Note 14 – 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 Plan’s funded status at December 31 is as follows:

(In thousands)	2013		2012
Reconciliation of Projected Benefit Obligation:
Projected obligation at January 1	$	38,839	$	32,387
Interest cost		1,550		1,534
Actuarial loss (gain)		(827)		137
Benefit payments		(524)		(702)
Payments due to settlements		(1,380)		-
Increase (decrease) related to discount rate change		(4,099)		5,483
Projected obligation at December 31		33,559		38,839
Reconciliation of Fair Value of Plan Assets:
Fair value of plan assets at January 1		30,590		29,341
Actual return on plan assets		4,812		1,951
Contribution		-		-
Benefit payments		(2,158)		(702)
Fair value of plan assets at December 31		33,244		30,590

Funded status at December 31	$	(315)	$	(8,249)

Accumulated benefit obligation at December 31	$	33,559	$	38,839

Unrecognized net actuarial loss	$	5,539	$	14,879
Net periodic pension cost not yet recognized	$	5,539	$	14,879

Weighted-average assumptions used to determine benefit obligations at December 31 are presented in the following table:

	2013		2012		2011
Discount rate	4.77	%	4.00	%	4.75	%
Rate of compensation increase	N/A		N/A		N/A

The components of net periodic benefit cost for the years ended December 31 are presented in the following table:

(In thousands)	2013		2012		2011
Interest cost on projected benefit obligation	$	1,550	$	1,534	$	1,541
Expected return on plan assets		(1,668)		(1,165)		(1,070)
Recognized net actuarial loss		1,255		1,194		1,159
Adjustment due to settlement accounting for termination liability		269		-		-
Net periodic benefit cost	$	1,406	$	1,563	$	1,630

Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31 are presented in the following table:

	2013		2012		2011
Discount rate	4.00	%	4.75	%	5.00	%
Expected return on plan assets	5.50	%	4.00	%	4.50	%
Rate of compensation increase	N/A		N/A		N/A

The expected rate of return on assets of 5.50% reflects the Plan’s predominant investment of assets in equity securities and an analysis of the average rate of return of the S&P 500 index and 10 year U. S. Treasury bonds over the past 10 years.

The following table reflects the components of the net unrecognized benefits costs that is reflected in accumulated other comprehensive income (loss) for the periods indicated. Additions represent the growth in the unrecognized actuarial loss during the period. Reductions represent the portion of the unrecognized benefits that are recognized each period as a component of the net periodic benefit cost.

	Unrecognized
	Net
(In thousands)	Gain/(Loss)
Included in accumulated other comprehensive income (loss) at January 1, 2011	$	10,618
Additions during the year		443
Reclassifications due to recognition as net periodic pension cost		(1,159)
Increase related to change in discount rate assumption		1,337
Included in accumulated other comprehensive income (loss) as of December 31, 2011		11,239
Additions during the year		(649)
Reclassifications due to recognition as net periodic pension cost		(1,194)
Increase related to change in discount rate assumption		5,483
Included in accumulated other comprehensive income (loss) as of December 31, 2012.		14,879
Additions during the year		(3,969)
Reclassifications due to recognition as net periodic pension cost		(1,255)
Increase (decrease) related to change in discount rate assumption		(4,099)
Excess if distributions over reduction in projected benefit obligations		254
Loss recognized due to settlement		(271)
Included in accumulated other comprehensive income (loss) as of December 31, 2013		5,539
Applicable tax effect		(2,211)
Included in accumulated other comprehensive income (loss) net of tax effect at December 31, 2013	$	3,328

Amount expected to be recognized as part of net periodic pension cost in the next fiscal year	$	(220)

There are no plan assets expected to be returned to the employer in the next twelve months.

The following items have not yet been recognized as a component of net periodic benefit cost at December 31:

(In thousands)	2013		2012		2011
Net actuarial loss	$	(5,539)	$	(14,879)	$	(11,240)
Net periodic benefit cost not yet recognized	$	(5,539)	$	(14,879)	$	(11,240)

Pension Plan Assets

The Company’s pension plan weighted average allocations at December 31 are presented in the following table:

	2013			2012
Asset Category:
Cash and certificates of deposit		10.9	%		11.1	%
Equity Securities:		67.1			58.5
Debt Securities		22.0			30.4
Total pension plan sssets		100.0	%		100.0	%

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

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

Investment strategies and asset allocations are based on careful consideration of plan liabilities, the plan’s funded status and the Company’s financial condition. Investment performance and asset allocation are measured and monitored on an ongoing basis. The current target allocations for plan assets are 50-70% for equity securities, 30-40% for fixed income securities and 0-10% for cash funds and emerging market debt funds. This asset allocation has been set after taking into consideration the Plan’s current frozen status and the possibility of partial plan terminations over the intermediate term.

