Edgar Filing: SANDY SPRING BANCORP INC

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 March 31, 2014

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

For the transition period from ____________ to ____________

Commission File Number: 0-19065

SANDY SPRING BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

301-774-6400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Yes x No ¨

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

Yes 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 outstanding shares of common stock outstanding as of May 7, 2014.

Common stock, $1.00 par value – 25,058,633 shares

SANDY SPRING BANCORP, INC.

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION

Item1.	FINANCIAL STATEMENTS

	Condensed Consolidated Statements of Condition at March 31, 2014 and December 31, 2013	4

	Condensed Consolidated Statements of Income - Unaudited for the Three Months Ended March 31, 2014 and 2013	5

	Condensed Consolidated Statements of Comprehensive Income – Unaudited for the Three Months Ended March 31, 2014 and 2013	6

	Condensed Consolidated Statements of Cash Flows – Unaudited for the Three Months Ended March 31, 2014 and 2013	7

	Condensed Consolidated Statements of Changes in Stockholders’ Equity – Unaudited for the Three Months Ended March 31, 2014 and 2013	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33

Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52

Item 4.	CONTROLS AND PROCEDURES	52

PART II - OTHER INFORMATION

Item 1.	LEGAL PROCEEDINGS	52

Item 1A.	RISK FACTORS	52

Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	52

Item 3.	DEFAULTS UPON SENIOR SECURITIES	52

Item 4.	MINE SAFETY DISCLOSURES	52

Item 5.	OTHER INFORMATION	53

Item 6.	EXHIBITS	53

SIGNATURES		54

Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as other periodic reports filed with the Securities and Exchange Commission, and written or oral communications made from time to time by or on behalf of Sandy Spring Bancorp and its subsidiaries (the “Company”), may contain statements relating to future events or future results of the Company that are considered “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend” and “potential,” or words of similar meaning, or future or conditional verbs such as “should,” “could,” or “may.” Forward-looking statements include statements of Company 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 the Company’s 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 the Company’s 2013 Annual Report on Form 10-K, Item 1A of Part II of this report and the following:

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

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

the Company’s liquidity requirements could be adversely affected by changes in our assets and liabilities;

the Company’s investment securities portfolio is subject to credit risk, market risk, and liquidity risk as well as changes in the estimates the Company uses to value certain of the securities in the 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 the Company’s ability to attract, develop and retain qualified banking professionals;

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

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

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

PART I

Item 1. FINANCIAL STATEMENTS

Sandy spring bancorp, inc. and subsidiaries

CONDENSED Consolidated STATEMENTS OF CONDITION

	(Unaudited)
	March 31,			December 31,
(Dollars in thousands)	2014			2013
Assets
Cash and due from banks	$	58,448		$	46,755
Federal funds sold		474			475
Interest-bearing deposits with banks		57,273			27,197
Cash and cash equivalents		116,195			74,427
Residential mortgage loans held for sale (at fair value)		3,079			8,365
Investments available-for-sale (at fair value)		736,270			751,284
Investments held-to-maturity — fair value of $220,693 and $216,007 at March 31, 2014 and December 31, 2013, respectively		223,747			224,638
Other equity securities		37,567			40,687
Total loans and leases		2,832,813			2,784,266
Less: allowance for loan and lease losses		(38,026	)		(38,766	)
Net loans and leases		2,794,787			2,745,500
Premises and equipment, net		45,644			45,916
Other real estate owned		1,619			1,338
Accrued interest receivable		12,288			12,532
Goodwill		84,171			84,171
Other intangible assets, net		960			1,330
Other assets		112,671			115,912
Total assets	$	4,168,998		$	4,106,100

Liabilities
Noninterest-bearing deposits	$	882,169		$	836,198
Interest-bearing deposits		2,077,026			2,041,027
Total deposits		2,959,195			2,877,225
Securities sold under retail repurchase agreements and federal funds purchased		67,038			53,842
Advances from FHLB		569,000			615,000
Subordinated debentures		35,000			35,000
Accrued interest payable and other liabilities		28,379			25,670
Total liabilities		3,658,612			3,606,737

Stockholders' Equity
Common stock — par value $1.00; shares authorized 50,000,000; shares issued and outstanding 25,043,482 and 24,990,021 at March 31, 2014 and December 31, 2013, respectively		25,043			24,990
Additional paid in capital		193,708			193,445
Retained earnings		290,285			283,898
Accumulated other comprehensive income		1,350			(2,970	)
Total stockholders' equity		510,386			499,363
Total liabilities and stockholders' equity	$	4,168,998		$	4,106,100

The accompanying notes are an integral part of these statements

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of IncomE – UNAUDITED

	Three Months Ended March 31,
(Dollars in thousands, except per share data)	2014			2013
Interest Income:
Interest and fees on loans and leases	$	29,734		$	29,646
Interest on loans held for sale		59			353
Interest on deposits with banks		20			19
Interest and dividends on investment securities:
Taxable		4,116			3,934
Exempt from federal income taxes		2,321			2,327
Total interest income		36,250			36,279
Interest Expense:
Interest on deposits		1,184			1,455
Interest on retail repurchase agreements and federal funds purchased		38			49
Interest on advances from FHLB		3,218			3,223
Interest on subordinated debt		218			226
Total interest expense		4,658			4,953
Net interest income		31,592			31,326
Provision for loan and lease losses		(982	)		78
Net interest income after provision for loan and lease losses		32,574			31,248
Non-interest Income:
Investment securities gains		-			56
Service charges on deposit accounts		1,972			2,069
Mortgage banking activities		316			1,527
Wealth management income		4,466			4,042
Insurance agency commissions		1,640			1,349
Income from bank owned life insurance		598			612
Visa check fees		978			957
Other income		1,279			1,807
Total non-interest income		11,249			12,419
Non-interest Expenses:
Salaries and employee benefits		16,355			16,346
Occupancy expense of premises		3,472			3,182
Equipment expenses		1,256			1,249
Marketing		542			515
Outside data services		1,216			1,152
FDIC insurance		520			596
Amortization of intangible assets		370			461
Other expenses		3,818			4,322
Total non-interest expenses		27,549			27,823
Income before income taxes		16,274			15,844
Income tax expense		5,346			5,286
Net income	$	10,928		$	10,558

Net Income Per Share Amounts:
Basic net income per share	$	0.44		$	0.42
Diluted net income per share	$	0.43		$	0.42
Dividends declared per common share	$	0.18		$	0.14

The accompanying notes are an integral part of these statements

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of COMPREHENSIVE INCOME - UNAUDITED

	Three Months Ended March 31,
(In thousands)	2014			2013
Net income	$	10,928		$	10,558
Other comprehensive income (loss):
Investments available-for-sale:
Net change in unrealized gains (losses) on investments available-for-sale		7,132			(3,046	)
Related income tax (expense) benefit		(2,823	)		1,215
Net investment gains reclassified into earnings		-			56
Related income tax expense		-			(23	)
Net effect on other comprehensive income (loss) for the period		4,309			(1,798	)

Defined benefit pension plan:
Recognition of unrealized gain		48			364
Related income tax benefit		(37	)		(146	)
Net effect on other comprehensive income (loss) for the period		11			218
Total other comprehensive income (loss)		4,320			(1,580	)
Comprehensive income	$	15,248		$	8,978

The accompanying notes are an integral part of these statements

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of Cash Flows – UNAUDITED

	Three Months Ended March 31,
(Dollars in thousands)	2014			2013
Operating activities:
Net income	$	10,928		$	10,558
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,915			2,012
Provision (credit) for loan and lease losses		(982	)		78
Share based compensation expense		395			318
Deferred income tax expense		740			1,111
Origination of loans held for sale		(23,379	)		(97,722	)
Proceeds from sales of loans held for sale		29,062			87,010
Gains on sales of loans held for sale		(397	)		(1,522	)
Loss on sales of other real estate owned		-			123
Investment securities gains		-			(56	)
Net decrease (increase) in accrued interest receivable		244			(534	)
Net (increase) decrease in other assets		(5,994	)		3,198
Net increase (decrease) in accrued expenses and other liabilities		7,906			(232	)
Other – net		1,318			1,940
Net cash provided by operating activities		21,756			6,282
Investing activities:
Purchases of other equity securities		3,120			-
Purchases of investments available-for-sale		-			(11,470	)
Net proceeds from redemption of Federal Home Loan Bank of Atlanta stock		-			2,399
Proceeds from maturities, calls and principal payments of investments held-to-maturity		671			4,269
Proceeds from maturities, calls and principal payments of investments available-for-sale		21,118			66,715
Net increase in loans and leases		(48,587	)		(35,822	)
Proceeds from the sales of other real estate owned		-			731
Expenditures for premises and equipment		(856	)		(551	)
Net cash provided (used) in investing activities		(24,534	)		26,271
Financing activities:
Net increase in deposits		81,970			6,174
Net increase (decrease) in retail repurchase agreements and federal funds purchased		13,196			(36,627	)
Proceeds from advances from FHLB		530,000			-
Repayment of advances from FHLB		(576,000	)		(58	)
Proceeds from issuance of common stock		(79	)		(343	)
Dividends paid		(4,541	)		(3,519	)
Net cash provided (used) by financing activities		44,546			(34,373	)
Net increase (decrease) in cash and cash equivalents		41,768			(1,820	)
Cash and cash equivalents at beginning of period		74,427			86,406
Cash and cash equivalents at end of period	$	116,195		$	84,586

Supplemental Disclosures:
Interest payments	$	4,712		$	5,189
Income tax payments		10			-
Transfers from loans to other real estate owned		281			92

The accompanying notes are an integral part of these statements.

Sandy Spring Bancorp, Inc. and Subsidiaries

CONDENSED Consolidated Statements of changes in stockholders’ equity - UNAUDITED

									Accumulated
			Additional						Other			Total
	Common		Paid-In			Retained			Comprehensive			Stockholders’
(Dollars in thousands, except per share data)	Stock		Capital			Earnings			Income			Equity
Balances at January 1, 2014	$	24,990	$	193,445		$	283,898		$	(2,970	)	$	499,363
Net income							10,928						10,928
Other comprehensive loss, net of tax										4,320			4,320
Common stock dividends - $0.18 per share							(4,541	)					(4,541	)
Stock compensation expense				395									395
Common stock issued pursuant to:													-
Stock option plan - 6,671 shares		7		83									90
Employee stock purchase plan - 5,650 shares		5		116									121
Restricted stock - 41,140 shares		41		(331	)								(290	)
Balances at March 31, 2014	$	25,043	$	193,708		$	290,285		$	1,350		$	510,386

Balances at January 1, 2013	$	24,905	$	191,689		$	255,606		$	11,312		$	483,512
Net income							10,558						10,558
Other comprehensive loss, net of tax										(1,580	)		(1,580	)
Common stock dividends - $0.14 per share							(3,519	)					(3,519	)
Stock compensation expense				318									318
Common stock issued pursuant to:													-
Employee stock purchase plan - 6,349 shares		7		99									106
Restricted stock - 43,151 shares		43		(491	)								(448	)
Balances at March 31, 2013	$	24,955	$	191,615		$	262,645		$	9,732		$	488,947

The accompanying notes are an integral part of these statements

Sandy Spring Bancorp, Inc. and Subsidiaries

Notes to the CONDENSED Consolidated Financial Statements - UNAUDITED

Note 1 – Significant Accounting Policies

Nature of Operations

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

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. The following summary of significant accounting policies of the Company is presented to assist the reader in understanding the financial and other data presented in this report. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2014. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included. Certain reclassifications have been made to prior period amounts, as necessary, to conform to the current period presentation. The Company has evaluated subsequent events through the date of the issuance of its financial statements.

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 14, 2014. There have been no significant changes to the Company’s accounting policies as disclosed in the 2013 Annual Report on Form 10-K.

Principles of Consolidation

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

Use of Estimates

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

Cash Flows

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

Loans Acquired with Deteriorated Credit Quality

Acquired loans are evaluated for evidence of credit deterioration since their origination as of the date of the acquisition are recorded at their initial fair value. Credit deterioration is determined based on the probability of collection of all contractually required principal and interest payments. The historical allowance for loan and lease losses related to the purchased loans is not carried over to the Company. The determination of credit quality deterioration as of the purchase date may include parameters such as past due and non-accrual status, commercial risk ratings, cash flow projections, type of loan and collateral, collateral value and recent loan-to-value ratios or appraised values. For loans acquired with no evidence of credit deterioration, the fair value discount or premium is amortized over the contractual life of the loan as an adjustment to yield. For loans acquired with evidence of credit deterioration, the Company determines at the acquisition date the excess of the loan’s contractually required payments over all cash flows expected to be collected as an amount that should not be accreted into interest income (nonaccretable difference). The remaining amount representing the difference in the expected cash flows of acquired loans and the initial investment in the acquired loans is accreted into interest income over the remaining life of the loan or pool of loans (accretable yield). Subsequent to the purchase date, increases in expected cash flows over those expected at the purchase date are recognized prospectively as interest income over the remaining life of the loan. The present value of any decreases in expected cash flows after the purchase date is recognized as an impairment through a charge to the provision for loan losses. Increases in the present value of expected cash flows after the purchase date are recognized as an adjustment to the accretable yield. Subsequent to the purchase date, the methods utilized to estimate the required allowance for loan and lease losses (“ALLL”) are similar to originated loans. Loans carried at fair value, mortgage loans held for sale and loans under revolving credit agreements are excluded from the scope of this guidance on loans acquired with deteriorated credit quality.

