G.research, LLC January 8, 2018 One Corporate Center Rye, NY 10580-1422 Tel (914) 921-5150 www.gabellisecurities.com Blossom in January http://www.nationalcherryblossomfestival.org Sandy Spring Bancorp (SASR - $39.47 – NASDAQ) Initiation – Buy Steve Comery Gabelli & Company 2018 (914) 921-5596 -Please Refer To Important Disclosures On The Last Page Of This Report- G.research, LLC January 8, 2018 One Corporate Center Rye, NY 10580-1422 Tel (914) 921-5150 www.gabellisecurities.com Geography Summary We find the Washington D.C. Metropolitan Statistical Area (MSA), where Sandy Spring primarily operates, to be a compelling market for community bank investment due to historically low and non-cyclical unemployment rates, relatively-affordable real estate pricing, generally well-secured and conservative rents, and potential for consolidation among the remaining community banks after several recent acquisitions. The D.C. MSA itself comprises the District of Columbia proper in Exhibit 1 Washington DC MSA Map addition to twenty-two additional counties, five in Maryland, sixteen in Virginia, and one in West Virginia. Combined, the population of these areas was about 6.1M in 2016, according to U.S. Census Bureau. Stable Employment Outlook Employment in the DC area is heavily supported by the U.S. Federal Government, including and especially the Department of Homeland Security. Another notable industry is education: with Georgetown, Howard, George Washington, and American Universities all in the District proper and the University of Maryland and George Mason University within the surrounding counties. Additionally, over the last decade Northern Virginia has amassed a slate of large corporate operations mainly related to data and cloud computing mainstays like Amazon, Microsoft, and Google(a). Loudon County, in the center of the map in Exhibit 1, serves as a conduit for about 70% of the world’s internet traffic each day, (b) according to a local official . Source: US Bureau of Labor Statistics Exhibit 2 County Unemployment County UR The area’s co-location with the U.S. government, dense fiber infrastructure, and District of Columbia 7.0% relatively-inexpensive electricity present a compelling and difficult-to-replicate United States 4.1 combination. Fredericksburg City, VA 4.1 Prince George's County, MD 3.7 Due to the relatively non-cyclical nature of these primary employers, the DC Stafford County, VA 3.6 MSA tends to have comparatively-low unemployment rates at both troughs and Spotsylvania County, VA 3.6 peaks of the economic cycle. Exhibit 2 has the most recent regional Warren County, VA 3.6 unemployment data, where every county within the DC MSA except for DC Charles County, MD 3.5 proper is below the US national unemployment rate of 4.1%: with some very far Prince William County, VA 3.3 below. The overall unemployment rate for the MSA was 3.6% most recently, but Manassas City, VA 3.3 Exhibit 2 shows that even this low average is pulled up by the District outlier. Calvert County, MD 3.2 Clarke County, VA 3.2 Following the financial crisis, US national unemployment peaked at 10.0% in Fauquier County, VA 3.2 October 2009, and the DC MSA’s comparable rate was 6.2% during the same Frederick County, MD 3.1 period, a proportion the nation as a whole did not reach until April 2014, nearly Manassas Park City, VA 3.1 five years later. Due to the non-cyclical composition of employers listed above, Fairfax County, VA 3.0 we would anticipate further relative outperformance for the region under both normal and recessionary economic conditions. Loudon County, VA 3.0 Fairfax City, VA 2.8 Montgomery County, MD 2.8 Jefferson County, WV 2.8 a) Washington Post, Northern Virginia Center of the Data World; July 5, 2017 Alexandria City, VA 2.7 b) CBS News, The heart of “The Cloud” is in Virginia; October 22, 2017 Falls Church City, VA 2.6 Arlington County, VA 2.4 Source: US Bureau of Labor Statistics 1 Exhibit 3 Real Estate Price to Income Affordable Real Estate 6.0 More-specific to banking, low and relatively-moderate United States unemployment leads to well-secured credits, especially on a 5.5 relative basis. Looking at Exhibit 3, while the DC price-to- Washington, income ratio did track the top 10 and top 20 city real estate 5.0 DC markets during the last financial crisis, since the correction Top 10 DC real estate has remained affordable on a relative basis, 4.5 Top 20 growing moderately compared to other urban peers. Values 4.0 on the Y axis describe average real estate prices as a multiple of average annual income. 