Market volatility risk is controlled by limiting the asset allocation of the most volatile asset class, equities, to no more than 70% of the portfolio and by ensuring that there is sufficient liquidity to meet distribution requirements from the portfolio without disrupting long-term assets. Diversification of the equity portion of the portfolio is controlled by limiting the value of any initial acquisition so that it does not exceed 5% of the market value of the portfolio when purchased. The policy requires the sale of any portion of an equity position when its value exceeds 10% of the portfolio. Fixed income market volatility risk is managed by limiting the term of fixed income investments to five years. Fixed income investments must carry an “A” or better rating by a recognized credit rating agency. Corporate debt of a single issuer may not exceed 10% of the market value of the portfolio. The investment in derivative instruments such as “naked” call options, futures, commodities, and short selling is prohibited. Investment in equity index funds and the writing of “covered” call options (a conservative strategy to increase portfolio income) are permitted. Foreign currency-denominated debt instruments are not permitted. At December 31, 2013, management is of the opinion that there are no significant concentrations of risk in the assets of the plan with respect to any single entity, industry, country, commodity or investment fund that are not otherwise mitigated by FDIC insurance available to the participants of the plan and collateral pledged for any such amount that may not be covered by FDIC insurance. Investment performance is measured against industry accepted benchmarks. The risk tolerance and asset allocation limitations imposed by the policy are consistent with attaining the rate of return assumptions used in the actuarial funding calculations. The RPIC committee meets quarterly to review the activities of the investment managers to ensure adherence with the Investment Policy Statement.

Fair Values

The fair values of the Company’s pension plan assets by asset category at December 31 are presented in the following tables:

	2013
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset Category:
Cash and certificates of deposit	$	3,486	$	-	$	-	$	3,486
Equity Securities:
Industrials		3,916		-		-		3,916
Financials		1,765						1,765
Telecommunication services		1,401		-		-		1,401
Consumer		3,867		-		-		3,867
Health care		2,705		-		-		2,705
Information technology		3,705		-		-		3,705
Energy		2,496		-		-		2,496
Materials		1,383		-		-		1,383
Other		1,073		-		-		1,073
Total equity securities		22,311		-		-		22,311
Fixed income securities:
U. S. Government Agencies		-		-		-		-
Corporate bonds		-		7,310		-		7,310
Other		137		-		-		137
Total pension plan sssets	$	25,934	$	7,310	$	-	$	33,244

	2012
	Quoted Prices in		Significant Other		Significant
	Active Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Total
Asset Category:
Cash and certificates of deposit	$	3,253	$	-	$	-	$	3,253
Equity Securities:
Industrials		2,676		-		-		2,676
Financials		2,353						2,353
Telecommunication services		1,121		-		-		1,121
Consumer		3,515		-		-		3,515
Health care		1,900		-		-		1,900
Information technology		2,328		-		-		2,328
Energy		2,645		-		-		2,645
Materials		1,207		-		-		1,207
Other		156		-		-		156
Total equity securities		17,901		-		-		17,901
Fixed income securities:
U. S. Government Agencies		-		-		-		-
Corporate bonds		-		9,283		-		9,283
Other		153		-		-		153
Total pension plan sssets	$	21,307	$	9,283	$	-	$	30,590

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.

Estimated Future Benefit Payments

Benefit payments, which reflect expected future service, as appropriate, that are expected to be paid for the years ending December 31 are presented in the following table:

	Pension
(In thousands)	Benefits
2014	$	895
2015		977
2016		1,107
2017		1,251
2018		1,339
2019-2023		9,150

Cash and Deferred Profit Sharing Plan

The Sandy Spring Bancorp, Inc. Cash and Deferred Profit Sharing Plan includes a 401(k) provision with a Company match. The 401(k) provision is voluntary and covers all eligible employees after ninety days of service. Employees contributing to the 401(k) provision receive a matching contribution of 100% of the first 3% of compensation and 50% of the next 2% of compensation subject to employee contribution limitations. The Company matching contribution vests immediately. The Plan permits employees to purchase shares of Sandy Spring Bancorp, Inc. common stock with their 401(k) contributions, Company match, and other contributions under the Plan. The Company’s matching contribution to the 401(k) Plan that are included in non-interest expenses totaled $1.7 million, $1.5 million and $ 1.4 million in 2013, 2012 and 2011, respectively.

Executive Incentive Retirement Plan

The Executive Incentive Retirement Plan is a defined contribution plan that provides for contributions to be made to the participants’ plan accounts based on the attainment of a level of financial performance compared to a selected group of peer banks. This level of performance is determined annually by the board of directors. Benefit costs related to the Plan included in non-interest expense for 2013, 2012 and 2011 were $0.3 million, $0.2 million, and $0.3 million, respectively.