Note 2 – Investments

Investments available-for-sale

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

	March 31, 2014									December 31, 2013
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. government agencies	$	147,711	$	10	$	(5,272	)	$	142,449	$	147,688	$	-	$	(8,222	)	$	139,466
State and municipal		158,427		8,092		(28	)		166,491		159,524		6,060		(156	)		165,428
Mortgage-backed		418,334		10,678		(5,532	)		423,480		439,054		10,188		(6,992	)		442,250
Corporate debt		2,000		3		-			2,003		2,000		4		-			2,004
Trust preferred		1,348		-		(224	)		1,124		1,701		-		(288	)		1,413
Total debt securities		727,820		18,783		(11,056	)		735,547		749,967		16,252		(15,658	)		750,561
Marketable equity securities		723		-		-			723		723		-		-			723
Total investments available-for-sale	$	728,543	$	18,783	$	(11,056	)	$	736,270	$	750,690	$	16,252	$	(15,658	)	$	751,284

Any unrealized losses in the U.S. government agencies, state and municipal, mortgage-backed or corporate debt investment securities at March 31, 2014 are not the result of credit related events but due to changes in interest rates. These declines are considered temporary in nature and are expected to decline over time and recover as these securities approach maturity.

The mortgage-backed securities portfolio at March 31, 2014 is composed entirely of either the most senior tranches of GNMA, FNMA or FHLMC collateralized mortgage obligations ($196.9 million), or GNMA, FNMA or FHLMC mortgage-backed securities ($226.5 million). The Company does not intend to sell these securities and has sufficient liquidity to hold these securities for an adequate period of time, which may be maturity, to allow for any anticipated recovery in fair value.

At March 31, 2014, the trust preferred portfolio consisted of one pooled trust preferred security. The pooled trust preferred security, which is backed by debt issued by banks and thrifts, totals $1.3 million with a fair value of $1.1 million. The fair value of this security was determined by management through the use of a third party valuation specialist due to the limited trading activity for this security.

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

Evaluation of the structural terms as established in the indenture;

Detailed credit and structural evaluation for each piece of issuer collateral in the pool;

Overall default (.48%), recovery and prepayment (2%)/amortization probabilities by issuers in the pool;

Identification of adverse conditions specifically related to the security, industry and geographical area;

Projection of estimated cash flows that incorporate default expectations and loss severities;

Review of historical and implied volatility of the fair value of the security;

Evaluation of credit risk concentrations;

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

A discount rate of 13.0% was established using credit adjusted financial institution spreads for comparably rated institutions and a liquidity adjustment that considered the previously noted characteristics.

As a result of this evaluation, it was determined that the pooled trust preferred security had not incurred any credit-related other-than-temporary impairment (“OTTI”) for the quarter ended March 31, 2014. Non-credit related OTTI on this security, which is not expected to be sold and which the Company has the ability to hold until maturity, was $0.2 million at March 31, 2014. This non-credit related OTTI was recognized in other comprehensive income (“OCI”) at March 31, 2014.

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

Default rates were developed based on the financial condition of the trust preferred issuers in the pool and the payment or deferral status. Conditional default rates were estimated based on the payment characteristics of the security and the financial condition of the issuers in the pool. Near term and future defaults are estimated using third party industry data in addition to a review of key financial ratios and other pertinent data on the financial stability of the underlying issuer;

Loss severity is forecasted based on the type of impairment using research performed by third parties;

The security contains one level of subordination below the senior tranche, with the senior tranche receiving the spread from the subordinate bonds. Given recent performance, it is not expected that the senior tranche will receive its full interest and principal at the bond’s maturity date;

Credit ratings of the underlying issuers are reviewed in conjunction with the development of the default rates applied to determine the credit amounts related to the credit loss; and

Potential prepayments are estimated based on terms and rates of the underlying trust preferred securities to determine the impact of excess spread on the credit enhancement, the removal of the strongest institutions from the underlying pool and any impact that prepayments might have on diversity and concentration.

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

(In thousands)	OTTI Losses
Cumulative credit losses on investment securities, through December 31, 2013	$	531
Additions for credit losses not previously recognized		-
Cumulative credit losses on investment securities, through March 31, 2014	$	531

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

	March 31, 2014
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		14	$	139,156	$	5,272	$	-	$	5,272
State and municipal		4		2,966		28		-		28
Mortgage-backed		26		151,197		5,062		470		5,532
Trust preferred		1		1,124		-		224		224
Total		45	$	294,443	$	10,362	$	694	$	11,056

	December 31, 2013
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		15	$	139,466	$	8,222	$	-	$	8,222
State and municipal		12		11,680		156		-		156
Mortgage-backed		30		169,377		6,865		127		6,992
Trust preferred		1		1,413		-		288		288
Total		58	$	321,936	$	15,243	$	415	$	15,658

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

	March 31, 2014				December 31, 2013
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	2,080	$	2,083	$	2,080	$	2,085
Due after one year through five years		16,024		16,690		12,766		13,285
Due after five years through ten years		384,578		389,461		392,389		392,339
Due after ten years		325,138		327,313		342,732		342,852
Total debt securities available for sale	$	727,820	$	735,547	$	749,967	$	750,561

At March 31, 2014 and December 31, 2013, investments available-for-sale with a book value of $200.0 million and $186.6 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agencies securities, exceeded ten percent of stockholders' equity at March 31, 2014 and December 31, 2013.

Investments held-to-maturity

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

	March 31, 2014									December 31, 2013
			Gross		Gross			Estimated				Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
(In thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
U.S. government agencies	$	64,507	$	-	$	(3,010	)	$	61,497	$	64,505	$	-	$	(4,827	)	$	59,678
State and municipal		159,012		2,786		(2,857	)		158,941		159,889		1,920		(5,753	)		156,056
Mortgage-backed		228		27					255		244		29		-			273
Total investments held-to-maturity	$	223,747	$	2,813	$	(5,867	)	$	220,693	$	224,638	$	1,949	$	(10,580	)	$	216,007

Gross unrealized losses and fair value by length of time that the individual held-to-maturity securities have been in a continuous unrealized loss position at the dates indicated are presented in the following tables:

	March 31, 2014
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		8	$	61,496	$	3,010	$	-	$	3,010
State and municipal		89		79,377		2,533		324		2,857
Total		97	$	140,873	$	5,543	$	324	$	5,867

	December 31, 2013
					Continuous Unrealized
					Losses Existing for:
	Number								Total
	of				Less than		More than		Unrealized
(Dollars in thousands)	securities		Fair Value		12 months		12 months		Losses
U.S. government agencies		8	$	59,678	$	4,827	$	-	$	4,827
State and municipal		113		94,243		5,366		387		5,753
Total		121	$	153,921	$	10,193	$	387	$	10,580

The Company intends to hold these securities until they reach maturity.

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

	March 31, 2014				December 31, 2013
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
(In thousands)	Cost		Value		Cost		Value
Due in one year or less	$	1,690	$	1,695	$	1,720	$	1,725
Due after one year through five years		1,564		1,569		3,249		3,269
Due after five years through ten years		145,655		144,499		139,033		135,074
Due after ten years		74,838		72,930		80,636		75,939
Total debt securities held-to-maturity	$	223,747	$	220,693	$	224,638	$	216,007

At March 31, 2014 and December 31, 2013, investments held-to-maturity with a book value of $167.3 million and $165.8 million, respectively, were pledged as collateral for certain government deposits and for other purposes as required or permitted by law. The outstanding balance of no single issuer, except for U.S. Agency securities, exceeded ten percent of stockholders' equity at March 31, 2014 and December 31, 2013.

Equity securities

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

(In thousands)	March 31, 2014		December 31, 2013
Federal Reserve Bank stock	$	8,269	$	8,269
Federal Home Loan Bank of Atlanta stock		29,298		32,418
Total equity securities	$	37,567	$	40,687

Note 3 – Loans and Leases

Outstanding loan balances at March 31, 2014 and December 31, 2013 are net of unearned income including net deferred loan costs of $0.5 million and $0.7 million, respectively. The loan portfolio segment balances at the dates indicated are presented in the following table:

(In thousands)	March 31, 2014		December 31, 2013
Residential real estate:
Residential mortgage	$	640,939	$	618,381
Residential construction		143,109		129,177
Commercial real estate:
Commercial owner occupied real estate		582,472		592,823
Commercial investor real estate		573,634		552,178
Commercial acquisition, development and construction		163,343		160,696
Commercial Business		348,180		356,651
Leases		439		703
Consumer		380,697		373,657
Total loans and leases	$	2,832,813	$	2,784,266

Note 4 – CREDIT QUALITY ASSESSMENT

Allowance for Loan and Lease Losses

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

	Three Months Ended March 31,
(In thousands)	2014			2013
Balance at beginning of year	$	38,766		$	42,957
Provision for loan and lease losses		(982	)		78
Loan and lease charge-offs		(717	)		(3,108	)
Loan and lease recoveries		959			1,319
Net charge-offs		242			(1,789	)
Balance at period end	$	38,026		$	41,246

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

	For the Three Months Ended March 31, 2014
				Commercial Real Estate															Residential Real Estate
										Commercial
	Commercial			Commercial			Commercial			Owner									Residential			Residential
(Dollars in thousands)	Business			AD&C			Investor R/E			Occupied R/E			Leasing			Consumer			Mortgage			Construction			Total
Balance at beginning of year	$	6,308		$	3,754		$	9,263		$	6,308		$	16		$	4,142		$	7,819		$	1,156		$	38,766
Provision (credit)		(1,245	)		346			(550	)		413			(2	)		254			(115	)		(83	)		(982	)
Charge-offs		(126	)		-			-			-			-			(368	)		(223	)		-			(717	)
Recoveries		894			-			5			-			-			37			20			3			959
Net charge-offs		768			-			5			-			-			(331	)		(203	)		3			242
Balance at end of period	$	5,831		$	4,100		$	8,718		$	6,721		$	14		$	4,065		$	7,501		$	1,076		$	38,026

Total loans and leases	$	348,180		$	163,343		$	573,634		$	582,472		$	439		$	380,697		$	640,939		$	143,109		$	2,832,813
Allowance for loans and leases to total loans and leases ratio		1.67	%		2.51	%		1.52	%		1.15	%		3.19	%		1.07	%		1.17	%		0.75	%		1.34	%

Balance of loans specifically evaluated for impairment	$	5,041		$	4,133		$	9,458		$	7,150			*na.*		$	28		$	6,116		$	1,849		$	33,775
Allowance for loans specifically evaluated for impairment	$	1,311		$	1,167		$	152		$	412			*na.*			*na.*		$	604		$	-		$	3,646
Specific allowance to specific loans ratio		26.01	%		28.24	%		1.61	%		5.76	%		*na.*			*na.*			9.88	%		0.00	%		10.79	%

Balance of loans collectively evaluated	$	343,139		$	159,210		$	564,176		$	575,322		$	439		$	380,669		$	634,823		$	141,260		$	2,799,038
Allowance for loans collectively evaluated	$	4,520		$	2,933		$	8,566		$	6,309		$	14		$	4,065		$	6,897		$	1,076		$	34,380
Collective allowance to collective loans ratio		1.32	%		1.84	%		1.52	%		1.10	%		3.19	%		1.07	%		1.09	%		0.76	%		1.23	%

	For the Year Ended December 31, 2013
				Commercial Real Estate															Residential Real Estate
										Commercial
	Commercial			Commercial			Commercial			Owner									Residential			Residential
(Dollars in thousands)	Business			AD&C			Investor R/E			Occupied R/E			Leasing			Consumer			Mortgage			Construction			Total
Balance at beginning of year	$	6,495		$	4,737		$	9,583		$	6,997		$	332		$	3,846		$	8,522		$	2,445		$	42,957
Provision (credit)		1,910			(3,978	)		1,100			(874	)		(326	)		1,951			329			(1,196	)		(1,084	)
Charge-offs		(2,915	)		(85	)		(4,774	)		(240	)		-			(1,853	)		(1,194	)		(104	)		(11,165	)
Recoveries		818			3,080			3,354			425			10			198			162			11			8,058
Net charge-offs		(2,097	)		2,995			(1,420	)		185			10			(1,655	)		(1,032	)		(93	)		(3,107	)
Balance at end of period	$	6,308		$	3,754		$	9,263		$	6,308		$	16		$	4,142		$	7,819		$	1,156		$	38,766

Total loans and leases	$	356,651		$	160,696		$	552,178		$	592,823		$	703		$	373,657		$	618,381		$	129,177		$	2,784,266
Allowance for loans and leases to total loans and leases ratio		1.77	%		2.34	%		1.68	%		1.06	%		2.28	%		1.11	%		1.26	%		0.89	%		1.39	%

Balance of loans specifically evaluated for impairment	$	5,608		$	4,128		$	7,654		$	7,111			na.		$	29		$	6,141		$	1,852		$	32,523
Allowance for loans specifically evaluated for impairment	$	849		$	1,031		$	126		$	426			na.			na.		$	626		$	-		$	3,058
Specific allowance to specific loans ratio		15.14	%		24.98	%		1.65	%		5.99	%		na.			na.			10.19	%		0.00	%		9.40	%

Balance of loans collectively evaluated	$	351,043		$	156,568		$	544,524		$	585,712		$	703		$	373,628		$	612,240		$	127,325		$	2,751,743
Allowance for loans collectively evaluated	$	5,459		$	2,723		$	9,137		$	5,882		$	16		$	4,142		$	7,193		$	1,156		$	35,708
Collective allowance to collective loans ratio		1.56	%		1.74	%		1.68	%		1.00	%		2.28	%		1.11	%		1.17	%		0.91	%		1.30	%

