Sandy Spring snags final puzzle piece to its D.C. expansion plans

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Sandy Spring Bancorp in Olney, Md., believes Revere Bank gives it the right amount of scale to outmaneuver banks of all sizes in the nation's capital.

Sandy Spring, which agreed on Tuesday to buy the $2.6 billion-asset Revere, plans to compete with smaller institutions by offering more products and services. When going against big banks, Sandy Spring will emphasize high-touch service to build client relationships.

"I think that's a recipe for long-term success," Daniel Schrider, the $8.4 billion-asset Sandy Spring's chairman and CEO, said during a Tuesday conference call to discuss the $461 million Revere deal.

Buying Revere also gives Sandy Spring more heft in the Maryland suburbs around Washington. The expectation is that the deal should pair well with the 2017 purchase of WashingtonFirst Bankshares in Reston, Va., which gave Sandy Spring more of a lift around Northern Virginia.

The deals — Sandy Spring's only bank acquisitions since 2012 — "complement us in very different ways, but collectively, once we're all together, it's very similar in terms of our approach to clients," Schrider said.

The $12.5 billion-asset WesBanco in Wheeling, W.Va., agreed in July to buy the $3.1 billion-asset Old Line Bancshares in Bowie, Md. A group of WashingtonFirst executives, including former CEO Shaza Andersen, recently opened de novo Trustar Bank in Great Falls, Va.

The Revere acquisition will also push Sandy Spring above $10 billion in assets. While lawmakers removed required stress testing, Sandy Spring will be subject to a cap on interchange fees. Sandy Spring estimated that the cap could cost it $3.1 million in annual interchange fees.

Sandy Spring has been preparing to cross the regulatory threshold. It hired Kevin Slane in May 2018 as its first chief risk officer.

Sandy Spring also disclosed the impact that the Current Expected Credit Loss method would have on the deal. The company said it will record a $13 million credit mark on purchased-credit deteriorated (PCD) components and a $15 million credit mark for non-PCD components.

With the $10 billion-asset threshold soon to be in the rear-view mirror, Schrider said Sandy Spring will look at more acquisitions. The next deal could be for a target that would help Sandy Spring increase fee income; only a fifth of the company's revenue comes from areas such as wealth management, insurance and mortgage.

Future deals could also expand Sandy Spring's operations into southern Pennsylvania; Richmond, Va.; and western Virginia, Schrider said.

"We're open to those conversations, but we're not looking for big geographic leaps," he said.

Deal conversations are accelerating as potential sellers become more realistic about bank valuations. Sellers are increasingly looking for more relative value and long-term potential versus "day-of-announcement" type potential, Schrider said.

Sandy Spring's stock price was down 6.2% in mid-afternoon trading Tuesday.

Catherine Mealor, an analyst at Keefe, Bruyette & Woods, said the initial investor reaction is typical, adding that she sees no major red flags with the deal. She said the acquisition, which valued Revere at 173.4% of its tangible book value, is well priced and comes with good earnings accretion.

Revere, however, will not help Sandy Spring's loan-to-deposit ratio, which would increase from 103% to 105%.

Sandy Spring is "getting really nice cost savings and some nice growth ... but [it is] diluting the deposit base a little bit," Mealor said. "But over time, I think it will be a good deal for them."

While Sandy Spring has the opportunity to close "numerous" branches — it has 50 locations, while Revere has 11 — Schrider said decisions on specific closures have not been made. He also said it was too early to determine the number of jobs that might be cut.

The company estimated that it would cut about 45% of Revere's annual noninterest expenses. Three-fourths of the savings should be realized next year.

While commercial real estate lending continues to be strong around Washington, Schrider said Sandy Spring will remain disciplined. The company's lending capacity can exceed $100 million to a single commercial client, but it will typically limit exposure to $25 million to $35 million on a project.

"That keeps us out of that speculative office space," Schrider said.

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