Summary
- Acquisition of Revere Bank is expected to boost earning assets and, consequently, earnings next year.
- Merger-related expenses will pressurize earnings in 2020.
- Net Income is expected to rise but due to an increase in number of shares, EPS is expected to decline next year.
- Reducing target price on SASR leads to the downgrading of stance on SASR to neutral.
Sandy Spring Bancorp (SASR) has announced to acquire Revere Bank by the first quarter of 2020. Based on the details in the announcement and management's guidance given in the 3QFY19 conference call, I expect SASR's net income to grow by around 34% next year. However, due to an increase in number of shares, earnings per share are expected to slightly decline.
Revere Acquisition to Boost Loans and Net Income
As announced by SASR last month and reiterated in the 3QFY19 conference call, SASR will gain around $11 billion in assets from its acquisition of Revere Bank. The acquisition is planned to be closed by the end of the first quarter of 2020. As Revere Bank had around $2.3 billion in loans at the end of June 2019 (source: 2Q earnings), I'm expecting SASR's loan portfolio to rise by that amount next year. I'm also expecting organic mid-single digit growth of SASR's loan book outside of the Revere acquisition. The rise in loans will be the major driver of net income in 2020.
The acquisition will lead to growth in the rest of the balance sheet as well. I'm expecting SASR's equity to rise by around $500 million next year, with $400 million attributable to the acquisition, which will increase common stock and additional paid-in capital. I'm also expecting the number of shares to increase to 48.6 million after the merger from the current 35.8 million. My assumption is based on the merger agreement wherein 1.05 shares of SASR are to be issued to holders of Revere Bank for each share that they own. The equity and number of shares outstanding assumptions lead to book value per share, BVPS, estimate of $34 for end of 2020. My estimates for SASR's loans and other key balance sheet items are given in the table below.
