Sandy Spring Bancorp

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

(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

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. Earn. Mult. Announced Closed Old Line Bank Bay Bank $0.6 1.93x 26.2x 9/27/2017 Pending Union Bank & Trust Xenith 3.2 1.56 10.1 5/22/2017 Pending Sandy Spring WashingtonFirst 2.1 2.56 24.0 5/16/2017 1/1/2018 United Bank Cardinal 4.2 2.24 17.5 8/18/2016 4/21/2017 Summit Financial First Century Bank 0.4 0.95 NA 6/1/2016 4/3/2017 Blue Ridge Bank River Bank 0.1 1.08 8.8 3/31/2016 10/20/2016 Summit Financial Highland County Bank 0.1 1.48 29.2 2/29/2016 10/3/2016 Bank of Hampton Roads Xenith Bank 1.0 1.06 25.5 2/10/2016 7/29/2016 Bay Bank Hopkins Federal 0.5 1.05 28.2 12/18/2015 7/8/2016 Towne Bank Monarch Bank 1.1 1.92 17.4 12/17/2015 6/27/2016 United Bank Bank of Georgetown 1.2 2.18 27.6 11/9/2015 6/3/2016 Park Sterling First Capital Bank 0.6 1.51 17.3 10/1/2015 1/4/2016 Eagle Bank Virginia Heritage 0.9 2.06 18.1 6/9/2014 10/31/2014

Source: Company Filings, Gabelli & Company Estimates

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Sandy Spring Bancorp (SASR - $39.47 - NASDAQ) Blossom in January - Buy Year EPS P/E PMV 2019P $3.25 12.1x $50 Dividend: $1.04 Current Return: 2.6% 2018P 2.85 13.8 46 Shares O/S: 24.0 million 2017E 2.50 15.8 42 52-Week Range: $45.64 - $36.50 2016A 1.94 20.3 ---

COMPANY OVERVIEW Sandy Spring Bancorp (SASR) is a $5.2B-asset bank holding company headquartered in Olney, Maryland. The subsidiary bank operates forty-four branches across Virginia, Maryland, and the District of Columbia: primarily lending to commercial real estate (CRE), commercial & industrial (C&I), and residential borrowers.

Investment Case:

 Initiating coverage of SASR with a Buy recommendation and 2019 Private Market Value of $50 per share.

 We value SASR shares conservatively at 2.2x TBV, in-line with trading multiples for peer institutions. We think this is reasonable with potential for upside, given recent transaction multiples of 2.24x for Cardinal Financial (CNFL) and 2.56x for SASR’s own acquisition of WashingtonFirst (WFBI).

 Since 2010, Sandy Spring’s balance sheet has demonstrated better credit performance on average than identified peers through lower non-performing loan asset ratios and charge-off rates.

 Sticky retail and noninterest commercial deposits have helped SASR expand net interest margins (NIMs) by 9bps during the current Fed tightening cycle while peers have contracted about 13bps on average.

 About 9% of the company’s LTM revenue came from wealth management and trust businesses, which help diversify income and provide additional potential value in an acquisition scenario.

 We identify several potential acquirers for Sandy Spring’s business including First National Bank (FNB), United Bank (UBSI), and Union Bank (UBSH).

 Returns are enhanced by a 2.6% current return from dividends.

Table 1

Sandy Spring Bank Earnings Model

2015-2021P

Fiscal year end 12/31 2015 2016 2017E 2018P 2019P 2020P 2021P CAGR

($ millions, except per share) '16-'21P

Revenue$ 188 $ 199 $ 220 $ 334 $ 360 $ 388 $ 418 16.0 %

Pretax income (a) 63 70 92 155 178 193 211 24.6

EPS, cont ops (a) $1.73 $1.94 $2.50 $ 2.85 $3.25 $ 3.55 $3.85 14.6

TBV / Share $18.11 $18.71 $19.20 $20.70 $22.95 $25.50 $28.35

P/E Multiple 22.8x 20.3x 15.8x 13.8x 12.1x 11.1x 10.3x

P/TBV Multiple 2.2 2.1 2.1 1.9 1.7 1.5 1.4

(a) excludes impacts of one-time securities sales, merger costs, and litigation charges

Source: Company data and Gabelli & Company estimates

Company History Although Sandy Spring Bancorp under the current holding-company structure incorporated in 1988, the subsidiary bank actually began operating in 1868. Successive management teams engaged in several small-to-medium-sized acquisitions from 1993-2011, with deals ranging between $2-$66M in total value.

