894
 
$
890
 
$
6
 
$
896
 

(In thousands)
     
Continuous unrealized losses
existing for:
     
 
Available for sale as of
December 31, 2007
 
Fair Value
 
Less than 12
months
 
More than 12
months
 
Total Unrealized
Losses
 
                   
U.S. Agencies and Corporations
 
$
20,925
 
$
0
 
$
99
 
$
99
 
Mortgage-backed
   
12,554
   
43
   
4
   
47
 
   
$
33,479
 
$
43
 
$
103
 
$
146
 
 
Approximately 100% of the bonds carried in the available-for-sale investment portfolio with continuous unrealized losses as of June 30, 2008 and December 31, 2007 are rated AAA. The securities representing the unrealized losses in the available-for-sale investment portfolio as of June 30, 2008 all have minimal duration risk (2.61 years), low credit risk and minimal loss (approximately 0.61% ) when compared to book value. The securities representing the unrealized losses in the available-for-sale investment portfolio as of December 31, 2007, all have minimal duration risk (1.14 years) , low credit risk, and minimal loss (approximately 0.43%) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the Company’s intent and ability to hold these investments for a sufficient period of time, which may be to maturity, to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the available-for-sale portfolio are temporary.

Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at June 30, 2008 and December 31, 2007 are as follows:
 
(In thousands)
     
Continuous unrealized losses
existing for:
     
Held to Maturity as of June 30, 2008
 
Fair Value
 
Less than 12
months
 
More than 12
months
 
Total Unrealized
Losses
 
                   
Mortgage-backed
 
$
489
 
$
1
 
$
0
 
$
1
 
State and municipal
   
7,593
   
140
   
0
   
140
 
   
$
8,082
 
$
141
 
$
0
 
$
141
 
 

(In thousands)
     
Continuous unrealized losses
existing for:
     
Held to Maturity as of December 31, 2007
 
Fair Value
 
Less than 12
months
 
More than 12
months
 
Total Unrealized
Losses
 
                           
State and municipal
 
$
3,340
 
$
1
 
$
31
 
$
32
 
   
$
3,340
 
$
1
 
$
31
 
$
32
 

Approximately 27% of the bonds carried in the held-to-maturity portfolio with continuous unrealized losses as of June 30, 2008 are rated AAA and 73% are rated A. Approximately 92% of the bonds carried in the held-to-maturity investment portfolio with continuous unrealized losses as of December 31, 2007 are rated AAA and 8% are rated AA1. The securities representing the unrealized losses in the held-to-maturity portfolio as of June 30, 2008 all have moderate duration risk (4.88 years), low credit risk and minimal loss (approximately 1.72% ) when compared to book value. The securities representing the unrealized losses in the held-to-maturity portfolio as of December 31, 2007, all have modest duration risk of 4.69 years , low credit risk, and minimal loss (approximately 1%) when compared to book value. The unrealized losses that exist are the result of market changes in interest rates since the original purchase. These factors coupled with the Company’s intent and ability to hold these investments for a sufficient period of time, which may be to maturity, to allow for any anticipated recovery in fair value substantiates that the unrealized losses in the held-to-maturity portfolio are temporary.
 
14


Note 8 - Segment Reporting

The Company operates in four operating segments—Community Banking, Insurance, Leasing, and Investment Management. Only Community Banking currently meets the threshold for segment reporting; however, the Company is disclosing separate information for all four operating segments. Each of the operating segments is a strategic business unit that offers different products and services. The Insurance, Leasing, and Investment Management segments are businesses that were acquired in separate transactions where management at the time of acquisition was retained. The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements included in the 2007 Annual Report on Form 10-K. However, the segment data reflect intersegment transactions and balances.

The Community Banking segment is conducted through Sandy Spring Bank and involves delivering a broad range of financial products and services, including various loan and deposit products to both individuals and businesses. Parent company income is included in the Community Banking segment, as the majority of parent company activities are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, trust income, fees on sales of investment products and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment and other expenses. Included in Community Banking expenses are noncash charges associated with amortization of intangibles related to acquired entities totaling $.9 million and $.7 million for the three month periods ended June 30, 2008 and 2007, respectively. For the six month periods ended June 30, 2008 and 2007, the amortization related to acquired entities totaled $1.7 million and $1.3 million, respectively.

The Insurance segment is conducted through Sandy Spring Insurance Corporation, a subsidiary of the Bank, and offers annuities as an alternative to traditional deposit accounts. In addition, Sandy Spring Insurance Corporation operates the Chesapeake Insurance Group and Wolfe and Reichelt Insurance Agency, general insurance agencies located in Annapolis, Maryland, and Neff & Associates, located in Ocean City, Maryland. Major sources of revenue are insurance commissions from commercial lines and personal lines. Expenses include personnel and support charges. Included in insurance expenses are non-cash charges associated with amortization of intangibles totaling $0.1 million for both of the three month periods ended June 30, 2008 and 2007. For both of the six month periods ended June 30, 2008 and 2007, amortization related to acquired entities totaled $0.2 million.
 
