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Within the banking sector it’s usually higher to manage your individual progress as a lot as attainable – by and enormous, banks that generate sturdy inner core earnings progress outperform people who purchase it, and banks that generate above-average mortgage progress are likely to outperform people who rely extra on fee sensitivity. That makes Sandy Spring Bancorp (SASR) a reputation value being attentive to, notably with its leverage to the enticing and rising Washington, DC – Baltimore metro hall.
Sandy Spring isn’t notably fee delicate, however with Russia’s battle in Ukraine resulting in increased commodity costs (vitality specifically) and higher uncertainty, that is probably not such a foul factor, as increased oil costs may gradual the economic system sufficient to push not less than one fee hike off the desk. Alternatively, the financial institution has been displaying that it may possibly generate good natural mortgage progress, and the pipeline going into 2022 seems to be good.
Valuation isn’t as clear-cut as I would love. The shares aren’t notably low-cost on the idea of ROTCE or as low-cost as I would like on long-term core earnings, however the P/E isn’t that top for a financial institution that ought to generate good earnings progress in a sexy market.
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A Progress Financial institution In A Progress Market
Leveraging a well-established model within the prosperous suburbs of Washington, D.C., Sandy Spring is well-positioned to reap the benefits of mortgage progress alternatives within the sixth-largest metro space within the U.S. Not solely is the DC metro space enticing by way of dimension and common incomes, the affect of the federal authorities tends to defend the world from the cyclicality seen in different markets – in good occasions and unhealthy, the federal authorities tends to maintain increasing and maintain spending cash.
Sandy Spring is, and for the foreseeable future will stay, primarily an actual property lender, with about half of its mortgage e book in owner-occupied and investor-owned business actual property. Given good yields on these loans and the truth that the D.C. actual property market tends to be a lot much less cyclical than different markets, that doesn’t concern me all that a lot, notably given a better-than-average credit score high quality historical past.
On the similar time, although, the financial institution has been actively trying to construct up its core C&I enterprise lending operations. C&I loans have grown to nearly 20% of the mortgage e book (from 12% just some years in the past), and the financial institution continues to rent away mortgage officers from bigger banks available in the market. I like this shift, and I imagine there’s a good alternative for smaller banks to take share from bigger entrenched gamers on the idea of service – one thing that ought to get a lift at Sandy Spring because it rolls out its new “ncino” business mortgage platform.
Additional underscoring the potential of the D.C. market, I’d be aware that Pinnacle Monetary Companions (PNFP), considered one of my favourite progress backs, has lately made D.C. considered one of its latest goal markets, hiring away a business lending group from a super-regional to steer the preliminary cost. Whereas the presence of a brand new hard-charging financial institution available in the market isn’t precisely an unalloyed optimistic for Sandy Spring, there’s greater than sufficient room within the D.C. space for 2 rising business lenders.
A Largely DIY Progress Plan
Sandy Spring has not prevented M&A in its previous, and isn’t ignoring alternatives to develop by way of acquisition as we speak, however the progress plan right here doesn’t revolve round M&A, and by and enormous that’s typically a great factor. Whereas prudent M&A is a sound technique for progress within the banking sector, too many banks use up shareholder capital on offers with restricted synergies and worth creation potential.
Sandy Spring final did a banking deal in 2020, buying Revere Financial institution and increasing its presence within the D.C.-Baltimore hall, and administration has stated they’re inquisitive about doubtlessly including to its footprint inside a 100-mile or so radius of its current working footprint – a goal space that would come with Richmond, VA (a roughly $130B deposit market), Harrisburg, PA (a roughly $30B market), and the outer edges of the Philly MSA.
Aside from the occasional choose deal, Sandy Spring’s progress goes to be pushed by its lending operations. Loans have been up greater than 5% on an adjusted end-of-period foundation within the fourth quarter, an above-average stage of progress, with double-digit progress in C&I lending (up 13% qoq) and investor-owned actual property (up greater than 10% qoq). The pipeline going into 2022 seems to be strong, and I count on excessive single-digit mortgage progress in ’22 and ’23, excluding PPP run-off, because the financial institution advantages from a recovering economic system and share progress alternatives within the C&I area.
One space the place I don’t see a lot leverage is with asset sensitivity – the financial institution’s leverage to increased charges. Greater than half of Sandy Spring’s loans are fixed-rate, and the financial institution’s comparatively excessive mortgage/deposit ratio likewise limits fee sensitivity, with the financial institution estimating {that a} 100bp transfer in charges would solely drive round 2% progress in internet curiosity revenue – effectively beneath the 5%-6% common of most banks as of late.
Beneath-average asset sensitivity going right into a tightening cycle is lower than perfect, however not an enormous strike in opposition to the financial institution. Sandy Spring will profit from increased charges, notably because it places extra fixed-rate loans on the books at increased charges, however will probably be a extra drawn-out course of. What’s extra, relative to extra asset-sensitive banks, Sandy Spring is much less weak to disappointments on fee hikes if spiking oil costs finally result in a extra protracted cycle from the Fed.
The Outlook
I want to see extra working leverage from Sandy Spring. Larger opex has weighed on current quarterly outcomes and it’s an space that always will get numerous consideration from traders. I don’t suppose Sandy Spring administration is being careless with its spending, numerous the opex appears to be going towards areas that can help additional progress (hiring new lending groups, reinvesting in IT capabilities, et al), and the effectivity ratio isn’t problematic, however it’s a gating issue to earnings progress.
Wanting on the earnings outlook, PPP runoff and a normalization of reserves (no repeat of the unfavourable provision expense in 2021) will strain 2022 reported earnings, however Sandy Spring ought to get again to excessive single-digit pre-provision revenue progress in 2023 and I count on not less than just a few years of excessive single-digit core earnings progress earlier than progress slows towards the higher finish of the mid-single-digits. I do count on Sandy Spring to stay a really worthwhile financial institution, with mid-teens ROTCEs.
Lengthy-term discounted core earnings do counsel double-digit long-term annualized return potential right here. Likewise, a 12.5x a number of on FY’23 earnings helps a good worth above $50, and I believe that’s a good P/E relative to the expansion potential right here. ROTCE-driven P/TBV isn’t as supportive, however I’m not shocked on condition that that metric doesn’t reward progress.
The Backside Line
Relative to what I usually count on/demand from smaller banks, Sandy Spring is a borderline name on valuation, however I just like the financial institution’s leverage to the rising D.C.-Baltimore markets and the financial institution’s targeted efforts to develop its C&I lending enterprise. Whereas I can’t say that is considered one of my high concepts in banking, it’s a reputation value consideration all the identical.