In May 2017, the current management team announced a large transformative deal for WashingtonFirst Bankshares (WFBI), a $2.1B-asset institution with operations primarily on the Virginia side of Washington D.C. At almost $500M in total value, WFBI represents by far the largest acquisition in Sandy Spring’s history.

Management Daniel Schrider – CEO Mr. Schrider has worked in different capacities at Sandy Spring since 1989, when he joined the firm as a commercial lender. He acceded to the role of Chief Credit officer in 2003 and President and Chief Executive Officer six years later in 2009.

Philip J. Mantua – CFO Mr. Mantua is also a long-term member of the Sandy Spring organization, working as Director of Managerial Accounting from 1999 to 2004, when he moved to the CFO role. Prior to his employment at Sandy Spring, Mr. Mantua worked with Olson Research Associates, an asset/liability-management consultant (headquartered in Columbia, Maryland), for fifteen years.

Company Lending In the interest of comparability, we examine Sandy Spring’s business in the context of three peers. Two of which were recently acquired: Cardinal Financial, which merged with UBSI in 2017, and WashingtonFirst, which SASR itself purchased in 2017. Eagle Bank, which operates out of Bethesda, serves as the final peer.

Exhibit 8 Loan Portfolios ($ millions) SASR EGBN CNFL WFBI Sept. 17 % Sept. 17 % Dec. 16 % Dec. 16 % CRE (non-OO) 1,104.7 26.3% 2,898.9 47.6% 1,689.2 51.4% 557.8 36.4% Owner-occupied 831.5 19.8 749.6 12.3 NA NA 231.4 15.1 ADC 295.2 7.0% 971.3 16.0% 589.4 17.9% 288.2 18.8 CRE $2,231.4 53.2% $4,619.8 75.9% $2,278.7 69.4% $1,077.5 70.2%

C&I 451.7 10.8% 1,244.2 20.4% 374.0 11.4% 165.2 10.8% Commercial $451.7 10.8% $1,244.2 20.4% $374.0 11.4% $165.2 10.8%

Resi Mort. 882.9 21.1% 109.5 1.8% 465.6 14.2% 287.3 18.7% Resi Constr. 171.8 4.1 NA NA NA NA NA NA HELOC NA NA 101.9 1.7 161.0 4.9 " " Other 456.4 10.9 8.8 0.1 5.8 0.2 4.7 0.3 Consumer $1,511.1 36.0% $220.2 3.6% $632.4 19.2% $291.9 19.0%

Total $4,194.1 100.0% $6,084.2 100.0% $3,285.0 100.0% $1,534.5 100.0% Source: Company filings

All four are clearly primarily commercial lenders, although Sandy Spring has the lowest commercial ratio at 64% and, axiomatically, the highest consumer ratio at 36%. Within the commercial categories, Sandy Spring stands out with a higher weighting on owner-occupied at 31% of commercial, and lower relative amount of acquisition, development and construction (ADC) with 11%. We think this indicates a comparatively conservative commercial portfolio, as construction loans are unsecured by income-producing assets and generally riskier than other CRE categories. Given the comparatively-lower distribution to riskier categories and the larger consumer portfolio than peers, we would expect Sandy Spring’s yields to lag versus the group, a proposition confirmed in Exhibit 9 below.

Exhibit 9 Yield on Interest-Earning Assets

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 4.79% 4.78% 4.58% 4.29% 4.15% 4.06% 4.02% 4.23% EGBN 5.15 4.80 4.81 4.67 4.77 4.69 4.60 4.74 OLBK 5.25 5.48 5.34 4.98 4.52 4.49 4.31 4.37 UBSI 4.91 4.68 4.43 4.16 4.12 3.94 4.00 4.16 UBSH 5.68 5.50 5.10 4.77 4.40 4.26 4.21 4.25 BYBK 11.367.267.895.715.605.104.504.72 XBKS NA 4.20 4.29 4.16 3.95 3.98 4.05 4.23 WFBI 5.10 5.06 5.02 4.57 4.51 4.32 4.23 4.28 CFNL 5.14 4.94 4.56 4.33 4.29 4.06 3.98 NA

Average 6.08 5.24 5.18 4.67 4.52 4.36 4.24 4.39 SASR 4.58% 4.37% 4.24% 4.15% 3.93% 3.91% 3.96% 4.08% Source: Company filings

Here, we expand the peer group to include several more area peers including Access National Bank (ANCX) based in Reston, VA; Old Line Bank (OLBK) headquartered in Bowie, MD; United Bank (UBSI) which operates out of dual locations in Charleston, WV and Washington, D.C.; and Union Bank & Trust (UBSH) from Richmond, VA. We have also included two more acquired companies, Bay Bank in Columbia, MD (BYBK) and Xenith in Richmond, VA (XBKS); we detail both deals in Exhibit 7 on prior transactions above.