The Leasing segment is conducted through The Equipment Leasing Company, a subsidiary of the Bank that provides leases for essential commercial equipment used by small to medium sized businesses. Equipment leasing is conducted through vendor relations and direct solicitation to end-users located primarily in states along the east coast from New Jersey to Florida. The typical lease is categorized as a financing lease and is characterized as a “small ticket” by industry standards, averaging less than $100 thousand, with individual leases generally not exceeding $500 thousand. Major revenue sources include interest income. Expenses include personnel and support charges.
 
The Investment Management segment is conducted through West Financial Services, Inc., a subsidiary of the Bank that was acquired in October 2005. This asset management and financial planning firm, located in McLean, Virginia, provides comprehensive financial planning to individuals, families, small businesses and associations including cash flow analysis, investment review, tax planning, retirement planning, insurance analysis and estate planning. West Financial has approximately $681.0 million in assets under management as of June 30, 2008. Major revenue sources include noninterest income earned on the above services. Expenses include personnel and support charges. Included in investment management expenses are non-cash charges associated with amortization of intangibles totaling $0.2 million for both of the three month periods ended March 31, 2008 and 2007, and $0.4 million for both of the six month periods ended June 30, 2008 and 2007.
 
15

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

(In thousands)
 
Community
Banking
 
 
Insurance
 
 
Leasing
 
Investment
Mgmt.
 
Inter-Segment
Elimination
 
 
Total
 
Quarter ended
June 30, 2008
                         
                           
Interest income
 
$
41,398
 
$
12
 
$
749
 
$
6
 
$
(320
)
$
41,845
 
Interest expense
   
14,743
   
0
   
303
   
0
   
(320
)
 
14,726
 
Provision for loan and lease losses
   
6,009
   
0
   
180
   
0
   
0
   
6,189
 
Noninterest income
   
9,002
   
1,558
   
121
   
1,167
   
(153
)
 
11,695
 
Noninterest expenses
   
22,305
   
1,416
   
396
   
922
   
(153
)
 
24,886
 
Income before income taxes
   
7,343
   
154
   
(9
)
 
251
   
0
   
7,739
 
Income tax expense
   
1,859
   
62
   
70
   
97
   
0
   
2,088
 
Net income
 
$
5,484
 
$
92
 
$
(79
)
$
154
 
$
0
 
$
5,651
 
                                       
Assets
 
$
3,169,169
 
$
11,929
 
$
39,999
 
$
11,238
 
$
(68,212
)
$
3,164,123
 
                                 
Quarter ended
June 30, 2007
                                     
                                       
Interest income
 
$
45,617
 
$
31
 
$
672
 
$
17
 
$
(323
)
$
46,014
 
Interest expense
   
19,860
   
0
   
278
   
0
   
(323
)
 
19,815
 
Provision for loan and lease losses
   
780
   
0
   
0
   
0
   
0
   
780
 
Noninterest income
   
8,136
   
1,574
   
195
   
1,124
   
(156
)
 
10,873
 
Noninterest expenses
   
22,545
   
1,333
   
242
   
995
   
(156
)
 
24,959
 
Income before income taxes
   
10,568
   
272
   
347
   
146
   
0
   
11,333
 
Income tax expense
   
2,861
   
108
   
137
   
58
   
0
   
3,164
 
Net income
 
$
7,707
 
$
164
 
$
210
 
$
88
 
$
0
 
$
8,169
 
                                       
Assets
 
$
3,104,217
 
$
11,635
 
$
33,302
 
$
9,089
 
$
(56,834
)
$
3,101,409
 
 
   
 
     
 
     
 
     
(In thousands)
 
Community
Banking
 
 
Insurance
 
 
Leasing
 
Investment
Mgmt.
 
Inter-Segment
Elimination
 
 
Total
 
Year to Date
June 30, 2008
                         
                           
Interest income
 
$
84,897
 
$
32
 
$
1,456
 
$
20
 
$
(638
)
$
85,767
 
Interest expense
   
32,120
   
0
   
587
   
0
   
(638
)
 
32,069
 
Provision for loan and lease losses
   
8,676
   
0
   
180
   
0
   
0
   
8,856
 
Noninterest income
   
18,400
   
3,729
   
258
   
2,309
   
(305
)
 
24,391
 
Noninterest expenses
   
44,575
   
2,779
   
687
   
1,853
   
(305
)
 
49,589
 
Income before income taxes
   
17,926
   
982
   
260
   
476
   
0
   
19,644
 
Income tax expense
   
5,028
   
397
   
178
   
185
   
0
   
5,788
 
Net income
 
$
12,898
 
$
585
 
$
82
 
$
291
 
$
0
 
$
13,856
 
                                       
Assets
 
$
3,169,169
 
$
11,929
 
$
39,999
 
$
11,238
 
$
(68,212
)
$
3,164,123
 
                                 
Year to Date
June 30, 2007
                                     
                                       
Interest income
 
$
87,126
 
$
46
 
$
1,316
 
$
32
 
$
(612
)
$
87,908
 
Interest expense
   
37,770
   
0
   
536
   
0
   
(612
)
 
