Sandy Spring Bancorp(SASR) - 2022 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Condensed Consolidated Financial Statements This section presents the unaudited condensed consolidated financial statements, including condition, income, and cash flow statements, prepared under U.S. GAAP Condensed Consolidated Statements of Condition Total assets increased to $13.77 billion driven by net loan growth, while total liabilities rose due to increased borrowings, and stockholders' equity decreased to $1.45 billion Condensed Consolidated Statements of Condition (Unaudited) | (Dollars in thousands) | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total assets | $ 13,765,597 | $ 12,590,726 | | Net loans | 11,090,545 | 9,857,946 | | Total deposits | 10,749,486 | 10,624,731 | | Total borrowings | 1,416,343 | 313,798 | | Total liabilities | 12,313,735 | 11,071,047 | | Total stockholders' equity | 1,451,862 | 1,519,679 | Condensed Consolidated Statements of Income Net income decreased to $33.6 million for Q3 2022 and $132.3 million for the nine-month period, primarily due to a significant provision for credit losses Key Income Statement Data (Unaudited, in thousands) | | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $ 112,960 | $ 106,604 | $ 320,361 | $ 319,250 | | Provision/(credit) for credit losses | 18,890 | (8,229) | 23,571 | (47,141) | | Total non-interest income | 16,882 | 24,394 | 72,722 | 79,519 | | Total non-interest expense | 65,780 | 63,181 | 192,918 | 194,329 | | Net income | $ 33,584 | $ 56,976 | $ 132,319 | $ 189,703 | | Diluted EPS | $ 0.75 | $ 1.20 | $ 2.92 | $ 3.98 | Notes to the Condensed Consolidated Financial Statements These notes detail the company's significant accounting policies, conforming to U.S. GAAP, and outline its primary operating segments after the June 2022 insurance segment sale - The company's accounting policies conform to U.S. GAAP and have had no significant changes from the 2021 Annual Report on Form 10-K[14] - The company is evaluating the impact of ASU 2022-02, which will eliminate troubled debt restructuring (TDR) accounting and enhance disclosure requirements for loan modifications for borrowers in financial difficulty, effective for fiscal years after December 15, 2022[41] - The company operates in two primary segments: Community Banking and Investment Management. The Insurance segment's assets were sold effective June 1, 2022[129][131] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the financial condition and results, noting a net income decrease to $33.6 million in Q3 2022 due to credit loss provisions, despite strong loan growth and stable capital ratios - Q3 2022 net income fell to $33.6 million from $57.0 million in Q3 2021, mainly due to a $18.9 million provision for credit losses versus a prior-year credit of $8.2 million[140] - Total loans grew 15% year-over-year to $11.2 billion, with commercial loans (excluding PPP) growing 21%, funded by an $1.1 billion increase in borrowings[144] - The tangible common equity ratio decreased to 7.98% from 9.10% year-over-year, impacted by share repurchases and a $141.9 million increase in accumulated other comprehensive loss from the rising rate environment[145] Results of Operations Net income for the nine months ended September 30, 2022, decreased to $132.3 million due to a credit loss provision and lower non-interest income, despite net interest income growth Nine-Month Non-Interest Income Comparison (in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Gain on disposal of assets | $ 16,516 | $ — | $ 16,516 | N/M | | Mortgage banking activities | 5,347 | 20,887 | (15,540) | (74.4)% | | Insurance agency commissions | 2,927 | 5,685 | (2,758) | (48.5)% | | Bank card fees | 3,916 | 5,078 | (1,162) | (22.9)% | | Total non-interest income | $ 72,722 | $ 79,519 | $ (6,797) | (8.5)% | Nine-Month Non-Interest Expense Comparison (in thousands) | Category | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Salaries and employee benefits | $ 119,049 | $ 114,295 | $ 4,754 | 4.2% | | Occupancy expense of premises | 14,527 | 16,712 | (2,185) | (13.1)% | | Other expenses | 21,687 | 27,100 | (5,413) | (20.0)% | | Total non-interest expense | $ 192,918 | $ 194,329 | $ (1,411) | (0.7)% | Financial Condition Total assets grew 9% to $13.8 billion driven by a 13% increase in loans to $11.2 billion, while capital ratios remained strong despite a slight decline - Total loans increased by $1.25 billion (12.6%) from Dec 31, 2021 to Sep 30, 2022, led by a $925 million (22.3%) increase in Commercial