Due to the relatively-conservative lending mix described in Exhibit 8 above and the credit exhibits below, Sandy Spring’s portfolio has consistently yielded about 30bps below the peer average over the last several years. With the WFBI portfolio about 15bps above SASR’s, including a lower-yielding securities book, SASR has a clear runway to narrowing the gap. We would also note that WFBI holds over 50% variable-rate commercial loans, whereas Sandy Spring’s legacy ratio was closer to one-quarter: although originations in recent quarters have approached the 50% range.

Even with the relatively-more conservative mix, Sandy Spring has narrowed the yield differences since the Federal Reserve began the current tightening cycle in December 2015, narrowing the gap from 45 bps to 31 bps over the period. We chart this progression in Exhibit 10 on the following page.

Exhibit 10 Quarterly Yield on Interest-Earning Assets

Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 ANCX 4.08% 4.10% 4.03% 4.01% 3.98% 4.01% 4.39% 4.23% EGBN 4.71 4.67 4.70 4.60 4.47 4.70 4.73 4.74 OLBK 4.41 4.30 4.32 4.27 4.36 4.37 4.28 4.37 UBSI 3.92 4.01 4.04 3.94 4.00 3.85 3.91 4.16 UBSH 4.15 4.23 4.23 4.16 4.23 4.19 4.24 4.25 BYBK 4.85 4.53 4.67 4.26 4.41 4.38 4.65 4.72 XBKS NA 4.00 3.97 4.23 NA 4.17 4.21 4.23 WFBI 4.24 4.25 4.10 4.23 4.10 4.23 4.31 4.28 CFNL NA 3.99 3.99 3.97 NA NA NA NA

Average 4.38 4.25 4.25 4.21 4.26 4.27 4.33 4.39 SASR 3.93% 3.94% 3.97% 3.96% 3.98% 3.99% 4.11% 4.08% Source: Company filings

Credit Comparison As we mentioned in the previous section, Sandy Spring generally holds a more conservative portfolio than its commercial peers, with more owner-occupied and less construction lending. We would therefore anticipate fewer nonperforming assets and lower charge-off rates than peers, and we examine each in Exhibits 11-12 below.

Since 2011, Sandy Spring has outperformed the peer group average nonperforming asset ratio in every examined period, as Exhibit 11 shows below, which supports our expectations around a relatively-conservative loan portfolio.

Exhibit 11 Nonperforming Assets / Total Assets

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 1.25% 0.83% 0.32% 0.30% 0.15% 0.63% 0.48% 0.27% EGBN 1.53 1.27 1.06 0.90 0.68 0.31 0.30 0.24 OLBK 0.96 1.22 1.12 1.27 0.65 0.56 0.59 0.19 UBSI 1.57 1.56 1.69 1.37 1.20 1.26 1.00 1.02 UBSH 2.55 1.97 1.44 1.18 0.64 0.35 0.24 0.32 BYBK 4.99 6.62 4.91 2.29 3.10 2.10 2.55 2.17 XBKS NA NA 3.73 3.92 2.17 2.32 1.15 0.79 WFBI 1.23 1.25 1.92 1.97 0.84 0.86 0.43 1.19 CFNL NA NA NA 0.11 0.17 0.02 0.00 NA

Average 2.14 2.31 2.27 1.63 1.18 0.97 0.78 0.85 SASR 2.78% 2.25% 1.61% 1.01% 0.85% 0.80% 0.66% 0.59%

Source: Company filings

Accordingly, lower nonperforming balances led to less loss content for SASR, which has had better-than-peer average charge off ratios in every annual period since 2012, and has had single-digit basis point ratios since 2014.