37,694
 
Provision for loan and lease losses
   
1,619
   
0
   
0
   
0
   
0
   
1,619
 
Noninterest income
   
15,089
   
4,451
   
344
   
2,207
   
(312
)
 
21,779
 
Noninterest expenses
   
43,851
   
2,623
   
512
   
1,899
   
(312
)
 
48,573
 
Income before income taxes
   
18,975
   
1,874
   
612
   
340
   
0
   
21,801
 
Income tax expense
   
4,969
   
742
   
242
   
134
   
0
   
6,087
 
Net income
 
$
14,006
 
$
1,132
 
$
370
 
$
206
 
$
0
 
$
15,714
 
                                       
Assets
 
$
3,104,217
 
$
11,635
 
$
33,302
 
$
9,089
 
$
(56,834
)
$
3,101,409
 
 
16


Note 9 - Comprehensive Income

The components of total comprehensive income for the three and six month periods ended June 30, 2008 and 2007 are as follows:
 
     
For the three months ended June 30, 
 
     
2008 
   
2007
 
           
Tax 
               
Tax 
       
     
Pretax 
   
Benefit/ 
   
Net 
   
Pretax 
   
Benefit/ 
   
Net
 
(In thousands) 
   
Amount 
   
(Expense) 
   
Amount 
   
Amount
   
(Expense) 
   
Amount 
 
Net Income
             
$
5,651
             
$
8,169
 
Other comprehensive income:
               
                   
Unrealized holding (losses) gains arising during the period
 
$
(1,527
)
 
608
   
(919
)
$
(533
)
 
210
   
(323
)
Reclassification adjustment for (gains) losses included in net income
   
(79
)
 
32
   
(47
)
 
(4
)
 
1
   
(3
)
Adjustment for pensions (FAS 158)
   
55
   
(22
)
 
33
   
0
   
0
   
0
 
Total change in other comprehensive income
 
$
(1,551
)
 
618
   
(933
)
$
(537
)
 
211
   
(326
)
Total comprehensive income
             
$
4,718
             
$
7,843
 
 
   
For the six months ended June 30,
 
   
 2008
 
 2007
 
       
Tax
         
Tax
     
   
Pretax
 
Benefit/
 
Net
 
Pretax
 
Benefit/
 
Net
 
(In thousands)
 
Amount
 
(Expense)
 
Amount
 
Amount
 
(Expense)
 
Amount
 
Net Income
             
$
13,856
             
$
15,714
 
Other comprehensive income:
                                   
Unrealized holding (losses) gains arising during the period
 
$
(408
)
 
162
   
(246
)
$
200
   
(80
)
 
120
 
Reclassification adjustment for (gains) losses included in net income
   
(653
)
 
261
   
(392
)
 
(6
)
 
2
   
(4
)
Adjustment for pensions (FAS 158)
   
110
   
(44
)
 
66
   
(643
)
 
252
   
(391
)
Total change in other comprehensive income
 
$
(951
)
 
379
   
(572
)
$
(449
)
 
174
   
(275
)
Total comprehensive income
             
$
13,284
             
$
15,439
 
 
17

 
Note 10- Fair Value Measurements

On February 15, 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS No. 159), which gives entities the option to measure eligible financial assets, financial liabilities and Company 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 Company commitment. Subsequent changes in fair value must be recorded in earnings. Additionally, SFAS No. 159 allows for a one-time election for recorded to beginning retained earnings.

The Company adopted SFAS No. 159 as of January 1, 2008 and elected the fair value option for a group of specific financial instruments which are mortgage loans held for sale. The Company believes by electing the fair value option for this financial instrument, it will allow the accounting for gains on sale of mortgage loans to more accurately reflect the timing and economics of the transaction. The effect of this adjustment was immaterial to the Company’s financial results for the six month period ending June 30, 2008.

Simultaneously with the adoption of SFAS No, 159, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), effective January 1, 2008. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Under SFAS No. 157, fair value measurements are not adjusted for transaction costs. SFAS No. 157 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 under SFAS No. 157 are described below.

Basis of Fair Value Measurement:

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

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

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

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

The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, many other sovereign government obligations, liquid mortgage products, active listed equities and most money market securities. Such instruments are generally classified within level 1 or level 2 of the fair value hierarchy. As required by SFAS No. 157, the Company does not adjust the quoted price for such instruments.

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

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used.

18


Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value. Market value is measured based on the value of the collateral securing these loans and is classified at a level 3 in the fair value hierarchy. Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable. The value of real estate collateral is determined based on appraisals by qualified licensed appraisers hired by the Company. 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 managements review and analysis. Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

Impaired loans totaled $49.7 million at June 30, 2008, compared to $21.9 million at December 31, 2007.

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 as represented in SFAS No. 157.

The following table sets forth the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis. 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):

   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Balance as of
June 30, 2008
 
Assets
                         
Residential Mortgage loans held for sale
 
$
-
 
$
12,087
 
$ 
   
$ 
12,087
 
Impaired loans
               
49,689