Sandy Spring Bancorp(SASR) - 2021 Q4 - Annual Report

PART I Business Sandy Spring Bancorp, Inc. is a community banking organization with over 50 locations in the Washington metropolitan area, focusing on commercial and retail banking, mortgage, private banking, and wealth management services Company Overview as of December 31, 2021 | Metric | Value | | :--- | :--- | | Total Assets | $12.6 billion | | Total Loans | $10.0 billion | | Total Deposits | $10.6 billion (as of Dec 31, 2021) | | Locations | Over 50 | | Primary Markets | Central Maryland, Northern Virginia, Washington D.C. | - The company completed the acquisition of Revere Bank on April 1, 2020, which added over $2.8 billion in assets, and acquired wealth advisory firm Rembert Pendleton Jackson (RPJ) on February 1, 2020, which had approximately $1.5 billion in assets under management[14] - The company participated extensively in the Small Business Administration's (SBA) Paycheck Protection Program (PPP), originating 8,574 loans totaling $1.6 billion in 2020 and 2021. As of December 31, 2021, $1.4 billion of these loans had been forgiven, with an outstanding balance of $183.5 million[24][25] - The company's workforce as of December 31, 2021, consisted of 1,116 employees, with 58.6% being women and 41.4% minorities[49] Loan Products The company offers diverse loan products, primarily commercial lending including real estate and business loans, alongside residential real estate and consumer loans - The commercial loan portfolio is diversified, with no single industry concentration exceeding 10% of total loans[23] - Commercial real estate loans consist of both owner-occupied and nonowner-occupied (investor) properties. The company mitigates risk through conservative loan-to-value ratios, personal guarantees, and floating or short-term fixed interest rates[27] - The company's strategic decision is to sell the majority of new conforming mortgage loan production in the secondary market[34] Deposit, Treasury, and Borrowing Activities The company funds long-term lending through core deposit growth, manages its investment portfolio for liquidity, and uses borrowings for short-term needs - The company relies primarily on core deposit growth to fund long-term loan growth, viewing deposit products as the lead product for developing multi-product customer relationships[43] - The investment portfolio's primary objective is to provide liquidity. As of year-end 2021, 96% of the portfolio was rated AA or above, with an average duration of 4.3 years[45] - The company issued $175 million in subordinated debt in November 2019 to support future growth and redeem higher-priced debt from previous acquisitions. This debt qualifies as Tier 2 capital[47] Regulation, Supervision, and Governmental Policy The company operates under extensive federal and state regulations, including capital adequacy, consumer protection, and anti-money laundering laws, with oversight from the Federal Reserve and SEC - The company is subject to minimum capital requirements, including a leverage ratio of 4%, a common equity Tier 1 ratio of 4.5%, and a total risk-based capital ratio of 8%, plus a 2.5% capital conservation buffer[81][83] - As an institution with over $10 billion in assets, the Bank is subject to the supervisory and enforcement authorities of the Consumer Financial Protection Bureau (CFPB)[79] - The Bank received an "outstanding" rating in its last Community Reinvestment Act (CRA) examination[85] - Due to crossing the $10 billion asset threshold, the company will become subject to interchange fee restrictions (Durbin Amendment) beginning July 1, 2022[77] Risk Factors The company faces significant risks from economic downturns, geographic concentration, interest rate fluctuations, high commercial real estate loan concentration, operational failures, and regulatory changes - The company's lending operations are concentrated in central Maryland, Northern Virginia, and Washington D.C., making it susceptible to downturns in local economic conditions[104] - The commercial real estate loan portfolio totaled $6.9 billion, or 69% of the total loan portfolio at December 31, 2021, exposing the company to increased lending risks dependent on the successful operation of these properties[118] - The company's total commercial investor real estate loans represented 380% of the Bank's total risk-based capital, exceeding the 300% regulatory guidance threshold that could trigger increased supervisory scrutiny[119][120] - The company will become subject to the interchange fee restrictions of the Durbin Amendment beginning July 1, 2022, which could adversely affect non-interest income[155] - The transition from LIBOR to alternative reference rates like SOFR for its loans, swaps, and debt obligations may introduce financial and operational risks, including potential disputes with counterparties[108][109] Properties The company's headquarters is in Olney, Maryland, with 12 owned banking centers and other locations leased - The company owns 12 of its full-service community banking centers and leases the remaining locations[172] Legal Proceedings The company is involved in routine litigation, with management not expecting any material impact on financial condition or operating results - Management does not anticipate that any currently pending legal proceedings will have a material effect on the company's financial condition or results of operations[173] PART II Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ, completed a stock repurchase plan in 2021, and outperformed its peer group in cumulative total return over five years - The company's common stock trades on the NASDAQ Global Select Market under the symbol "SASR"[175] - In 2021, the company repurchased all 2,350,000 shares authorized under its December 2020 stock repurchase plan at an average price of $45.65 per share[177] Cumulative Total Return Comparison (2016-2021) | Index | 12/31/16 | 12/31/21 | | :--- | :--- | :--- | | Sandy Spring Bancorp, Inc. | $100.00 | $141.59 | | S&P 500 Index | $100.00 | $233.41 | | Peer Group | $100.00 | $113.98 | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income significantly increased in 2021 due to a credit to provision for credit losses, with improved net interest income and margin, while assets slightly decreased and credit quality improved Key Financial Results (2021 vs. 