Exhibit 12 Net Charge Offs / Total Loans

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 0.30% 0.01% 0.13% 0.01% (0.04%) 0.00% (0.03%) (0.00%) EGBN 0.35 0.32 0.37 0.23 0.17 0.17 0.09 0.00 OLBK 0.38 0.11 0.23 0.07 0.39 0.07 0.02 0.01 UBSI 0.16 0.29 0.28 0.29 0.24 0.25 0.28 0.16 UBSH 0.58 0.56 0.58 0.36 0.11 0.14 0.09 0.24 BYBK 0.00 1.21 0.92 0.25 0.10 0.03 0.00 (0.10) XBKS NA NA NA NA 0.60 0.29 0.65 0.03 WFBI 0.35 0.22 0.43 0.32 0.24 0.04 0.18 0.08 CFNL 0.37 0.34 0.35 (0.03) 0.06 (0.07) (0.01) NA

Average 0.31 0.44 0.45 0.25 0.24 0.14 0.19 0.09 SASR 1.27% 0.66% 0.42% 0.12% 0.03% 0.07% 0.06% 0.10% Source: Company filings

Combined, we think both of these metrics meet our expectations for Sandy Spring’s historically-conservative underwriting. While the WashingtonFirst acquisition will alter SASR’s loan mix, that company has also had quite- low charge-offs versus the peer group.

Deposits As of June 30, 2017, Sandy Spring’s deposits resided in either the Washington-Arlington-Alexandria or Baltimore- Columbia-Towson MSAs. Acquired WFBI’s deposits are all in Washington-Arlington-Alexandria, but on the Virginia side where Sandy Spring had traditionally been relatively underpenetrated versus the company’s historical Maryland markets.

Exhibit 13 Deposit Geography ($ millions) June 17 % Washington-Arlington-Alexandria $3,006.8 77.2% Baltimore-Columbia-Towson, MD 887.0 22.8% Source: FDIC

The WashingtonFirst acquisition will expand these funding sources with a branch network in Fairfax County, VA, where Sandy Spring had been historically underpenetrated. Exhibit 14 below shows the combined branch network.

Exhibit 14 Branch Geography

Source: SASR company presentation

In terms of totals, the company will have 43 locations from the legacy SASR footprint and 19 from WFBI, although management has identified 8 with potential for consolidation from both networks.

As far as deposit categories, Sandy Spring’s retail network helps keep funding costs relatively modest, as displayed in Exhibit 15 below.

Exhibit 15 Deposits

SASR EGBN CFNL WFBI Sept. 2017 % Rate Sept. 2017 % Rate 2016 % Rate 2016 % Rate Noninterest 32.5% 0.00% 32.4% 0.00% 22.3% 0.00% 25.1% 0.00% Transaction 16.1 0.08 7.0 0.49 13.8 0.37 8.9 0.29 Savings & MM 34.6 0.36 45.7 0.63 24.8 0.40 31.6 0.65 Core deposits 83.2% 0.16% 85.1% 0.38% 60.9% 0.25% 65.5% 0.35%

Time 16.8 1.12 14.9 1.15 39.1 1.11 34.5 1.10 Total deposits 100.0% 0.48% 100.0% 0.73% 100.0% 0.75% 100.0% 0.81% Source: Company filings

Of particular note is the noninterest portion of deposits, where Sandy Spring and Eagle are both relatively strong. In addition to providing a free source of funding, noninterest deposits also become even more valuable as rates rise, assuming the company can hold onto them.

If we again expand the peer group to include more retail-oriented companies, Sandy Spring’s funding advantages become less-stark.

Exhibit 16 Annual Cost of Interest-Bearing Liabilities

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 1.66% 1.23% 0.90% 0.67% 0.53% 0.59% 0.78% 0.70% EGBN 1.42 1.20 0.76 0.56 0.49 0.54 0.69 0.97 OLBK 1.39 1.08 0.89 0.57 0.48 0.54 0.68 0.89 UBSI 1.53 1.04 0.82 0.65 0.56 0.50 0.53 0.73 UBSH 1.35 1.14 0.94 0.70 0.39 0.48 0.53 0.85 BYBK 0.67 0.89 0.78 0.55 0.42 0.58 0.50 0.56 XBKS NA 1.37 1.02 0.86 0.82 0.87 0.86 0.95 WFBI 1.81 1.43 1.24 0.84 0.83 0.90 1.02 1.19 CFNL 1.78 1.41 1.20 1.09 0.95 0.92 0.88 NA

Average 1.42 1.20 0.96 0.73 0.62 0.67 0.71 0.88 SASR 1.27% 1.06% 0.89% 0.74% 0.69% 0.70% 0.68% 0.80% Source: Company filings

More recently though, the company has moderated the effects of rising rates better than peers. Since Q415, the start of the current Fed tightening cycle, Sandy Spring has gone from paying rates 11bps above peers to 8bps below, indicating the value and stickiness of the retail deposit franchise.