The following table provides summary information regarding impaired loans at the dates indicated and for the periods then ended:

(In thousands)	March 31, 2014		December 31, 2013
Impaired loans with a specific allowance	$	12,327	$	12,217
Impaired loans without a specific allowance		21,448		20,306
Total impaired loans	$	33,775	$	32,523

Allowance for loan and lease losses related to impaired loans	$	3,646	$	3,058
Allowance for loan and lease losses related to loans collectively evaluated		34,380		35,708
Total allowance for loan and lease losses	$	38,026	$	38,766

Average impaired loans for the period	$	33,151	$	38,379
Contractual interest income due on impaired loans during the period	$	866	$	2,612
Interest income on impaired loans recognized on a cash basis	$	205	$	1,374
Interest income on impaired loans recognized on an accrual basis	$	93	$	473

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

	March 31, 2014
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
*Impaired loans with* a specific allowance**
Non-accruing	$	1,080	$	1,477	$	411	$	2,022	$	960	$	5,950
Restructured accruing		683		-		-		-		1,394		2,077
Restructured non-accruing		260		1,163		-		2,249		628		4,300
Balance	$	2,023	$	2,640	$	411	$	4,271	$	2,982	$	12,327

Allowance	$	1,311	$	1,167	$	152	$	412	$	604	$	3,646

*Impaired loans without* a specific allowance**
Non-accruing	$	813	$	-	$	6,263	$	913	$	793	$	8,782
Restructured accruing		1,086		-		2,174		-		2,074		5,334
Restructured non-accruing		1,119		1,493		610		1,966		2,144		7,332
Balance	$	3,018	$	1,493	$	9,047	$	2,879	$	5,011	$	21,448

Total impaired loans
Non-accruing	$	1,893	$	1,477	$	6,674	$	2,935	$	1,753	$	14,732
Restructured accruing		1,769		-		2,174		-		3,468		7,411
Restructured non-accruing		1,379		2,656		610		4,215		2,772		11,632
Balance	$	5,041	$	4,133	$	9,458	$	7,150	$	7,993	$	33,775

Unpaid principal balance in total impaired loans	$	6,765	$	10,357	$	14,171	$	8,759	$	8,368	$	48,420

	March 31, 2014

			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	5,325	$	4,131	$	8,556	$	7,131	$	8,008	$	33,151
Contractual interest income due on impaired loans during the period	$	95	$	177	$	188	$	229	$	177
Interest income on impaired loans recognized on a cash basis	$	65	$	27	$	17	$	84	$	12
Interest income on impaired loans recognized on an accrual basis	$	29	$	-	$	28	$	-	$	36

	December 31, 2013
			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
Non-accruing	$	374	$	1,360	$	749	$	2,022	$	-	$	4,505
Restructured accruing		790		-		-		1,174		2,365		4,329
Restructured non-accruing		349		1,122		-		1,274		638		3,383
Balance	$	1,513	$	2,482	$	749	$	4,470	$	3,003	$	12,217

Allowance	$	849	$	1,031	$	126	$	426	$	626	$	3,058

Impaired loans without a specific allowance
Non-accruing	$	1,532	$	382	$	5,440	$	646	$	-	$	8,000
Restructured accruing		1,417		-		852		-		2,861		5,130
Restructured non-accruing		1,146		1,264		613		1,995		2,158		7,176
Balance	$	4,095	$	1,646	$	6,905	$	2,641	$	5,019	$	20,306

Total impaired loans
Non-accruing	$	1,906	$	1,742	$	6,189	$	2,668	$	-	$	12,505
Restructured accruing		2,207		-		852		1,174		5,226		9,459
Restructured non-accruing		1,495		2,386		613		3,269		2,796		10,559
Balance	$	5,608	$	4,128	$	7,654	$	7,111	$	8,022	$	32,523

Unpaid principal balance in total impaired loans	$	7,943	$	10,318	$	12,351	$	8,684	$	8,650	$	47,946

	December 31, 2013

			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	7,153	$	5,451	$	10,605	$	8,386	$	6,784	$	38,379
Contractual interest income due on impaired loans during the period	$	452	$	654	$	587	$	692	$	227
Interest income on impaired loans recognized on a cash basis	$	238	$	253	$	75	$	725	$	83
Interest income on impaired loans recognized on an accrual basis	$	133	$	-	$	30	$	77	$	233

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:

	March 31, 2014
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	3,272	$	4,133	$	7,284	$	7,150	$	-	$	2,115	$	5,025	$	2,304	$	31,283
Loans and leases 90 days past due		-		-		-		-		-		-		-		-		-
Restructured loans and leases		1,769		-		2,174		-		-		-		3,468		-		7,411
Total non-performing loans and leases		5,041		4,133		9,458		7,150		-		2,115		8,493		2,304		38,694
Other real estate owned		54		365		-		-		-		30		1,170		-		1,619
Total non-performing assets	$	5,095	$	4,498	$	9,458	$	7,150	$	-	$	2,145	$	9,663	$	2,304	$	40,313

	December 31, 2013
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	3,400	$	4,127	$	6,802	$	5,936	$	-	$	2,259	$	5,735	$	2,315	$	30,574
Loans and leases 90 days past due		-		-		-		-		-		1		-		-		1
Restructured loans and leases		2,207		-		852		1,174		-		29		5,197		-		9,459
Total non-performing loans and leases		5,607		4,127		7,654		7,110		-		2,289		10,932		2,315		40,034
Other real estate owned		54		365		-		-		-		-		919		-		1,338
Total non-performing assets	$	5,661	$	4,492	$	7,654	$	7,110	$	-	$	2,289	$	11,851	$	2,315	$	41,372

	March 31, 2014
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	2,245	$	609	$	2,986	$	672	$	-	$	980	$	3,972	$	-	$	11,464
61-90 days		45		-		2,108		2,497		-		9		647		-		5,306
> 90 days		-		-		-		-		-		-		-		-		-
Total past due		2,290		609		5,094		3,169		-		989		4,619		-		16,770
Non-accrual loans and leases		3,272		4,133		7,284		7,150		-		2,115		5,025		2,304		31,283
Loans aquired with deteriorated credit quality		1,327		-		216		2,284		-		-		-		-		3,827
Current loans		341,291		158,601		561,040		569,869		439		377,593		631,295		140,805		2,780,933
Total loans and leases	$	348,180	$	163,343	$	573,634	$	582,472	$	439	$	380,697	$	640,939	$	143,109	$	2,832,813

	December 31, 2013
			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	382	$	-	$	5,826	$	876	$	4	$	716	$	4,119	$	-	$	11,923
61-90 days		1,142		-		-		2,540		-		176		208		-		4,066
> 90 days		-		-		-		-		-		1		-		-		1
Total past due		1,524		-		5,826		3,416		4		893		4,327		-		15,990
Non-accrual loans and leases		3,400		4,127		6,802		5,936		-		2,259		5,735		2,315		30,574
Loans aquired with deteriorated credit quality		1,363		-		571		2,366		-		-		-		-		4,300
Current loans		350,364		156,569		538,979		581,105		699		370,505		608,319		126,862		2,733,402
Total loans and leases	$	356,651	$	160,696	$	552,178	$	592,823	$	703	$	373,657	$	618,381	$	129,177	$	2,784,266

The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio at the dates indicated:

	March 31, 2014
			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Pass	$	320,276	$	157,653	$	546,151	$	543,353	$	1,567,433
Special Mention		16,131		-		3,217		14,492		33,840
Substandard		11,773		5,690		24,266		24,627		66,356
Doubtful		-		-		-		-		-
Total	$	348,180	$	163,343	$	573,634	$	582,472	$	1,667,629

	December 31, 2013
			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Pass	$	324,941	$	154,869	$	523,901	$	553,604	$	1,557,315
Special Mention		16,166		-		2,944		15,702		34,812
Substandard		15,274		5,827		25,333		23,517		69,951
Doubtful		270		-		-		-		270
Total	$	356,651	$	160,696	$	552,178	$	592,823	$	1,662,348

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 the dates indicated:

	March 31, 2014
					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Performing	$	439	$	378,582	$	632,446	$	140,805	$	1,152,272
Non-performing:
90 days past due		-		-		-		-		-
Non-accruing		-		2,115		5,025		2,304		9,444
Restructured loans and leases		-		-		3,468		-		3,468
Total	$	439	$	380,697	$	640,939	$	143,109	$	1,165,184

	December 31, 2013
					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Performing	$703		$371,368		$607,449		$126,862		$1,106,382
Non-performing:
90 days past due		-		1		-		-		1
Non-accruing		-		2,259		5,735		2,315		10,309
Restructured loans and leases		-		29		5,197		-		5,226
Total	$	703	$	373,657	$	618,381	$	129,177	$	1,121,918

During the three months ended March 31, 2014, the Company restructured $1.6 million in loans. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the recorded investment 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 2014 did not require significant specific reserves at March 31, 2014. For the year ended December 31, 2013, the Company restructured $3.4 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 2013 had specific reserves of $0.1 million at December 31, 2013. Commitments to lend additional funds on loans that have been restructured at March 31, 2014 and December 31, 2013 amounted to $5.6 million and $5.5 million, respectively.

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:

	For the Three Months Ended March 31, 2014
			Commercial Real Estate
							Commercial		All
			Commercial		Commercial		Owner		Other
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
Restructured accruing	$	14	$	-	$	1,322	$	-	$	-	$	1,336
Restructured non-accruing		-		282		-		-		-		282
Balance	$	14	$	282	$	1,322	$	-	$	-	$	1,618

Specific allowance	$	-	$	-	$	-	$	-	$	-	$	-

Restructured and subsequently defaulted	$	-	$	-	$	-	$	985	$	-	$	985

	For the Year Ended December 31, 2013
			Commercial Real Estate
							Commercial		All
			Commercial		Commercial		Owner		Other
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
Restructured accruing	$	87	$	-	$	852	$	-	$	2,064	$	3,003
Restructured non-accruing		425		-		-		-		-		425
Balance	$	512	$	-	$	852	$	-	$	2,064	$	3,428

Specific allowance	$	141	$	-	$	-	$	-	$	-	$	141

Restructured and subsequently defaulted	$	-	$	-	$	-	$	-	$	-	$	-

Other Real Estate Owned

Other real estate owned totaled $1.6 million and $1.3 million at March 31, 2014 and December 31, 2013.

Note 5 – Goodwill and Other Intangible Assets

The gross carrying amounts and accumulated amortization of intangible assets and goodwill are presented at the dates indicated in the following table:

	March 31, 2014							Weighted	December 31, 2013							Weighted
	Gross					Net		Average	Gross					Net		Average
	Carrying		Accumulated			Carrying		Remaining	Carrying		Accumulated			Carrying		Remaining
(Dollars in thousands)	Amount		Amortization			Amount		Life	Amount		Amortization			Amount		Life
Amortizing intangible assets:
Core deposit intangibles	$	9,716	$	(9,607	)	$	109	0.1 years	$	9,716	$	(9,352	)	$	364	0.3 years
Other identifiable intangibles		8,623		(7,772	)		851	1.9 years		8,623		(7,657	)		966	2.1 years
Total amortizing intangible assets	$	18,339	$	(17,379	)	$	960		$	18,339	$	(17,009	)	$	1,330

Goodwill	$	84,171				$	84,171		$	84,171				$	84,171

The following table presents the estimated future amortization expense for amortizing intangible assets within the years ending December 31:

(In thousands)	Amount
2014		451
2015		372
2016		94
2017		16
Thereafter		27
Total amortizing intangible assets	$	960

Note 6 – Deposits

The following table presents the composition of deposits at the dates indicated:

(In thousands)	March 31, 2014		December 31, 2013
Noninterest-bearing deposits	$	882,169	$	836,198
Interest-bearing deposits:
Demand		479,640		460,824
Money market savings		878,622		870,653
Regular savings		256,760		243,813
Time deposits of less than $100,000		257,509		263,636
Time deposits of $100,000 or more		204,495		202,101
Total interest-bearing deposits		2,077,026		2,041,027
Total deposits	$	2,959,195	$	2,877,225

Note 7 – Stockholders’ Equity

The Company re-approved a stock repurchase program in August 2013 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock or approximately 1,260,000 shares. Repurchases, which will be conducted through open market purchases or privately negotiated transactions, will be made depending on market conditions and other factors. No shares were repurchased during the first quarter of 2014.

Note 8 – Share Based Compensation

At March 31, 2014, the Company had two share based compensation plans in existence, the 1999 Stock Option Plan (expired but having outstanding options that may still be exercised) and the 2005 Omnibus Stock Plan, which is described below.

The Company’s 2005 Omnibus Stock Plan (“Omnibus Plan”) provides for the granting of non-qualifying stock options to the Company’s directors, and incentive and non-qualifying stock options, stock appreciation rights and restricted stock grants to selected key employees on a periodic basis at the discretion of the board. The Omnibus Plan authorizes the issuance of up to 1,800,000 shares of common stock of which 1,010,454 are available for issuance at March 31, 2014, 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. Options granted under the expired 1999 Stock Option Plan remain outstanding until exercised or they expire. The Company generally issues authorized but previously unissued shares to satisfy option exercises.

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 periods shown are presented in the following table:

	Three Months Ended March 31,
	2014			2013
Dividend yield		3.04	%		2.80	%
Weighted average expected volatility		46.78	%		53.87	%
Weighted average risk-free interest rate		1.56	%		0.83	%
Weighted average expected lives (in years)		5.08			5.34
Weighted average grant-date fair value	$	8.05		$	7.99

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.