3.5 We think this metric signifies not only the economic strength 3.0 of the D.C. metro area but also a relatively-conservative banking culture that keeps credits within a more-disciplined 2.5 band than their urban peers in other markets. 1979 1984 1989 1994 1999 2004 2009 2014 Source: Zillow Exhibit 4 Rent Affordability to Monthly Income Well-Secured Rents Zillow’s rent affordability metric tells a similar, if 0.40 United States not even more-compelling story about DC-area 0.35 Washington, DC credits and banking. Here, the Y axis measures the Top 10 proportion of average monthly income required to 0.30 Top 20 make average rent payments. While the spread has 0.25 clearly narrowed over the last several decades, DC rents remain remarkably affordable, especially 0.20 compared to the rest of the top 10 and top 20 rental markets. Breaking down the components of the 0.15 1979 1984 1989 1994 1999 2004 2009 2014 top-20 group, DC has the fifth most-affordable rents of any city in the ranking, and also the least- Source: Zillow pricy of any coastal city, relative to income. Exhibit 5 Monthly Rent as a % of Income We think the region’s historical and current advantages identify well-capitalized credits, with greater potential for Los Angeles 48.8% increasing prices if the rental spread were to narrow San Francisco 43.0 further toward the other large rental MSAs along with San Diego 41.9 greater downside protection versus other urban markets if Miami 41.4 the U.S. were to head into a recession as the relatively New York 39.2 under-heated rents offer tenants greater cushion to make Riverside 36.5 payments. This comparative security is in addition to the Boston 34.2 relative resilience of the employment market identified on the previous page in Exhibit 2. Seattle 32.3 Tampa 32.2 Consolidation Potential Dallas 29.7 As far as the depository market, the MSA is quite Chicago 29.5 competitive, with many large banks vying for market Houston 29.1 share. Due to a series of mergers (shown in Exhibit 7 on Baltimore 27.7 the next page), relatively few community-type banks are Philadelphia 27.6 left in the market as pure-plays. Sandy Spring Bank, our Phoenix, AZ 27.2 focal company in this report, ranks eleventh in deposit Washington 26.4 market share including the deposits of Washington First, a Atlanta 25.7 Northern Virginia company acquired by Sandy Spring. Minneapolis-St Paul 25.6 That acquisition closed on January 1, 2018. Detroit 25.0 St. Louis 23.2 Source: Zillow 2 Exhibit 6 DC FDIC Data June 2017 In Exhibit 7 below, we have listed twelve recent transactions in the DC Deposits Share MSA and nearby Virginia markets. As is apparent, transaction 1 E*Trade Bank 42,095.1 17.5% multiples have generally risen over the last twelve months, particularly 2 Bank of America 31,960.7 13.3 with the acquisitions of Cardinal (CNFL) by United Bank at 2.24x TBV and WashingtonFirst (WFBI) by Sandy Spring Bank at 2.56x, 3 Wells Fargo 31,634.8 13.1 although we do note that these were two premier pure-play community 4 Capital One 27,715.4 11.5 bank franchises (we will examine why further in this report). 5 SunTrust 19,627.6 8.2 6 BB&T 13,923.6 5.8 We would also note that multiples for metro DC banks, like the 7 PNC Bank 13,684.2 5.7 Cardinal and WFBI transactions have generally exceeded those for 8 United Bank 8,587.2 3.6 more suburban or rural Virginia markets, like the most-recent Union Bank & Trust (UBSH) deal for Xenith (XBKS), a company that 9 Citi 8,115.0 3.4 operates primarily the markets of Virginia Beach and nearby Hampton 10 EagleBank 5,953.3 2.5 Roads. 11 Sandy Spring 4,757.3 2.0 12 M&T Bank 4,483.8 1.9 Accordingly, we see material scarcity value in the few remaining 13 TD Bank 3,952.5 1.6 community bank names, as small regional (or even large regional) banks try to inorganically move into the area or deepen existing 14 Burke & Herbert 2,343.0 1.0 footholds. 15 HSBC Bank 2,334.7 1.0 16 Access National 2,147.5 0.9 However, even without further M&A, we expect that the void left by 17 Revere Bank 1,385.5 0.6 previous deals will create opportunities for community banks to attract 18 Union B & T 1,379.3 0.6 business left behind by acquired companies as the community bank 19 Old Line Bank 1,068.3 0.4 service model becomes even more unique to small business borrowers and property developers in this attractive geographic region. 20 John Marshall 879.0 0.4 Source: FDIC; Note: Shaded rows are universals or large regionals; Italicized rows are private companies Exhibit 7 D.C.-Area Bank Deals 2014-2017 Acquirer Target Assets (B) TBV Mult.