Exhibit 17 Quarterly Cost of Interest-Bearing Liabilities

Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 ANCX 0.69% 0.73% 0.79% 0.81% 0.80% 0.80% 0.69% 0.70% EGBN 0.51 0.55 0.63 0.77 0.80 0.89 0.92 0.97 OLBK 0.56 0.60 0.61 0.71 0.79 0.82 0.90 0.89 UBSI 0.51 0.52 0.51 0.54 0.55 0.59 0.66 0.73 UBSH 0.51 0.52 0.51 0.52 0.57 0.68 0.79 0.85 BYBK 0.52 0.48 0.49 0.52 0.48 0.48 0.50 0.56 XBKS NA 0.90 0.87 0.85 NA 0.86 0.90 0.95 WFBI 0.99 1.02 1.02 1.00 1.00 1.06 1.16 1.19 CFNL NA 0.94 0.90 0.84 NA NA NA NA

Average 0.60 0.69 0.69 0.72 0.70 0.77 0.83 0.88 SASR 0.71% 0.72% 0.68% 0.67% 0.67% 0.69% 0.75% 0.80% Source: Company filings

This funding outperformance is not quite enough to match peer net interest margins given the relatively- conservative loan mix, but the retail deposits and commercial lending combination have helped Sandy Spring expand NIM while peers have generally contracted.

Exhibit 18 Annual Net Interest Margin

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 3.41% 3.82% 3.94% 3.85% 3.80% 3.68% 3.52% 3.76% EGBN 4.09 3.99 4.32 4.30 4.44 4.33 4.16 4.14 OLBK 3.86 4.61 4.65 4.53 4.15 4.08 3.79 3.71 UBSI 3.64 3.87 3.81 3.68 3.71 3.58 3.62 3.65 UBSH 4.56 4.57 4.23 4.08 3.96 3.75 3.66 3.59 BYBK 11.366.707.435.335.314.704.144.66 XBKS NA 2.98 3.39 3.43 3.28 3.29 3.38 3.51 WFBI 3.69 4.02 4.14 3.97 3.92 3.74 3.52 3.45 CFNL 3.68 3.81 3.61 3.52 3.59 3.37 3.33 NA

Average 4.98 4.32 4.45 4.11 4.05 3.86 3.70 3.82 SASR 3.60% 3.57% 3.60% 3.63% 3.45% 3.44% 3.49% 3.54% Source: Company filings

Through the tightening period, the benefits of the deposit network are even more obvious. While average NIMs have declined by 13bps on average across the peer group, Sandy Spring has moved upward in almost every period: +9bps total over the stretch. We anticipate that, following the Washington First integration, Sandy Spring’s NIM will remain in the mid-350bps range over the next few years, with potential for upside if management can migrate the relatively-expensive WFBI funding sources as discussed below.

Exhibit 19 Quarterly Net Interest Margin

Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 ANCX 3.63% 3.61% 3.51% 3.49% 3.46% 3.46% 3.91% 3.76% EGBN 4.38 4.31 4.30 4.11 3.96 4.14 4.16 4.14 OLBK 3.98 3.85 3.85 3.73 3.75 3.74 3.60 3.71 UBSI 3.56 3.64 3.67 3.56 3.62 3.43 3.44 3.65 UBSH 3.76 3.82 3.84 3.76 3.78 3.66 3.62 3.59 BYBK 4.49 4.20 4.34 3.86 4.05 4.02 4.27 4.66 XBKS NA 3.30 3.29 3.56 NA 3.49 3.52 3.51 WFBI 3.53 3.51 3.37 3.53 3.40 3.47 3.51 3.45 CFNL NA 3.31 3.33 3.35 NA NA NA NA

Average 3.95 3.74 3.75 3.68 3.76 3.71 3.73 3.82 SASR 3.45% 3.44% 3.51% 3.50% 3.52% 3.51% 3.60% 3.54% Source: Company filings

Noninterest Income As Sandy Spring’s interest businesses have improved on a relative basis, noninterest income has remained very strong comparatively. In Exhibit 20 on the following page, we compare the proportional weights of noninterest revenue sources for each of the companies in our original peer group. While Sandy Spring does underperform in loan sales, we think that those businesses tend to be cyclical and the differences are likely to moderate if interest rates rise further.