Compensation expense is recognized on a straight-line basis over the vesting period of the respective stock option or restricted stock grant. The Company recognized compensation expense of $0.4 million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively, related to the awards of stock options and restricted stock grants. The intrinsic value of stock options exercised in the three months ended March 31, 2014 was insignificant. No stock options were exercised for the three months ended March 31, 2013. The total of unrecognized compensation cost related to stock options was approximately $0.3 million as of March 31, 2014. That cost is expected to be recognized over a weighted average period of approximately 2.4 years. The total of unrecognized compensation cost related to restricted stock was approximately $4.8 million as of March 31, 2014. That cost is expected to be recognized over a weighted average period of approximately 3.7 years. The fair value of the options vested during the three months ended March 31, 2014 and 2013, was $0.1 million and $0.2 million, respectively.

In the first quarter of 2014, 21,251 stock options were granted, subject to a three year vesting schedule with one third of the options vesting each year on the anniversary date of the grant. Additionally, 79,416 shares of restricted stock were granted, subject to a five year vesting schedule with one fifth of the shares vesting each year on the grant date anniversary.

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

						Weighted
	Number			Weighted		Average		Aggregate
	of			Average		Contractual		Intrinsic
	Common			Exercise		Remaining		Value
	Shares			Share Price		Life(Years)		(in thousands)
Balance at January 1, 2014		307,800		$	25.23			$	1,768
Granted		21,251		$	24.75
Exercised		(6,671	)	$	13.47			$	73
Forfeited or expired		-			-
Balance at March 31, 2014		322,380		$	25.44		2.5	$	1,209

Exercisable at March 31, 2014		274,628		$	26.02		1.8	$	1,071

Weighted average fair value of options granted during the year				$	8.05

A summary of the activity for the Company’s restricted stock for the period indicated is presented in the following table:

	Number			Weighted
	of			Average
	Common			Grant-Date
(In dollars, except share data):	Shares			Fair Value
Restricted stock at January 1, 2014		227,064		$	18.61
Granted		79,416		$	24.75
Vested		(56,910	)	$	16.61
Forfieted		(418	)	$	19.69
Restricted stock at March 31, 2014		249,152		$	21.02

Note 9 – 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. Benefits after January 1, 2005, are based on the benefit earned as of December 31, 2004, plus benefits earned in future years of service based on the employee’s compensation during each such year. All benefit accruals for employees were frozen as of December 31, 2007 based on past service and thus future salary increases 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.

The components of net periodic benefit cost for the periods indicated are presented in the following table:

	Three Months Ended March 31,
(In thousands)	2014			2013
Interest cost on projected benefit obligation	$	391		$	387
Expected return on plan assets		(494	)		(417	)
Recognized net actuarial loss		48			364
Net periodic benefit cost	$	(55	)	$	334

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. Given these uncertainties, management continues to monitor the funding level of the pension plan and may make contributions as necessary during 2014.

Note 10 – Net Income per Common Share

The calculation of net income per common share for the periods indicated is presented in the following table:

	Three Months Ended March 31,
(Dollars and amounts in thousands, except per share data)	2014		2013
Net income	$	10,928	$	10,558
Basic:
Basic weighted average EPS shares		24,999		24,911

Basic net income per share	$	0.44	$	0.42
Diluted:
Basic weighted average EPS shares		24,999		24,911
Dilutive common stock equivalents		125		92
Dilutive EPS shares		25,124		25,003

Diluted net income per share	$	0.43	$	0.42

Anti-dilutive shares		47		242

NOTE 11 – OTHER COMPREHENSIVE INCOME

Comprehensive income is defined as net income plus transactions and other occurrences that are the result of non-owner changes in equity. For condensed 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) and the components of the activity for the periods indicated:

(In thousands)	Unrealized Gains (Losses) on Investments Available-for-Sale		Defined Benefit Pension Plan			Total
Balance at January 1, 2014	$	358	$	(3,328	)	$	(2,970	)
Other comprehensive income before reclassification, net of tax		4,309		-			4,309
Reclassifications from accumulated other comprehensive income, net of tax		-		11			11
Current period change in other comprehensive income, net of tax		4,309		11			4,320
Balance at March 31, 2014	$	4,667	$	(3,317	)	$	1,350

(In thousands)	Unrealized Gains (Losses) on Investments Available-for-Sale			Defined Benefit Pension Plan			Total
Balance at January 1, 2013	$	20,258		$	(8,946	)	$	11,312
Other comprehensive income before reclassification, net of tax		(1,831	)		-			(1,831	)
Reclassifications from accumulated other comprehensive income, net of tax		33			218			251
Current period change in other comprehensive income, net of tax		(1,798	)		218			(1,580	)
Balance at March 31, 2013	$	18,460		$	(8,728	)	$	9,732

The following table provides the information on the reclassification adjustments out of accumulated other comprehensive income for the periods indicated:

	For the three months ended March 31,
(In thousands)	2014		2013
Unrealized gains/(losses) on investments available-for-sale
Affected line item in the Statements of Income:
Investment securities gains	$	-	$	56
Income before taxes		-		56
Tax expense		-		23
Net income	$	-	$	33

Amortization of defined benefit pension plan items
Affected line item in the Statements of Income:
Recognized actuarial loss 1	$	48	$	364
Income before taxes		48		364
Tax expense		37		146
Net income	$	11	$	218

1 This amount is included in the computation of net periodic pension cost, see Note 9

Note 12 – Financial Instruments with Off-balance Sheet Risk and Derivatives

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 notional value of commercial loan swaps outstanding was $46.0 million with a fair value of $1.5 million as of March 31, 2014 compared to $46.4 million with a fair value of $1.6 million as of December 31, 2013. The offsetting nature of the swaps results in a neutral effect on the Company’s operations. Fair values of the swaps are carried as both gross assets and gross liabilities in the condensed consolidated statements of condition. The associated net gains and losses on the swaps are recorded in other non-interest income.

Note 13 – 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;

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). 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.

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

Assets and Liabilities

Mortgage loans held for sale

Mortgage loans held for sale are valued based 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, mortgage-backed securities and corporate debt

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 2 – 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.

Assets Measured at Fair Value on a Recurring Basis

The following tables set forth the Company’s financial assets and liabilities at the dates 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:

	March 31, 2014
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets
Residential mortgage loans held for sale	$	-	$	3,079		$	-	$	3,079
Investments available-for-sale:
U.S. government agencies		-		142,449			-		142,449
State and municipal		-		166,491			-		166,491
Mortgage-backed		-		423,480			-		423,480
Corporate debt		-		2,003			-		2,003
Trust preferred		-		-			1,124		1,124
Marketable equity securities		-		723			-		723
Interest rate swap agreements		-		1,548			-		1,548

Liabilities
Interest rate swap agreements	$	-	$	(1,548	)	$	-	$	(1,548	)

	December 31, 2013
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets
Residential mortgage loans held for sale	$	-	$	8,365		$	-	$	8,365
Investments available-for-sale:
U.S. government agencies		-		139,466			-		139,466
State and municipal		-		165,428			-		165,428
Mortgage-backed		-		442,250			-		442,250
Corporate debt		-		2,004			-		2,004
Trust preferred		-		-			1,413		1,413
Marketable equity securities		-		723			-		723
Interest rate swap agreements		-		1,608			-		1,608

Liabilities
Interest rate swap agreements	$	-	$	(1,608	)	$	-	$	(1,608	)

The following table provides unrealized losses included in assets measured in the Condensed Consolidated Statements of Condition at fair value on a recurring basis for the period indicated:

	Significant Unobservable Inputs
(In thousands)	(Level 3)
Investments available-for-sale:
Balance at January 1, 2014	$	1,413
Total OTTI included in earnings		-
Principal redemption		(352	)
Total unrealized losses included in other comprehensive income (loss)		63
Balance at March 31, 2014	$	1,124

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 the date 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:

	March 31, 2014
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Impaired loans	$	-	$	-	$	10,921	$	10,921	$	17,463
Other real estate owned		-		-		1,619		1,619		(309	)
Total	$	-	$	-	$	12,540	$	12,540	$	17,154

	December 31, 2013
(In thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Total Losses
Impaired loans	$	-	$	-	$	11,011	$	11,011	$	17,655
Other real estate owned		-		-		1,338		1,338		(309	)
Total	$	-	$	-	$	12,349	$	12,349	$	17,346

At March 31, 2014, impaired loans totaling $33.8 million were written down to fair value of $30.2 million as a result of specific loan loss allowances of $3.6 million associated with the impaired loans which was included in the allowance for loan losses. Impaired loans totaling $32.5 million were written down to fair value of $29.5 million at December 31, 2013 as a result of specific loan loss allowances of $3.0 million associated with the impaired loans.

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.

The carrying amounts and fair values of the Company’s financial instruments at the dates indicated are presented in the following table:

					Fair Value Measurements
	March 31, 2014				Quoted Prices in
			Estimated		Active Markets for		Significant Other		Significant
	Carrying		Fair		Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Investments held-to-maturity and other equity securities	$	261,314	$	258,260	$	-	$	258,260	$	-
Loans, net of allowance		2,794,787		2,741,247		-		-		2,741,247
Other assets		86,812		86,812		-		86,812		-

Financial Liabilities
Time Deposits	$	462,004	$	462,394	$	-	$	462,394	$	-
Securities sold under retail repurchase agreements and federal funds purchased		67,038		67,038		-		67,038		-
Advances from FHLB		569,000		595,324		-		595,324		-
Subordinated debentures		35,000		11,871		-		-		11,871

					Fair Value Measurements
	December 31, 2013				Quoted Prices in
			Estimated		Active Markets for		Significant Other		Significant
	Carrying		Fair		Identical Assets		Observable Inputs		Unobservable Inputs
(In thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Investments held-to-maturity and other equity securities	$	224,638	$	216,007	$	-	$	216,007	$	-
Other equity securities		40,687		40,687				40,687
Loans, net of allowance		2,784,266		2,692,877		-		-		2,692,877
Other assets		86,213		86,213		-		86,213		-

Financial Liabilities
Time Deposits	$	465,737	$	465,392	$	-	$	465,392	$	-
Securities sold under retail repurchase agreements and federal funds purchased		53,842		53,842		-		53,842		-
Advances from FHLB		615,000		641,901		-		641,901		-
Subordinated debentures		35,000		11,376		-		-		11,376

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 March 31, 2014 and December 31, 2013 as determined by the each insurance carrier. The carrying value of accrued interest receivable approximates fair values due to the short-term duration.

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 (“FHLB”) 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 the FHLB 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 are 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 table above.

Note 14 - 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 amounted to $0.3 million and $0.4 million in for the three months ended March 31, 2014 and 2013, 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 three ended March 31, 2014 and 2013, 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 $1.1 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 three ended March 31, 2014 and 2013, respectively.

Information for the operating segments and reconciliation of the information to the condensed consolidated financial statements for the periods indicated is presented in the following tables:

	Three Months Ended March 31, 2014
	Community					Investment		Inter-Segment
(In thousands)	Banking			Insurance		Mgmt.		Elimination			Total
Interest income	$	36,250		$	2	$	4	$	(6	)	$	36,250
Interest expense		4,664			-		-		(6	)		4,658
Provision (credit) for loan and lease losses		(982	)		-		-		-			(982	)
Noninterest income		8,015			1,731		1,678		(175	)		11,249
Noninterest expenses		25,612			1,192		920		(175	)		27,549
Income before income taxes		14,971			541		762		-			16,274
Income tax expense		4,831			218		297		-			5,346
Net income	$	10,140		$	323	$	465	$	-		$	10,928

Assets	$	4,206,353		$	14,461	$	19,928	$	(71,744	)	$	4,168,998

	Three Months Ended March 31, 2013
	Community				Investment		Inter-Segment
(In thousands)	Banking		Insurance		Mgmt.		Elimination			Total
Interest income	$	36,279	$	2	$	3	$	(5	)	$	36,279
Interest expense		4,958		-		-		(5	)		4,953
Provision for loan and lease losses		78		-		-		-			78
Noninterest income		9,706		1,407		1,509		(203	)		12,419
Noninterest expenses		26,044		1,126		856		(203	)		27,823
Income before income taxes		14,905		283		656		-			15,844
Income tax expense		4,915		115		256		-			5,286
Net income	$	9,990	$	168	$	400	$	-		$	10,558

Assets	$	3,976,665	$	13,659	$	17,889	$	(76,187	)	$	3,932,026

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company

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. The Bank was founded in 1868 and is the oldest banking business based in Maryland. The Bank is independent, community oriented, and conducts a full-service commercial banking business through 46 community offices located in Anne Arundel, Carroll, Frederick, Howard, Montgomery and Prince George's counties in Maryland, and Arlington, Fairfax and Loudoun counties in Virginia. 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.

Overview

Net income for the Company for the first quarter of 2014 totaled $10.9 million ($0.43 per diluted share) as compared to net income of $10.6 million ($0.42 per diluted share) for the first quarter of 2013. These results reflect the following events:

Average total loans for the first quarter of 2014 increased 8% compared to the first quarter of 2013 due primarily to organic growth in the residential mortgage and commercial investor real estate portfolios.

The net interest margin was 3.47% for the first quarter of 2014, compared to 3.59% for the first quarter of 2013 and 3.53% for the fourth quarter of 2013. The decline was the result of declining loan yields during the past twelve months, primarily in the commercial loan portfolio.

The provision for loan and lease losses was a credit of $1.0 million for the first quarter of 2014 compared to a charge of $0.1 million for the first quarter of 2013 and $0.6 million for the fourth quarter of 2013. The decrease in the provision for the first quarter of 2014 compared to the prior year quarter was due primarily to decreases in historical losses and improved credit metrics that more than offset the effect of loan growth during the quarter.