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net Income | $235.1 million | $97.0 million | | Diluted EPS | $4.98 | $2.18 | | Net Interest Income | $424.5 million | $363.2 million | | Net Interest Margin | 3.56% | 3.35% | | Provision for Credit Losses | ($45.6 million) | $85.7 million | | Non-performing Loans / Total Loans | 0.49% | 1.11% | - Total loans declined 4%, driven by an $874.4 million reduction in PPP loans. Excluding PPP loans, total commercial loans grew by $681.1 million during the year[190] - Deposits increased 6% year-over-year, driven by 14% growth in noninterest-bearing deposits. This growth, along with PPP loan forgiveness, provided excess liquidity used to reduce borrowings[190] - The GAAP efficiency ratio improved to 49.47% in 2021 from 54.90% in 2020, as revenue growth outpaced non-interest expense growth[190] Financial Condition Total assets decreased slightly to $12.6 billion, with loan portfolio changes driven by PPP forgiveness and growth in investor commercial real estate, while deposits grew and borrowings significantly reduced Loan Portfolio Composition (December 31, 2021) | Loan Category | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Commercial Investor Real Estate | $4,141,346 | 41.5% | | Commercial Owner-Occupied Real Estate | $1,690,881 | 17.0% | | Commercial AD&C | $1,088,094 | 10.9% | | Commercial Business | $1,481,834 | 14.9% | | Residential & Consumer Loans | $1,564,936 | 15.7% | | Total Loans | $9,967,091 | 100.0% | Deposit Composition (December 31, 2021) | Deposit Category | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Noninterest-bearing deposits | $3,779,630 | 35.6% | | Interest-bearing deposits | $6,845,101 | 64.4% | | Total Deposits | $10,624,731 | 100.0% | - Total borrowings decreased by 73% to $313.8 million at year-end 2021 from $1.1 billion at year-end 2020, primarily due to the reduction of federal funds purchased and FHLB advances[250][265] Key Capital Ratios (December 31, 2021) | Ratio | Company | Minimum Requirement | | :--- | :--- | :--- | | Tier 1 Leverage | 9.26% | 4.00% | | Common Equity Tier 1 Capital | 11.91% | 4.50% | | Total Capital | 14.59% | 8.00% | Credit Risk Credit quality improved significantly in 2021, with non-performing loans and the allowance for credit losses decreasing due to improved economic forecasts and portfolio management Non-Performing Assets (NPA) Summary | Metric | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Non-performing loans | $48,810 thousand | $115,452 thousand | | Non-performing loans to total loans | 0.49% | 1.11% | | Non-performing assets to total assets | 0.40% | 0.91% | Allowance for Credit Losses (ACL) Activity | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Balance, January 1 | $165,367 | $56,132 | | Provision for credit losses | ($45,556) | $85,669 | | Net charge-offs | ($10,666) | ($807) | | Balance, period end | $109,145 | $165,367 | | ACL to total loans | 1.10% | 1.59% | - The reduction in non-performing loans was driven by partial payoffs and charge-offs of a few large borrowings in the hospitality sector[280] - In response to the COVID-19 pandemic, the company granted payment modifications/deferrals on over 2,500 loans totaling $2.1 billion. As of December 31, 2021, only 38 loans with an aggregate balance of $7.6 million remained in deferral status[286] Market Risk and Liquidity Management The company actively manages interest rate risk, is asset-sensitive, and is transitioning from LIBOR, while maintaining strong liquidity supported by core deposits and significant credit lines Net Interest Income (NII) Sensitivity Analysis (as of Dec 31, 2021) | Change in Interest Rates | Estimated % Change in NII | | :--- | :--- | | +200 bp | +4.80% | | +100 bp | +2.16% | - The company has ceased originating new LIBOR-indexed loans and is developing transition plans for approximately $1.6 billion in existing loans indexed to LIBOR that mature after June 30, 2023[319] - The company has significant external liquidity sources, including an available line of credit with the FHLB totaling $3.9 billion with no outstanding borrowings as of December 31, 2021[323] Financial Statements and Supplementary Data Management concluded internal control over financial reporting was effective, and the independent auditor issued unqualified opinions on both internal control and financial statements - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021, based on the COSO framework[329] - The independent registered public accounting firm, Ernst & Young LLP, issued an unqualified opinion, stating that the company maintained effective internal control over financial reporting as of December 31, 2021[333] - Ernst & Young LLP also issued an unqualified opinion on the consolidated financial statements, stating they present fairly, in all material respects, the financial position and results of operations in conformity with U.S. GAAP[343] - The critical audit matter identified by the auditor was the allowance for credit losses, specifically noting the high degree of subjectivity and significant judgment required in determining the qualitative reserve related to loan portfolio concentrations[349] Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2021, with no material changes to internal control over financial reporting during the fourth quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[571] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2021[570] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement for the upcoming Annual Meeting of Shareholders - This section incorporates by reference information from the company's Proxy Statement regarding directors and corporate governance[575] Executive Compensation Information regarding director and executive compensation, including the CEO pay ratio, is incorporated by reference from the company's definitive proxy statement - This section incorporates by reference information from the company's Proxy Statement regarding executive compensation[576] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the company's definitive proxy statement - This section incorporates by reference information from the company's Proxy Statement regarding stock ownership[577] Certain Relationships and Related Transactions and Director Independence Information regarding director independence and transactions with related persons is incorporated by reference from the company's definitive proxy statement - This section incorporates by reference information from the company's Proxy Statement regarding related party transactions and director independence[578] Principal Accountant Fees and Services Information regarding fees paid to the principal accountant and Audit Committee pre-approval policies is incorporated by reference from the company's definitive proxy statement - This section incorporates by reference information from the company's Proxy Statement regarding audit and non-audit fees[581] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements and auditor reports - This section contains the list of all financial statements and exhibits filed with the Form 10-K, including certifications by the CEO and CFO[583][584]