Summary
- Sandy Spring Bancorp is a rapidly growing community bank that operates in the metropolitan Washington DC area.
- The current dividend yield is about 3.5% and has grown for nine consecutive years.
- The dividend is well covered by both earnings and free cash flow.
- This community bank is seemingly conservatively run with a solid capital position and very good credit quality metrics.
- Sandy Spring is currently undervalued.
- Looking for a portfolio of ideas like this one? Members of The Income Strategist get exclusive access to our model portfolio. Get started today »
Thesis
Sandy Spring Bancorp Inc (SASR) is the fourth undervalued community bank that I am highlighting. This bank has operations in Maryland, Virginia, and Washington DC. The bank showed up as one of five banks passing several screens assessing dividend, dividend safety, valuation, and volatility. This bank is conservatively run and presently undervalued and the yield is about 3.5%. Sandy Spring had long-term dividend growth that was interrupted by the Great Recession. Since then the bank has raised the dividend at a rapid clip but the growth rate may slow due to acquisitions. With that said, I view the bank as a long-term buy due to its location in relatively high population growth areas with high incomes.
Source: Sandy Spring Bancorp
Overview of Sandy Spring Bancorp
Sandy Spring Bancorp is a small but rapidly growing community bank. The bank has three subsidiaries: Sandy Spring Bank with 55 branches, Sandy Spring Insurance Corporation, and West Financial Services. The bank provides personal banking, business banking, mortgages, insurance, and wealth management. Sandy Spring Insurance Corporation specializes in insurance, workers compensation, and professional liability protection. West Financial Services offers financial planning, wealth management, and asset management. Sandy Spring operates in southern and western Maryland, Northern Virginia, and Washington DC, as seen in the graphic below. The bank had over $6.6B in loans, $6.5B in deposits, and $8.4B in assets at end of Q3 2019. The bank is a market leader in its geographic area of operations. It is No. 2 in community bank deposit market share.
Source: KBW Investor Meeting October 2019
Sandy Spring Bancorp’s Profitability and Growth
Sandy Spring Bancorp’s top line is derived from interest income and non-interest income. For interest income, the bank gathers deposits at low rates and then makes loans at higher rates or invests in safe securities. A conservatively run community bank will invest in U.S. Treasuries, government agency securities, State and municipal securities, and mortgage-backed securities. Sandy Spring invests along these lines and investments are divided approximately into 36% mortgage-backed securities, 35% U.S. Treasuries, and 27.6% in State and municipal at end of Q2 2019.