Non-interest income decreased $1.2 million or 9% for the first quarter of 2014 compared to the first quarter of 2013 due largely to a decrease in mortgage banking activities due to a lower volume of refinancing activity. This decrease was partially offset by a 10% increase in wealth management income due to higher assets under management and a 22% increase in insurance agency commissions.

Non-performing loans decreased to $38.7 million at March 31, 2014 compared to $49.5 million at March 31, 2013. The coverage ratio of the allowance for loan and lease losses to non-performing loans was 98% at March 31, 2014 compared to a coverage ratio of 83% at March 31, 2013.

In the first quarter of 2014, the Mid-Atlantic region continued to experience slow but steady economic improvement. Concerns over a sluggish national economy and the unemployment rate continued to impede both the regional and national economic outlook. While the housing markets have improved, this sector is still significantly below levels experienced in prior economic recoveries due in part to higher long-term interest rates. The positive trends in housing and consumer spending have been offset by concerns over the long-term effects of the Affordable Care Act and stubbornly high unemployment. This has caused uncertainty on the part of both large and small businesses and has thus limited economic expansion. The effect of geopolitical events in Europe and the Ukraine together with declining economic indicators in China continue to provide underlying volatility. Together with state and municipal budget challenges across the country, these factors have caused enough economic uncertainty, particularly among individual consumers and small and medium-sized businesses, to suppress confidence and thus constrain the pace of economic growth and lending. Despite this challenging business environment, the Company has emphasized the fundamentals of community banking as it has maintained strong levels of liquidity and capital while overall credit quality has continued to improve.

The net interest margin decreased to 3.47% in the first quarter of 2014 compared to 3.59% for the first quarter of 2013. During 2014, lower rates on average interest-earning assets and a slowing decline in funding costs served to offset the effect of loan growth. Average loans increased 8% for the first quarter of 2014 compared to the prior year quarter, while average total deposits increased 1% compared to 2013.

Liquidity remained strong due to the borrowing lines with the Federal Home Loan Bank of Atlanta and the Federal Reserve and the size and composition of the investment portfolio.

The Company’s credit quality continued to improve as non-performing assets decreased to $40.3 million at March 31, 2014 from $54.7 million at March 31, 2013. This decrease was due primarily to a combination of the Company’s continuing efforts at resolution of non-performing loans and reduced migration of existing loans into non-performing status, particularly in the commercial real estate portfolio. Non-performing assets represented 0.97% of total assets at March 31, 2014 compared to 1.39% at March 31, 2013. The ratio of net charge-offs to average loans and leases was (0.04)% for the first quarter of 2014, compared to 0.28% for the prior year quarter.

Non-interest income decreased 9% in the first quarter of 2014 compared to the first quarter of 2013. This decline was driven by a significant decrease in mortgage banking income due primarily to lower mortgage origination volumes. This was partially offset by a 10% increase in wealth management income due to growth in assets under management and a 22% increase in insurance agency commissions as a result of growth in revenue due primarily to higher annual contingency commissions based on annual policy performance. In addition, other non-interest income decreased 29% in the first quarter of 2014 compared to the prior year quarter. This decrease was due to sales and dispositions of loans and fixed assets together with a non-recurring legal settlement, all of which occurred in the first quarter of 2013. Service charges on deposits decreased 5% due to lower overdraft fees.

Non-interest expenses decreased 1% in the first quarter of 2014 compared to the first quarter of 2013 as legal fees associated with loan workouts declined significantly compared to the prior year period. This decrease was offset by higher occupancy expenses due to weather–related costs.

Total assets at March 31, 2014 increased 2% compared to December 31, 2013 primarily due to organic loan growth in the first quarter which was funded by a 3% increase in deposits. Loan balances increased 2% compared to the prior year end due primarily to increases of 5% in residential mortgage and construction loans and 2% in consumer loans. Customer funding sources, which include deposits plus other short-term borrowings from core customers, increased 3% compared to balances at December 31, 2013. The increase in customer funding sources was driven primarily by a combined increase of 5% in interest-bearing and noninterest-bearing checking accounts together with increases of 5% in regular savings accounts and 25% in retail repurchase agreements. The Company continued to manage its net interest margin, primarily by managing rates on certificates of deposit and by utilizing short-term FHLB borrowings during this extended period of historically low interest rates. During the same period, stockholders’ equity increased $11 million due to net income in the first quarter of 2014.

Consolidated Average Balances, Yields and Rates

	Three Months Ended March 31,
	2014								2013
						Annualized								Annualized
	Average			(1)		Average			Average			(1)		Average
(Dollars in thousands and tax-equivalent)	Balances			Interest		Yield/Rate			Balances			Interest		Yield/Rate
Assets
Residential mortgage loans (2)	$	633,160		$	5,506		3.48	%	$	575,889		$	5,376		3.73	%
Residential construction loans		134,261			1,254		3.79			120,283			1,004		3.38
Commercial ADC loans		162,544			2,073		5.17			148,749			1,996		5.44
Commercial investor real estate loans		557,168			6,733		4.90			474,062			6,135		5.25
Commercial owner occupied real estate loans		584,155			7,067		5.08			567,723			7,801		5.71
Commercial business loans		349,734			4,037		4.64			347,569			4,586		5.21
Leasing		567			6		4.53			2,510			38		6.07
Consumer loans		377,822			3,117		3.37			357,366			3,063		3.51
Total loans and leases (3)		2,799,411			29,793		4.34			2,594,151			29,999		4.71
Taxable securities		710,246			4,452		2.51			754,112			4,305		2.28
Tax-exempt securities (4)		302,455			3,267		4.32			297,657			3,267		4.39
Interest-bearing deposits with banks		32,925			20		0.25			31,050			19		0.25
Federal funds sold		476			-		0.22			474			-		0.22
Total interest-earning assets		3,845,513			37,532		3.96			3,677,444			37,590		4.13

Less: allowance for loan and lease losses		(39,393	)							(43,705	)
Cash and due from banks		45,553								46,888
Premises and equipment, net		45,879								48,167
Other assets		207,662								217,784
Total assets	$	4,105,214							$	3,946,578

Liabilities and Stockholders' Equity
Interest-bearing demand deposits	$	460,245			92		0.08	%	$	423,485			92		0.09	%
Regular savings deposits		249,185			48		0.08			234,492			48		0.08
Money market savings deposits		877,864			273		0.13			892,343			411		0.19
Time deposits		463,379			771		0.67			512,205			904		0.72
Total interest-bearing deposits		2,050,673			1,184		0.23			2,062,525			1,455		0.29
Other borrowings		62,864			38		0.24			65,601			49		0.30
Advances from FHLB		600,922			3,218		2.17			468,072			3,223		2.79
Subordinated debentures		35,000			218		2.49			35,000			226		2.58
Total interest-bearing liabilities		2,749,459			4,658		0.69			2,631,198			4,953		0.76

Noninterest-bearing demand deposits		825,968								797,926
Other liabilities		25,936								33,790
Stockholders' equity		503,851								483,664
Total liabilities and stockholders' equity	$	4,105,214							$	3,946,578

Net interest income and spread				$	32,874		3.27	%				$	32,637		3.37	%
Less: tax-equivalent adjustment					1,282								1,311
Net interest income				$	31,592							$	31,326

Interest income/earning assets							3.96	%							4.13	%
Interest expense/earning assets							0.49								0.54
Net interest margin							3.47	%							3.59	%

(1)

Tax-equivalent income has been adjusted using the combined marginal federal and state rate of 39.88% for 2014 and 2013. The annualized taxable-equivalent adjustments utilized in the above table to compute yields aggregated to $1.3 million and $1.3 million in 2014 and 2013, respectively.

(2)

Includes residential mortgage loans held for sale. Home equity loans and lines are classified as consumer loans.

(3)

Non-accrual loans are included in the average balances.

(4)

Includes only investments that are exempt from federal taxes.

Results of Operations

For the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

Net income for the Company for the first three months of 2014 totaled $10.9 million ($0.43 per diluted share) compared to net income of $10.6 million ($0.42 per diluted share) for the first three months of 2013.

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-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.

Net interest income for the first three months of 2014 was $31.6 million compared to $31.3 million for the first three months of 2013. On a tax-equivalent basis, net interest income for the first quarter of 2014 was $32.9 million compared to $32.6 million for the first quarter of 2013, an increase of 1%. The preceding table provides an analysis of net interest income performance that reflects a net interest margin that decreased to 3.47% for the first three months of 2014 compared to 3.59% for the first three months of 2013. Average interest-earning assets increased by 5% while average interest-bearing liabilities increased 4% in the first quarter of 2014. Average noninterest-bearing deposits increased 4% in the first three months of 2014 while the percentage of average noninterest-bearing deposits to total deposits remained essentially stable at 29% for the first three months of 2014 compared to 28% for the first three months of 2013.The decrease in the net interest margin was caused by the effect of lower rates on interest-earning assets that exceeded the benefit of lower rates on interest-bearing deposits and borrowings.

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:

	2014 vs. 2013									2013 vs. 2012
	Increase									Increase
	Or			Due to Change In Average:*						Or			Due to Change In Average:*
(Dollars in thousands and tax equivalent)	(Decrease)			Volume			Rate			(Decrease)			Volume			Rate
Interest income from earning assets:
Loans and leases	$	(206	)	$	2,300		$	(2,506	)	$	2,721		$	3,475		$	(754	)
Securities		147			(283	)		430			(1,120	)		(270	)		(850	)
Other earning assets		1			1			-			(2	)		(1	)		(1	)
Total interest income		(58	)		2,018			(2,076	)		1,599			3,204			(1,605	)

Interest expense on funding of earning assets:
Interest-bearing demand deposits		-			8			(8	)		5			13			(8	)
Regular savings deposits		-			3			(3	)		2			7			(5	)
Money market savings deposits		(138	)		(7	)		(131	)		(101	)		18			(119	)
Time deposits		(133	)		(84	)		(49	)		(464	)		(147	)		(317	)
Total borrowings		(24	)		717			(741	)		(399	)		313			(712	)
Total interest expense		(295	)		637			(932	)		(957	)		204			(1,161	)
Net interest income	$	237		$	1,381		$	(1,144	)	$	2,556		$	3,000		$	(444	)

* 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.

Interest Income

The Company's total tax-equivalent interest income for the first quarter of 2014 remained level compared to the prior year quarter. The previous table shows that, in 2014, the increase in average loans and leases was offset by a continued decline in earning asset yields with respect to the loan portfolio.

In the first three months of 2014, the average balance of the loan portfolio increased 8% compared to the prior year period. This growth was primarily in the commercial investor real estate, residential mortgage and consumer loan portfolios. These increases were driven by organic loan growth as the regional economy improved. The yield on average loans and leases decreased by 37 basis points due to the continued prevailing low interest rate environment as relatively higher rate loans were paid off and new loans were originated at comparatively lower rates. The decline in the portfolio yield was driven primarily by a decrease of 25 basis points in the yield in the residential mortgage portfolio, a decrease of 49 basis points in the commercial loan portfolio and a decrease of 14 basis points in the yield on the overall consumer loan portfolio. The decrease in the yield on the mortgage loan portfolio was due to declining rates on both new and existing adjustable rate mortgage loans, which the Company does not sell but maintains in the portfolio, while the decline in the yield on the commercial loan portfolio was due to the continuing low interest rate environment and competition for quality loans.

The average yield on total investment securities decreased 18 basis points while the average balance of the portfolio declined 4% for the first three months of 2014 compared to the first three months of 2013. The decrease in the yield on investments was due primarily to calls and maturities of securities that were replaced by lower yielding investments as a result of lower overall market rates.

Interest Expense

Interest expense decreased by $0.3 million or 6% in the first three months of 2014 compared to the first three months of 2013, primarily as a result of a 7 basis point decrease in the average rate paid on interest-bearing liabilities. Deposit activity during the first three months of 2014 remained virtually level compared to the first three months of 2013. Average noninterest-bearing and interest-bearing checking accounts increased $65 million or 5% and regular savings accounts increased $15 million or 6% as clients kept funds in short-term instruments to preserve liquidity. This growth was partially offset by a decrease in average certificates of deposit of $49 million or 10% in the first three months of 2014 compared to the prior year period. This decrease was primarily due to the Company’s management of rates offered on certificates in an effort to preserve the Company’s net interest margin during this extended period of historically low interest rates. Average balances of money market accounts decreased $14 million or 2% in the first three months of 2014 compared to the first three months of 2013. In addition, the average rate paid on advances from the Federal Home Loan Bank of Atlanta decreased 62 basis points for the first quarter of 2014 compared to the first quarter of 2013 due to an increase in short-term advances to take advantage of current low interest rates.

Non-interest Income

Non-interest income amounts and trends are presented in the following table for the periods indicated:

	Three Months Ended March 31,				2014/2013			2014/2013
(Dollars in thousands)	2014		2013		$ Change			% Change
Securities gains	$	-	$	56	$	(56	)		(100.0	)%
Service charges on deposit accounts		1,972		2,069		(97	)		(4.7	)
Mortgage banking activities		316		1,527		(1,211	)		(79.3	)
Wealth management income		4,466		4,042		424			10.5
Insurance agency commissions		1,640		1,349		291			21.6
Income from bank owned life insurance		598		612		(14	)		(2.3	)
Visa check fees		978		957		21			2.2
Other income		1,279		1,807		(528	)		(29.2	)
Total non-interest income	$	11,249	$	12,419	$	(1,170	)		(9.4	)

Total non-interest income was $11.2 million for the first quarter of 2014 compared to $12.4 million for the first quarter of 2013. The primary drivers of non-interest income for the first quarter of 2014 were declines in mortgage banking income and other non-interest income which were largely offset by increases in wealth management income and income from insurance agency commissions. Further detail by type of non-interest income follows:

Income from mortgage banking activities decreased in 2014 compared to 2013 due primarily to significantly reduced loan origination volumes from refinancing activity.

