KBRA Affirms Ratings for Sandy Spring Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Olney, Maryland based Sandy Spring Bancorp, Inc. (NASDAQ: SASR) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the subsidiary, Sandy Spring Bank (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by the company’s long-tenured and solid executive management team, favorable credit loss history, and robust earnings capability. The ratings are further strengthened by management’s previous execution of strategic objectives including M&A and organic growth to scale within its footprint. However, balance sheet growth is expected to moderate in 2H23 as SASR shifts its focus to the existing customer base and relationship oriented deposit gathering. KBRA considers the company’s fee income contribution as favorable historically, though more peer-like today representing ~20% of operating revenue following the sale of the company's insurance business in late 2022. SASR’s management has expressed a desire to drive fee contribution higher going forward through growth in wealth management and trust services. We also note that a portion of these fee sources, principally mortgage banking, has experienced levels of decline and reinforces the spread-reliant nature of the revenue profile overall, consistent across the industry. The funding profile includes considerable noninterest bearing balances, representing 28% of the total deposit base as of 2Q23, which has been partially remixed into higher cost deposits. As a result, SASR reflected a total cost of deposits of nearly 2% through 1H23. Access to secondary sources of liquidity is considered ample, representing nearly 25% of total assets, covering uninsured deposits by over 160% as of 2Q23. SASR’s NPA level has improved to near 5-year lows representing 0.43% of loans plus OREO as of 2Q23, though slightly higher than similarly rated peers. Realized loan losses have been negligible and the few that have been realized are mostly concentrated in investor CRE and the commercial loan book. The company’s credit performance has been historically sound, supported by the underlying strength of the regional Suburban Maryland/Northern Virginia MSA economy, as well as management’s stringent credit underwriting standards. KBRA recognizes that the company’s emphasis on growing entirely within a strong geographic area is reflective of management’s deep knowledge of local markets and has been a catalyst of SASR’s large deposit market share. With that said, we recognize that the bank’s appetite relative to loan growth will likely be muted given the regional competitive landscape. Lastly, SASR’s capital profile has been trending downward since 2021 given the growth in earning assets and is now positioned below peer averages. However, KBRA anticipates SASR’s capital profile to be managed at or near current levels through the medium term via retained earnings and limited earning asset growth.

Rating Sensitivities

Further scale within economically robust MSAs and the continuation of earnings diversification including lower-risk or uncorrelated fee income sources may lead to positive rating momentum over time. Conversely, additional deposit outflows that are outsized relative to peers, a substantial change in regulatory capital management resulting in a capital position below current levels or outside our range of tolerance relative to peer levels, or increased credit quality issues, as measured by levels of NPLs combined with charge-off activity, could result in negative rating action.

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