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 historical credit culture and performance, strong deposit market share positioning, diversified earnings profile reflected by a 19% noninterest income contribution to operating revenue primarily attributable to the wealth management segment with $6.2 billion in AUM as of 2Q24, and management’s execution of strategic objectives, including as a proven acquirer and through organic growth, to scale within its footprint. From a profitability standpoint, SASR’s earning profile has faced headwinds from the high interest rate environment in a competitive market landscape and its impact on the total cost of deposits as the company is forced to defend its deposit base with a loan-to-deposit ratio above 100%. While the company benefits from a solid base of NIB accounts (26% at 2Q24), the cost of total deposits in 1H24 of 2.67% are 45 bps above the peer average. With that said, we note NIM stabilization in recent quarters, and the liability sensitive positioning should contribute to stronger earnings in a lower rate environment. SASR has historically had a solid credit culture translating into low relative loss content in its loan portfolio. We note the elevated exposure to investor CRE (including multifamily) relative to peers, representing 51% of total loans and over 320% of risk-based capital at 2Q24. During 2Q24, asset quality metrics deteriorated reflecting rating changes that impacted NPAs and criticized loan metrics as part of the rating review project and less due to underlying performance of the portfolio. On a positive note, Investor CRE concentration levels continue to decline reflective of 323% of risk-based capital, a reduction from peak 4Q21 level of 360%. Despite a slightly weaker capital profile relative to the rating category peers with CET1 ratio at 11.3% vs 12.2% for the peer average at 2Q24, we note that capital ratios have been trending higher since the trough in 2022 following aggressive loan growth. KBRA expects the company to continue to build capital as it limits growth going forward in 2H24 and 2025.

Rating Sensitivities

Increasing scale within economically robust and attractive MSAs and the continuation of earnings diversification that grows its earnings power relative to higher rated peers, including lower-risk or uncorrelated fee income sources, may lead to positive rating momentum over time. Conversely, further weakening of its earning base from NIM compression or a substantial change in regulatory capital management resulting in a deteriorating capital position below peer levels, or increased credit quality issues that negatively impact the earnings profile, and therefore, capital levels relative to peers, could result in negative rating action.

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