Other non-interest income decreased during the first quarter of 2014 compared to the prior year period due mainly to gains on sales and dispositions of loans and fixed assets and a non-recurring legal settlement, all of which occurred in the first quarter of 2013.

Wealth management income is comprised of income from trust and estate services, investment management fees earned by West Financial Services, the Company’s investment management subsidiary, and fees on sales on investment products and services. Trust services fees increased 13% compared to the prior year period, due to an increase in assets under management. Investment management fees in West Financial Services increased 11% for the first quarter of 2014 compared to the first quarter of 2013, also due to higher assets under management. Fees on sales of investment products and services increased 3% for the quarter, also due to an increase in assets under management. Overall total assets under management increased to $2.7 billion at March 31, 2014 compared to $2.3 billion at March 31, 2013 as a result of positive market movements and additions from new and existing clients.

Insurance agency commissions increased in 2014 compared to 2013 due primarily to higher annual contingency commissions based on annual policy performance.

Service charges on deposits decreased in 2014 compared to 2013 due primarily to a decline in overdraft fees.

Income from bank owned life insurance decreased in the first three months of 2014 compared to the first three months of 2013 due to the decline in the interest rates paid on these policies. The Company invests in bank owned life insurance products in order to manage the cost of employee benefit plans. Investments totaled $86.8 million at March 31, 2014 and $84.3 million at March 31, 2013 and were well diversified by carrier in accordance with defined policies and practices. The average tax-equivalent yield on these insurance contract assets was 4.65% for the first quarter of 2014 compared to 4.92% for the prior year period.

No net OTTI losses were recognized in earnings in either the first quarter of 2014 or 2013. .

Non-interest Expense

Non-interest expense amounts and trends are presented in the following table for the years indicated:

	Three Months Ended March 31,				2014/2013			2014/2013
(Dollars in thousands)	2014		2013		$ Change			% Change
Salaries and employee benefits	$	16,355	$	16,346	$	9			0.1	%
Occupancy expense of premises		3,472		3,182		290			9.1
Equipment expenses		1,256		1,249		7			0.6
Marketing		542		515		27			5.2
Outside data services		1,216		1,152		64			5.6
FDIC insurance		520		596		(76	)		(12.8	)
Amortization of intangible assets		370		461		(91	)		(19.7	)
Professional fees		914		1,250		(336	)		(26.9	)
Other real estate owned		-		37		(37	)		(100.0	)
Other expenses		2,904		3,035		(131	)		(4.3	)
Total non-interest expense	$	27,549	$	27,823	$	(274	)		(1.0	)

Non-interest expenses totaled $27.5 million in 2014 compared to $27.8 million in 2013. This decrease in expenses was driven primarily by improved credit quality as legal fees associated with loan workouts declined significantly during the quarter. Further detail by category of non-interest expense follows:

Salaries and employee benefits, the largest component of non-interest expenses, remained virtually level compared to the prior year period. Salaries increased 6% compared to the prior year quarter due to a larger staff and merit increases. This was offset by decreases in commission and incentive compensation due largely to lower mortgage origination volumes, and a decrease in pension expense resulting from a higher discount rate assumption and higher projected returns on plan assets. The average number of full-time equivalent employees was 720 in the first quarter of 2014 compared to 699 in the first quarter of 2013.

Occupancy expenses increased in 2014 compared to 2013 due primarily to a significant increase in weather-related expenses in the first quarter of 2014. Equipment expenses remained level for 2014 compared to 2013.

Marketing expenses increased in 2014 compared to 2013 due to higher advertising expenses.

The growth in outside data services expenses was due to contractual increases by providers and bankcard account activity.

FDIC insurance expense decreased in 2014 compared to 2013 as the Company’s growth in assets was more than offset by a lower assessment rate due to improved financial ratios.

Intangibles amortization decreased in 2014 due to the costs of prior year acquisitions which were fully amortized during the period.

Professional fees declined as legal fees associated with loan workouts decreased in the first quarter of 2014 compared to the prior year quarter.

Other real estate owned expenses decreased compared to the prior year period due to the decline in the number of real estate owned properties.

Other non-interest expenses decreased in 2014 compared to the prior year quarter due mainly to decreases in various categories of operating expenses.

Income Taxes

The Company had income tax expense of $5.3 million in the first quarter of 2014, compared to expense of $5.3 million in the first quarter of 2013. The resulting effective rate was 33% for both the first quarter of 2014 and for the first quarter of 2013. The effective rate remained essentially unchanged for the quarter compared to the prior year quarter due to an increase in tax exempt income which offset the growth in income before taxes.

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. Both the GAAP and non-GAAP efficiency ratios increased in 2014 compared to the prior year due primarily to a decrease in non-interest income.

In addition, the Company uses pre-tax, pre-provision 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 and lease losses, and the provision for income taxes back to net income. This metric decreased in 2014 compared to the prior year due primarily to lower non-interest income.

GAAP and Non-GAAP Financial Measures

	Three Months Ended
	March 31,
(Dollars in thousands)	2014			2013
Pre-tax pre-provision income:
Net income	$	10,928		$	10,558
Plus non-GAAP adjustment:
Income taxes		5,346			5,286
Provision for loan and lease losses		(982	)		78
Pre-tax pre-provision income	$	15,292		$	15,922

Efficiency ratio - GAAP basis:
Non-interest expenses	$	27,549		$	27,823

Net interest income plus non-interest income	$	42,841		$	43,745

Efficiency ratio - GAAP basis		64.31	%		63.60	%

Efficiency ratio - Non-GAAP basis:
Non-interest expenses	$	27,549		$	27,823
Less non-GAAP adjustment:
Amortization of intangible assets		370			461
Non-interest expenses - as adjusted	$	27,179		$	27,362

Net interest income plus non-interest income	$	42,841		$	43,745
Plus non-GAAP adjustment:
Tax-equivalent income		1,282			1,311
Less non-GAAP adjustments:
Securities gains		-			56
Net interest income plus non-interest income - as adjusted	$	44,123		$	45,000

Efficiency ratio - Non-GAAP basis		61.60	%		60.80	%

FINANCIAL CONDITION

The Company's total assets were $4.2 billion at March 31, 2014, an increase of $63 million or 2% compared to $4.1 billion at December 31, 2013. Interest-earning assets increased $54 million to $3.9 billion at March 31, 2014 compared to December 31, 2013. The increase in interest-earning assets was primarily due to organic loan growth during the first quarter of 2014.

Analysis of Loans and Leases

A comparison of the loan portfolio at the dates indicated is presented in the following table:

	March 31, 2014					December 31, 2013					Period-to-Period Change
(Dollars in thousands)	Amount		%			Amount		%			$ Change			% Change
Residential real estate:
Residential mortgage	$	640,939		22.6	%	$	618,381		22.2	%	$	22,558			3.6	%
Residential construction		143,109		5.1			129,177		4.7			13,932			10.8
Commercial real estate:
Commercial owner occupied real estate		582,472		20.6			592,823		21.3			(10,351	)		(1.7	)
Commercial investor real estate		573,634		20.3			552,178		19.8			21,456			3.9
Commercial acquisition, development and construction		163,343		5.8			160,696		5.8			2,647			1.6
Commercial Business		348,180		12.3			356,651		12.8			(8,471	)		(2.4	)
Leases		439		-			703		-			(264	)		(37.6	)
Consumer		380,697		13.3			373,657		13.4			7,040			1.9
Total loans and leases	$	2,832,813		100.0	%	$	2,784,266		100.0	%	$	48,547			1.7

Total loans and leases, excluding loans held for sale, increased $49 million or 2% at March 31, 2014 compared to December 31, 2013. The commercial loan portfolio remained essentially level at March 31, 2014 compared to the prior year end largely due to a 4% increase in commercial investor real estate loans which was offset by decreases of 2% in both commercial business loans and commercial owner occupied real estate loans at March 31, 2014 compared to December 31, 2013. These trends reflect both an improving economy and increased competition in the Company’s marketplace for quality commercial loans.

The residential real estate portfolio, which is comprised of residential construction and permanent residential mortgage loans, reflected a 5% increase at March 31, 2014 compared to December 31, 2013. Permanent residential mortgages, most of which are 1-4 family, increased 4% due to higher loan origination volumes of adjustable rate and other mortgage loans which the Company elected to retain in its portfolio. The Company generally retains adjustable rate mortgages in its portfolio and sells the fixed rate mortgages that it originates in the secondary mortgage market whenever possible. Residential construction loans increased 11% at March 31, 2014 compared to the balance at December 31, 2013 due to increased construction activity as a result of a slowly improving economy.

The consumer loan portfolio increased by $7 million to $381 million at March 31, 2014 compared to December 31, 2013 due to growth in home equity lines of credit as the Company aggressively promoted this product line during the first quarter.

Analysis of Investment Securities

The composition of investment securities at the periods indicated is presented in the following table:

	March 31, 2014					December 31, 2013					Period-to-Period Change
(Dollars in thousands)	Amount		%			Amount		%			$ Change			% change
Available-for-Sale:
U.S. government agencies and corporations	$	142,449		14.3	%	$	139,466		13.7	%	$	2,983			2.1	%
State and municipal		166,491		16.7			165,428		16.3			1,063			0.6
Mortgage-backed		423,480		42.5			442,250		43.5			(18,770	)		(4.2	)
Corporate debt		2,003		0.2			2,004		0.2			(1	)		-
Trust preferred		1,124		0.1			1,413		0.1			(289	)		(20.5	)
Marketable equity securities		723		-			723		-			-			-
Total available-for-sale		736,270		73.8			751,284		73.8			(15,014	)		(2.0	)

Held-to-Maturity and Other Equity
U.S. government agencies and corporations		64,507		6.5			64,505		6.4			2			-
State and municipal		159,012		16.0			159,889		15.8			(877	)		(0.5	)
Mortgage-backed		228		0.0			244		-			(16	)		(6.6	)
Other equity securities		37,567		3.7			40,687		4.0			(3,120	)		(7.7	)
Total held-to-maturity and other equity		261,314		26.2			265,325		26.2			(4,011	)		(1.5	)
Total securities	$	997,584		100.0	%	$	1,016,609		100.0	%	$	(19,025	)		(1.9	)

Available-for-sale securities decreased 2% at March 31, 2014 compared to December 31, 2013 due to amortization of mortgage-backed securities and calls and maturities of other investments, while held-to-maturity securities remained level compared to the prior year-end.

The investment portfolio consists primarily of U.S. Agency securities, U.S. Agency mortgage-backed securities, U.S. Agency collateralized mortgage obligations and state and municipal securities. The duration of the portfolio was 3.8 years at March 31, 2014 and 3.9 years at December 31, 2013. The Company considers the duration of the portfolio to be adequate for liquidity purposes. This investment strategy has resulted in a portfolio with low credit risk that would provide the required liquidity needed to meet increased loan demand. The portfolio is monitored on a continuing basis with consideration given to interest rate trends and the structure of the yield curve and with constant assessment of economic projections and analysis.

At March 31, 2014, the trust preferred portfolio included one pooled trust preferred security backed by debt issued by banks and thrifts, which totaled $1.3 million, with a fair value of $1.1 million. The fair value of this security was determined by a third party valuation specialist due to the limited trading activity for this security in the marketplace. The specialist used an income valuation approach technique (present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The methodology, observable inputs and significant assumptions employed by the specialist to determine fair value are provided in Note 2 – Investments in the Notes to the Consolidated Financial Statements.

As a result of this valuation, it was determined that the pooled trust preferred security had not incurred any credit-related OTTI for the three months ended March 31, 2014. Cumulative credit-related OTTI of $0.5 million has been recognized in earnings through March 31, 2014. Non-credit related OTTI on this security, which is not expected to be sold and which the Company has the ability to hold until maturity, was $0.2 million at March 31, 2014. This non-credit related OTTI was recognized in accumulated other comprehensive income (“OCI”) at March 31, 2014.

Other Earning Assets

Residential mortgage loans held for sale decreased $5 million to $3 million as of March 31, 2014 from $8 million as of December 31, 2013 due to reduced mortgage loan origination volumes. The aggregate of federal funds sold and interest-bearing deposits with banks increased $30 million to $58 million at March 31, 2014 compared to December 31, 2013.

Deposits

The composition of deposits at the periods indicated is presented in the following table:

	March 31, 2014					December 31, 2013					Period-to-Period Change
(Dollars in thousands)	Amount		%			Amount		%			$ Change			% change
Noninterest-bearing deposits	$	882,169		29.8	%	$	836,198		29.1	%	$	45,971			5.5	%
Interest-bearing deposits:
Demand		479,640		16.2			460,824		16.0			18,816			4.1
Money market savings		878,622		29.7			870,653		30.2			7,969			0.9
Regular savings		256,760		8.6			243,813		8.5			12,947			5.3
Time deposits of less than $100,000		257,509		8.7			263,636		9.2			(6,127	)		(2.3	)
Time deposits of $100,000 or more		204,495		7.0			202,101		7.0			2,394			1.2
Total interest-bearing deposits		2,077,026		70.2			2,041,027		70.9			35,999			1.8
Total deposits	$	2,959,195		100.0	%	$	2,877,225		100.0	%	$	81,970			2.8

Total deposits increased $82 million or 3% at March 31, 2014 compared to December 31, 2013. This increase was due primarily to increases in combined noninterest-bearing and interest-bearing checking accounts together with regular savings. These increases were somewhat offset by a decline in certificates of deposit, as the Company managed its deposit mix. Total borrowings decreased 5% at March 31, 2014 compared to December 31, 2013. This decrease was due primarily to growth in deposits which were used to fund the increase in loans.