investor real estate loans[197] - During Q1 2022, the company transferred debt securities with an amortized cost of $305.6 million from available-for-sale to held-to-maturity to lessen the impact of rising interest rates on tangible common equity[199] Risk-Based Capital Ratios | | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Tier 1 leverage | 9.33% | 9.26% | | Common equity tier 1 capital | 10.18% | 11.91% | | Tier 1 capital | 10.18% | 11.91% | | Total capital | 14.15% | 14.59% | Credit Risk Credit quality improved with non-performing loans decreasing, while the allowance for credit losses increased to $128.3 million due to loan growth and a more cautious economic outlook Non-Performing Assets (in thousands) | | September 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total non-accrual loans | $ 40,217 | $ 46,086 | | Total non-performing loans | 44,461 | 48,810 | | Total non-performing assets | $ 45,200 | $ 49,844 | | Non-performing loans to total loans | 0.40 % | 0.49 % | | Allowance for credit losses to non-performing loans | 288.50 % | 223.61 % | - The provision for credit losses for the nine months ended Sep 30, 2022 was a charge of $23.6 million, compared to a credit of $47.1 million for the same period in 2021, reflecting loan growth and a more conservative economic forecast[229] - The allowance for credit losses increased to $128.3 million at Q3 2022 from $109.1 million at YE 2021. The allowance as a percentage of total loans was 1.14% at Q3 2022[230] Market Risk Management The company manages interest rate risk, showing asset sensitivity with projected Net Interest Income increases in rising rate scenarios, while Economic Value of Equity shows increased risk in such scenarios Estimated Change in Net Interest Income (NII) from Interest Rate Shocks | Change in Interest Rates | +200 bp | +100 bp | -100 bp | | :--- | :--- | :--- | :--- | | Sep 30, 2022 | 1.03% | 0.53% | (0.94%) | | Dec 31, 2021 | 4.80% | 2.16% | N/A | Estimated Change in Economic Value of Equity (EVE) from Interest Rate Shocks | Change in Interest Rates | +200 bp | +100 bp | -100 bp | | :--- | :--- | :--- | :--- | | Sep 30, 2022 | (9.80%) | (4.87%) | 5.02% | | Dec 31, 2021 | (2.16%) | 0.05% | N/A | Liquidity Management The company maintains a strong liquidity position with $2.5 billion in available FHLB borrowing capacity and $4.1 billion in total commitments to extend credit - At September 30, 2022, the company had $2.5 billion in available FHLB borrowing capacity, with $840.0 million outstanding[255] - The parent company (Bancorp) held $83.0 million in liquid assets and could receive up to $140.9 million in dividends from the Bank without prior regulatory approval as of September 30, 2022[256] - Total commitments to extend credit and available credit lines increased to $4.1 billion at September 30, 2022, up from $3.7 billion at December 31, 2021[259] Quantitative and Qualitative Disclosures About Market Risk This section incorporates by reference the 'Market Risk Management' discussion from Item 2, detailing interest rate risk management through NII and EVE simulation analysis - The report refers to the 'Financial Condition - Market Risk Management' section within the MD&A for disclosures about market risk[262] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting in Q3 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[263] - No material changes were made to internal controls over financial reporting during the third quarter of 2022[263] PART II - OTHER INFORMATION Legal Proceedings Management does not expect pending or threatened legal proceedings to materially affect the company's financial condition or operating results - Management does not anticipate that the ultimate liability from any pending or threatened legal proceedings will have a material adverse effect on the company's financial condition or results[264][107] Risk Factors No material changes to risk factors have occurred since the company's 2021 Annual Report on Form 10-K - No material changes in risk factors have occurred since the company's 2021 Annual Report on Form 10-K[265] Unregistered Sales of Equity Securities and Use of Proceeds The company's board authorized a $50.0 million stock repurchase plan, with no shares repurchased in Q3 2022, leaving $25.0 million available - The company did not repurchase any shares of its common stock during the quarter ended September 30, 2022[266] - Under the current stock repurchase plan authorized on March 30, 2022, a total of $25.0 million remains available for repurchase[266]