Capital Management

Management monitors historical and projected earnings, dividends and asset growth, as well as risks associated with the various types of on and off-balance sheet assets and liabilities, in order to determine appropriate capital levels. During the first quarter of 2014, total stockholders' equity increased $11 million to $510 million at March 31, 2014, from $499 million at December 31, 2013. This increase was due primarily to net income during the year. The ratio of average equity to average assets was 12.27% for the first quarter of 2014, as compared to 12.26% for the first quarter of 2013.

Bank holding companies and banks are required to maintain capital ratios in accordance with guidelines adopted by the federal bank regulators. These guidelines are commonly known as Risk-Based Capital guidelines. The actual regulatory ratios and required ratios for capital adequacy, in addition to the ratios required to be categorized as “well capitalized”, are summarized for the Company in the following table.

Risk-Based Capital Ratios

							Minimum
	Ratios at						Regulatory
	March 31, 2014			December 31, 2013			Requirements
Total Capital to risk-weighted assets		15.85	%		15.65	%		8.00	%

Tier 1 Capital to risk-weighted assets		14.64	%		14.42	%		4.00	%

Tier 1 Leverage		11.43	%		11.32	%		3.00	%

Tier 1 capital of $460 million and total qualifying capital of $498 million each included $35.0 million in trust preferred securities that are considered regulatory capital for purposes of determining the Company’s Tier 1 capital ratio. As of March 31, 2014, the most recent notification from the Bank’s primary regulator categorized the Bank as a "well-capitalized" institution under the prompt corrective action rules of the Federal Deposit Insurance Act. Designation as a well-capitalized institution under these regulations is not a recommendation or endorsement of the Company or the Bank by federal bank regulators.

In July 2013, the Federal Reserve Board approved revisions to its capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. The rules include new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for calculating those ratios. The new minimum capital level requirements applicable to the Company and the Bank will be: (1) a new common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6% (increased from 4%); (3) a total capital ratio of 8% (unchanged from current rules); and (4) a Tier 1 leverage ratio of 4%. The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from Tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The new capital conservation buffer requirement will be phased 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. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such action.

Tangible Common Equity

Tangible equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity and tangible assets exclude the balances of goodwill and other intangible assets from stockholder’s equity and total assets, respectively. Management believes that this non-GAAP financial measure provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of the non-GAAP ratio of tangible equity to tangible assets and tangible book value per share are provided in the following table.

Tangible Common Equity Ratio – Non-GAAP

(Dollars in thousands, except per share data)	March 31, 2014			December 31,2013
Tangible common equity ratio:
Total stockholders' equity	$	510,386		$	499,363
Accumulated other comprehensive income (loss)		(1,350	)		2,970
Goodwill		(84,171	)		(84,171	)
Other intangible assets, net		(960	)		(1,330	)
Tangible common equity	$	423,905		$	416,832

Total assets	$	4,168,998		$	4,106,100
Goodwill		(84,171	)		(84,171	)
Other intangible assets, net		(960	)		(1,330	)
Tangible assets	$	4,083,867		$	4,020,599

Tangible common equity ratio		10.38	%		10.37	%

Tangible book value per share	$	16.93		$	16.68

Credit Risk

The fundamental lending business of the Company is based on understanding, measuring and controlling the credit risk inherent in the loan portfolio. The Company’s loan and lease portfolio is subject to varying degrees of credit risk. Credit risk entails both general risks, which are inherent in the process of lending, and risk specific to individual borrowers. The Company’s credit risk is mitigated through portfolio diversification, which limits exposure to any single customer, industry or collateral type. Typically, each consumer and residential lending product has a generally predictable level of credit losses based on historical loss experience. Home mortgage and home equity loans and lines generally have the lowest credit loss experience. Loans secured by personal property, such as auto loans, generally experience medium credit losses. Unsecured loan products, such as personal revolving credit, have the highest credit loss experience and for that reason, the Company has chosen not to engage in a significant amount of this type of lending. Credit risk in commercial lending can vary significantly, as losses as a percentage of outstanding loans can shift widely during economic cycles and are particularly sensitive to changing economic conditions. Generally, improving economic conditions result in improved operating results on the part of commercial customers, enhancing their ability to meet their particular debt service requirements. Improvements, if any, in operating cash flows can be offset by the impact of rising interest rates that may occur during improved economic times. Inconsistent economic conditions may have an adverse effect on the operating results of commercial customers, reducing their ability to meet debt service obligations.

Current economic data has shown that the Mid-Atlantic region remains one of the stronger markets in the nation. While the Company deals with the lingering impact of a very slowly recovering economy and its resulting effects on its borrowers, it continues to seek relationship opportunities, particularly in the real estate sector. Total non-performing loans decreased 3% to $39 million at March 31, 2014 compared to the balance at December 31, 2013. While the diversification of the lending portfolio among different commercial, residential and consumer product lines along with different market conditions of the D.C. suburbs, Northern Virginia and Baltimore metropolitan area has mitigated some of the risks in the portfolio, local economic conditions and levels of non-performing loans may continue to be influenced by the economic activity being experienced in various business sectors on both a regional and national level.

To control and manage credit risk, management has a credit process in place to reasonably ensure that credit standards are maintained along with an in-house loan administration accompanied by oversight and review procedures. The primary purpose of loan underwriting is the evaluation of specific lending risks and involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of portfolio credit quality, early identification of potential problem credits and the aggressive management of problem credits. As part of the oversight and review process, the Company maintains an allowance for loan and lease losses (the “allowance”).

The allowance represents an estimation of the losses that are inherent in the loan and lease portfolio. The adequacy of the allowance is determined through careful and ongoing evaluation of the credit portfolio, and involves consideration of a number of factors, as outlined below, to establish an adequate allowance for loan losses. Determination of the allowance is inherently subjective and requires significant estimates, including estimated losses on pools of homogeneous loans and leases based on historical loss experience and consideration of current economic trends, which may be susceptible to significant change. Loans and leases deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for loan and lease losses, which is recorded as a current period operating expense.

The methodology for assessing the appropriateness of the allowance includes: (1) a general allowance that reflects historical losses, as adjusted, by credit category, and (2) a specific allowance for impaired credits on an individual or portfolio basis. This methodology is further described in the section entitled “Critical Accounting Policies” and in “Note 1 – Significant Accounting Policies” of the Notes to the Consolidated Financial Statements. The amount of the allowance is reviewed monthly and approved quarterly by the Credit and Investment Risk Committee of the board of directors.

The Company recognizes a collateral dependent lending relationship as non-performing when either the loan becomes 90 days delinquent or as a result of factors (such as bankruptcy, interruption of cash flows, etc.) considered at the monthly credit committee meeting. When a commercial loan is placed on non-accrual status, it is considered to be impaired and all accrued but unpaid interest is reversed. Classification as an impaired loan is based on a determination that the Company may not collect all principal and interest payments according to contractual terms. Impaired loans exclude large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment such as leases, residential real estate and consumer loans. Typically, all payments received on non-accrual loans are applied to the remaining principal balance of the loans. Integral to the assessment of the allowance process is an evaluation that is performed to determine whether a specific allowance on an impaired loan is warranted and, when losses are confirmed, a charge-off is taken to reduce the loan to its net realizable value. Any further collateral deterioration results in either further specific allowances being established or additional charge-offs. At such time an action plan is agreed upon for the particular loan and an appraisal will be ordered depending on the time elapsed since the prior appraisal, the loan balance and/or the result of the internal evaluation. A current appraisal on large loans is usually obtained if the appraisal on file is more than 12 months old and there has been a material change in market conditions, zoning, physical use or the adequacy of the collateral based on an internal evaluation. The Company’s policy is to strictly adhere to regulatory appraisal standards. If an appraisal is ordered, no more than a 30 day turnaround is requested from the appraiser, who is selected by Credit Administration from an approved appraiser list. After receipt of the updated appraisal, the assigned credit officer will recommend to the Chief Credit Officer whether a specific allowance or a charge-off should be taken. The Chief Credit Officer has the authority to approve a specific allowance or charge-off between monthly credit committee meetings to insure that there are no significant time lapses during this process.

The Company’s methodology for evaluating whether a loan is impaired begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the sufficiency of collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring impairment, the Company looks primarily to the discounted cash flows of the project itself or to the value of the collateral as the primary sources of repayment of the loan. The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and respective payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as impaired.

Management has established a credit process that dictates that structured procedures be performed to monitor these loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:

An internal evaluation is updated quarterly to include borrower financial statements and/or cash flow projections.

The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.

Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.

At the monthly credit committee meeting the loan may be downgraded and a specific allowance may be decided upon in advance of the receipt of the appraisal.

Upon receipt of the updated appraisal (or based on an updated internal financial evaluation) the loan balance is compared to the appraisal and a specific allowance is decided upon for the particular loan, typically for the amount of the difference between the appraisal and the loan balance.

The Company will specifically reserve for or charge-off the excess of the loan amount over the amount of the appraisal net of closing costs. In certain cases the Company may establish a larger reserve due to knowledge of current market conditions or the existence of an offer for the collateral that will facilitate a more timely resolution of the loan.

If an updated appraisal is received subsequent to the preliminary determination of a specific allowance or partial charge-off, and it is less than the initial appraisal used in the initial charge-off, an additional specific allowance or charge-off is taken on the related credit. Partially charged-off loans are not written back up based on updated appraisals and always remain on non-accrual with any and all subsequent payments applied to the remaining balance of the loan as principal reductions. No interest income is recognized on loans that have been partially charged-off.

Loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief or other concessions, to a borrower experiencing financial difficulty are considered troubled debt restructured loans (TDR’s). All restructurings that constitute concessions to a borrower experiencing financial difficulties are considered impaired loans and may either be in accruing status or non-accruing status. Non-accruing restructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms. Loans may be removed from disclosure as an impaired loan in the year subsequent to the restructuring if their revised loans terms are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk.

The Company may extend the maturity of a performing or current loan that may have some inherent weakness associated with the loan. However, the Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Maturity date extensions only occur under revised terms that clearly place the Company in a position to increase the likelihood of or assure full collection of the loan under the contractual terms and /or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view extension of a loan to be a satisfactory approach to resolving non-performing credits. On an exception basis, certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which are not affecting the performance of the credit or other identified weakness may be extended.

Collateral values or estimates of discounted cash flows (inclusive of any potential cash flow from guarantees) are evaluated to estimate the probability and severity of potential losses. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

The determination of the allowance requires significant judgment, and estimates of probable losses in the loan and lease portfolio can vary significantly from the amounts actually observed. While management uses available information to recognize probable losses, future additions to the allowance may be necessary based on changes in the credits comprising the portfolio and changes in the financial condition of borrowers, such as may result from changes in economic conditions. In addition, federal and state regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank, periodically review the loan and lease portfolio and the allowance. Such reviews may result in adjustments to the allowance based upon their analysis of the information available at the time of each examination.

The Company makes provisions for loan and lease losses in amounts necessary to maintain the allowance at an appropriate level, as established by use of the allowance methodology previously discussed. The provision for loan and lease losses was a credit of $1.0 million in the first quarter of 2014 compared to a charge of $0.1 million in the first quarter of 2013. Historical net charge-offs represent a principal component in the application of the Company’s allowance methodology. A continued decrease in the confirmed losses over the related historical period in addition to a decline in problem loans served to reduce the overall provision for the quarter.

Substantially all of the fixed-rate residential mortgage loans originated by the Company are sold in the secondary mortgage market. Concurrent with such sales, the Company is required to make customary representations and warranties to the purchasers about the mortgage loans and the manner in which they were originated. The related sale agreements grant the purchasers recourse back to the Company, which could require the Company to repurchase loans or to share in any losses incurred by the purchasers. This recourse exposure typically extends for a period of nine to eighteen months after the sale of the loan although the time frame for repurchase requests can extend for an indefinite period. Such transactions could be due to a number of causes including borrower fraud or early payment default. The Company has seen a very limited number of repurchase and indemnity demands from purchasers for such events and routinely monitors its exposure in this regard. The Company maintains a liability of $0.5 million for probable losses due to repurchases. The Company believes that this reserve is adequate.

Allowance for Loan and Lease Losses

During the first quarter of 2014, there were no changes in the Company’s methodology for assessing the appropriateness of the allowance for loan and lease losses from the prior year. Variations can occur over time in the estimation of the adequacy of the allowance as a result of the credit performance of borrowers. No portion of the allowance was unallocated at March 31, 2014 or December 31, 2013.

At March 31, 2014, total non-performing loans and leases were $38.7 million, or 1.37% of total loans and leases, compared to $40.0 million, or 1.44% of total loans and leases, at December 31, 2013. Timely recognition and aggressive management of problem credits has resulted in the significant reduction of the migration of these loans into non-accrual status during this period. The allowance represented 98% of non-performing loans and leases at March 31, 2014 as compared to 97% at December 31, 2013. The increase in this ratio was due primarily to the decline in non-performing loans and leases mentioned on the previous page. The allowance for loan and lease losses as a percent of total loans and leases was 1.34% at March 31, 2014 as compared to 1.39% at December 31, 2013. This decrease was due to a combination of a lower level of both non-performing loans and historical losses at March 31, 2014 compared to the prior year end.

Continued analysis of the actual loss history on the problem credits in 2013 and 2014 provided an indication that the coverage of the inherent losses on the problem credits was adequate. The Company continues to monitor the impact of the economic conditions on our commercial customers, the reduced inflow of non-accruals, lower inflow in criticized loans and the significant decline in early stage delinquencies. The improvement in these credit metrics supports management’s outlook for continued improved credit quality performance.

The balance of impaired loans was $33.8 million, with specific allowances of $3.7 million against those loans at March 31, 2014, as compared to $32.5 million with allowances of $3.0 million, at December 31, 2013.

The Company's borrowers are concentrated in nine counties in Maryland, three counties in Virginia and in Washington D.C. Commercial and residential mortgages, including home equity loans and lines, represented 76% of total loans and leases at March 31, 2014 and at December 31, 2013. Certain loan terms may create concentrations of credit risk and increase the Company’s exposure to loss. These include terms that permit the deferral of principal payments or payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates; and interest-only loans. The Company does not make loans that provide for negative amortization or option adjustable-rate mortgages.

Summary of Loan and Lease Loss Experience

The following table presents the activity in the allowance for loan and lease losses for the periods indicated:

	Three Months Ended			Year Ended
(Dollars in thousands)	March 31, 2014			December 31, 2013
Analysis of Allowance for Loan Losses:
Balance, January 1	$	38,766		$	42,957
Provision (credit) for loan and lease losses		(982	)		(1,084	)
Charge-offs:
Commercial business		126			(2,915	)
Commercial real estate:
Commercial acquisition, development and construction		-			(85	)
Commercial investor real estate		-			(4,774	)
Commercial owner occupied real estate		-			(240	)
Leasing		-			-
Consumer		368			(1,853	)
Residential real estate:
Residential mortgage		223			(1,194	)
Residential construction		-			(104	)
Total charge-offs		717			(11,165	)
Recoveries:
Commercial business		894			818
Commercial real estate:
Commercial acquisition, development and construction		-			3,080
Commercial investor real estate		5			3,354
Commercial owner occupied real estate		-			425
Leasing		-			10
Consumer		37			198
Residential real estate:
Residential mortgage		20			162
Residential construction		3			11
Total recoveries		959			8,058
Net charge-offs		242			(3,107	)
Balance at end of period	$	38,026		$	38,766

Allowance for loan losses to loans		1.34	%		1.39	%
Annualized net charge-offs to average loans and leases		(0.04	)%		0.12	%

Analysis of Credit Risk

The following table presents information with respect to non-performing assets and 90-day delinquencies for the periods indicated:

	March 31,		December 31,
(Dollars in thousands)	2014		2013
Non-Performing Assets:
Loans and leases 90 days past due:
Commercial business	$	-	$	-
Commercial real estate:
Commercial AD&C		-		-
Commercial investor real estate		-		-
Commercial owner occupied real estate		-		-
Leasing		-		-
Consumer		-		1
Residential real estate:
Residential mortgage		-		-
Residential construction		-		-
Total loans and leases 90 days past due		-		1
Non-accrual loans and leases:
Commercial business		3,272		3,400
Commercial real estate:
Commercial AD&C		4,133		4,127
Commercial investor real estate		7,284		6,802
Commercial owner occupied real estate		7,150		5,936
Leasing		-		-
Consumer		2,115		2,259
Residential real estate:
Residential mortgage		5,025		5,735
Residential construction		2,304		2,315
Total non-accrual loans and lease		31,283		30,574
Total restructured loans - accruing		7,411		9,459
Total non-performing loans and leases		38,694		40,034
Other assets and real estate owned (OREO)		1,619		1,338
Total non-performing assets	$	40,313	$	41,372

Market Risk Management

The Company's net income is largely dependent on its net interest income. Net interest income is susceptible to interest rate risk to the extent that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or re-price more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as noninterest-bearing deposits and stockholders' equity.

The Company’s interest rate risk management goals are (1) to increase net interest income at a growth rate consistent with the growth rate of total assets, and (2) to minimize fluctuations in net interest margin as a percentage of interest-earning assets. Management attempts to achieve these goals by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets; by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched; by maintaining a pool of administered core deposits; and by adjusting pricing rates to market conditions on a continuing basis.

The Company’s board of directors has established a comprehensive interest rate risk management policy, which is administered by management’s Asset Liability Management Committee (“ALCO”). The policy establishes limits on risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity or “EVE” at risk) resulting from a hypothetical change in U.S. Treasury interest rates for maturities from one day to thirty years. The Company measures the potential adverse impacts that changing interest rates may have on its short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by the Company. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. As an example, certain money market deposit accounts are assumed to reprice at 100% of the interest rate change in each of the up rate shock scenarios even though this is not a contractual requirement. As a practical matter, management would likely lag the impact of any upward movement in market rates on these accounts as a mechanism to manage the bank’s net interest margin. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products.

The Company prepares a current base case and eight alternative simulations at least once a quarter and reports the analysis to the board of directors. In addition, more frequent forecasts are produced when interest rates are particularly uncertain or when other business conditions so dictate.

The statement of condition is subject to quarterly testing for eight alternative interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by +/- 100, 200, 300, and 400 basis points (“bp”), although the Company may elect not to use particular scenarios that it determines are impractical in a current rate environment. It is management’s goal to structure the balance sheet so that net interest earnings at risk over a twelve-month period and the economic value of equity at risk do not exceed policy guidelines at the various interest rate shock levels.

The Company augments its quarterly interest rate shock analysis with alternative external interest rate scenarios on a monthly basis. These alternative interest rate scenarios may include non-parallel rate ramps and non-parallel yield curve twists. If a measure of risk produced by the alternative simulations of the entire balance sheet violates policy guidelines, ALCO is required to develop a plan to restore the measure of risk to a level that complies with policy limits within two quarters.

Measures of net interest income at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Estimated Changes in Net Interest Income
Change in Interest Rates:	+ 400	bp	+ 300	bp	+ 200	bp	+ 100	bp	- 100	bp	- 200	bp	-300	bp	-400	bp
Policy Limit	23.50	%	17.50	%	15.00	%	10.00	%	10.00	%	15.00	%	17.50	%	23.50	%
March 31, 2014	(5.74	)%	(3.10	)%	(0.94	)%	(0.52	)%	N/A		N/A		N/A		N/A
December 31, 2013	(7.20	)%	(4.14	)%	(1.63	)%	(0.88	)%	N/A		N/A		N/A		N/A

As shown above, measures of net interest income at risk improved from December 31, 2013 at all rising interest rate shock levels. All measures remained well within prescribed policy limits.

The decrease in the risk position with respect to net interest income from December 31, 2013 to March 31, 2014 was the result of an increase in interest-bearing deposits with banks which will reprice immediately should rates rise in the future. Also contributing to the decreased risk position is a decline in short-term FHLB borrowings, thus reducing the Company’s exposure to increases in interest rates.

The measures of equity value at risk indicate the ongoing economic value of the Company by considering the effects of changes in interest rates on all of the Company’s cash flows, and by discounting the cash flows to estimate the present value of assets and liabilities. The difference between these discounted values of the assets and liabilities is the economic value of equity, which, in theory, approximates the fair value of the Company’s net assets.

Estimated Changes in Economic Value of Equity (EVE)
Change in Interest Rates:	+ 400	bp	+ 300	bp	+ 200	bp	+ 100	bp	- 100	bp	- 200	bp	-300	bp	-400	bp
Policy Limit	35.00	%	25.00	%	20.00	%	10.00	%	10.00	%	20.00	%	25.00	%	35.00	%
March 31, 2014	(12.98	)%	(9.08	)%	(5.55	)%	(2.27	)%	N/A		N/A		N/A		N/A
December 31, 2013	(15.27	)%	(10.86	)%	(6.21	)%	(2.15	)%	N/A		N/A		N/A		N/A

Measures of the economic value of equity (“EVE”) at risk improved from December 31, 2013 to March 31, 2014 in all rising shock scenarios except for the 100 basis point increase scenario in which the EVE at risk remained virtually unchanged. The significant positive impact in EVE was driven by higher core deposit balances in noninterest-bearing and interest-bearing checking accounts and regular savings accounts resulting in increased premiums should rates increase. Shorter durations in the investment portfolio are also a contributing factor to the reduced risk in EVE.

Liquidity Management

Liquidity is measured by a financial institution's ability to raise funds through loan and lease repayments, maturing investments, deposit growth, borrowed funds, capital and the sale of highly marketable assets such as investment securities and residential mortgage loans. The Company's liquidity position, considering both internal and external sources available, exceeded anticipated short-term and long-term needs at March 31, 2014. Management considers core deposits, defined to include all deposits other than time deposits of $100 thousand or more, to be a relatively stable funding source. Core deposits equaled 71% of total interest-earning assets at March 31, 2014. In addition, loan and lease payments, maturities, calls and pay downs of securities, deposit growth and earnings contribute a flow of funds available to meet liquidity requirements. In assessing liquidity, management considers operating requirements, the seasonality of deposit flows, investment, loan and deposit maturities and calls, expected funding of loans and deposit withdrawals, and the market values of available-for-sale investments, so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the Company is able to pursue new business opportunities.

Liquidity is measured using an approach designed to take into account, in addition to factors already discussed above, the Company’s growth and mortgage banking activities. Also considered are changes in the liquidity of the investment portfolio due to fluctuations in interest rates. Under this approach, implemented by the Funds Management Subcommittee of ALCO under formal policy guidelines, the Company’s liquidity position is measured weekly, looking forward at thirty day intervals from thirty (30) to three hundred sixty (360) days. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Resulting projections as of March 31, 2014, show short-term investments exceeding short-term borrowings by $21 million over the subsequent 360 days. This projected excess of liquidity versus requirements provides the Company with flexibility in how it funds loans and other earning assets.

The Company also has external sources of funds, which can be drawn upon when required. The main sources of external liquidity are available lines of credit with the Federal Home Loan Bank of Atlanta and the Federal Reserve. The line of credit with the Federal Home Loan Bank of Atlanta totaled $1.2 billion, of which $885 million was available for borrowing based on pledged collateral, with $569 million borrowed against it as of March 31, 2014. The line of credit at the Federal Reserve totaled $395 million, all of which was available for borrowing based on pledged collateral, with no borrowings against it as of March 31, 2014. Other external sources of liquidity available to the Company in the form of unsecured lines of credit granted by correspondent banks totaled $55 million at March 31, 2014, against which there were no outstanding borrowings. In addition, the Company had a secured line of credit with a correspondent bank of $20 million as of March 31, 2014. Based upon its liquidity analysis, including external sources of liquidity available, management believes the liquidity position was appropriate at March 31, 2014.

The parent company (“Bancorp”) is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, Bancorp is responsible for paying any dividends declared to its common shareholders and interest and principal on outstanding debt. Bancorp’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to Bancorp in any calendar year, without the receipt of prior approval from the Federal Reserve, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. Based on this requirement, as of March 31, 2014, the Bank could have declared a dividend of $60 million to Bancorp. At March 31, 2014, Bancorp had liquid assets of $12 million.

Arrangements to fund credit products or guarantee financing take the form of loan commitments (including lines of credit on revolving credit structures) and letters of credit. Approvals for these arrangements are obtained in the same manner as loans. Generally, cash flows, collateral value and risk assessment are considered when determining the amount and structure of credit arrangements.

Commitments to extend credit in the form of consumer, commercial real estate and business at the dates indicated were as follows:

	March 31,		December 31,
(In thousands)	2014		2013
Commercial	$	201,033	$	184,083
Real estate-development and construction		95,885		100,826
Real estate-residential mortgage		19,097		13,908
Lines of credit, principally home equity and business lines		750,457		710,202
Standby letters of credit		57,978		59,745
Total Commitments to extend credit and available credit lines	$	1,124,450	$	1,068,764

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Financial Condition - Market Risk and Interest Rate Sensitivity” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, which is incorporated herein by reference.

Item 4. CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the three months ended March 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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 from these matters will have a material effect on the Company’s financial condition, operating results or liquidity.

Item 1A. Risk Factors

There have been no material changes in the risk factors as discussed in the 2013 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company re-approved a stock repurchase program in August 2013 that permits the repurchase of up to 5% of the Company’s outstanding shares of common stock or approximately 1,260,000 shares. Repurchases which will be conducted through open market purchases or privately negotiated transactions, will be made depending on market conditions and other factors. There were no repurchase transactions executed during the quarter ended March 31, 2014.

Item 3. Defaults Upon Senior Securities – None

Item 4. Mine Safety Disclosures – Not applicable

Item 5. Other Information - None

Item 6. Exhibits

	Exhibit 31(a)	Certification of Chief Executive Officer
	Exhibit 31(b)	Certification of Chief Financial Officer
	Exhibit 32 (a)	Certification of Chief Executive Officer pursuant to 18 U.S. Section 1350
	Exhibit 32 (b)	Certification of Chief Financial Officer pursuant to 18 U.S. Section 1350
	Exhibit 101	The following materials from the Sandy Spring Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter end March 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Statements of Condition; (ii) The Condensed Consolidated Statements of Income; (iii) The Condensed Consolidated Statements of Comprehensive Income; (iv) The Condensed Consolidated Statements of Cash Flows; (v) The Condensed Consolidated Statements of Changes in Stockholders’ Equity; (vi) related notes.

Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly 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

Date: May 9, 2014

By:	/s/ Philip J. Mantua
Philip J. Mantua
Executive Vice President and Chief Financial Officer

Date: May 9, 2014