Exhibit 20 Noninterest Income ($ millions) SASR EGBN CFNL WFBI LTM % LTM % 2016 % 2016 % Service charges $8.2 3.8% $6.2 2.1% $4.8 2.5% $0.3 0.3% Loan sales 3.4 1.6 9.8 3.3 51.3 27.0 22.6 25.4 Trust/wealth mgmt 18.7 8.8 NA NA 0.4 0.2 1.8 2.1 Card fees 4.8 2.3 " " NA NA NA NA Insurance 6.2 2.9 " " " " " " BOLI 2.4 1.1 1.5 0.5 0.4 0.2 0.4 0.4 Other 6.4 3.0 8.8 3.0 0.6 0.3 1.1 1.3 Recurring $50.0 23.5% $26.3 8.9% $57.4 30.2% $26.2 29.4%

Non-recurring 1.3 0.6 0.6 0.2 5.0 2.6 1.3 1.5

Total noninterest (GAAP) 51.3 24.1 26.9 9.1 62.4 32.8 27.5 30.9

Net interest income 161.2 75.9 268.6 90.9 127.9 67.2 61.4 69.1

Total revenue (recurring) 211.2 99.4 294.8 99.8 185.2 97.4 87.5 98.5

Total revenue (GAAP) $212.5 100.0% $295.4 100.0% $190.2 100.0% $88.9 100.0%

Source: Company filings

The evident outliers are Sandy Spring’s trust/wealth management and insurance businesses, where the company has orchestrated a series of acquisitions of registered investment advisors (RIAs) and insurance agencies over the last decade to drive fee revenue. The wealth management and trust business has about $2.7B AUM as of September 30, 2017, and management expects to grow that number in the 8-10% range over the next several years. Unlike loan sales, wealth management fee revenues tend to recur regardless of the broader interest rate environment.

We think noninterest businesses are valuable for several reasons. They act as a revenue hedge against any potentially-unfavorable rate moves, provide additional margin with low capital requirements, and potentially sweeten the synergistic potential of an acquisition if the acquirer has a similar business line or is looking expand into one.

On the operating expense side, Sandy Spring falls in the middle of the identified peer group, with Eagle obviously benefitting from having a relatively-small branch network.

Exhibit 21 Noninterest Expense ($ millions)

SASREGBN CFNL WFBI LTM % LTM % 2016 % 2016 % Salaries and benefits $72.6 34.4% $68.3 23.2% $65.4 35.3% $35.2 40.2% Occupancy and equipment 20.1 9.5 15.3 5.2 10.2 5.5 7.4 8.4 Data processing 5.4 2.5 8.1 2.7 5.9 3.2 5.4 6.2 FDIC insurance 3.2 1.5 2.6 0.9 2.1 1.1 NA NA Legal, accounting, etc. NA NA 4.4 1.5 2.8 1.5 1.3 1.5 Marketing 3.1 1.5 3.8 1.3 3.4 1.8 NA NA Other 18.9 9.0 16.1 5.4 17.7 9.5 6.2 7.1 Recurring $123.3 58.4% $118.5 40.2% $107.4 58.0% $55.5 63.4%

Merger and conversion $1.3 0.6% NA NA $4.1 2.2% $0.0 0.0% Debt extinguishment NA NA " " 3.6 2.0 1.3 1.5 Non-recurring $1.3 0.6% - 0.0% $7.7 4.2% $1.4 1.6%

Total (GAAP) 124.6 59.0 118.5 40.2 115.2 62.2 56.9 65.0

Total revenue (recurring) $211.2 100.0%$ 294.8 100.0% $185.2 100.0% $87.5 100.0%

Source: Company filings

For Sandy Spring, however, we do expect the merger with WFBI to produce material synergies and lower this ratio to the low-50s for full-year 2018, after excluding one-time merger charges.

With net interest income below peers on a historical basis and fee income higher, Sandy Spring come in right around the group averages for ROA over the last two years, after three years of previous outperformance.

Exhibit 22 Return on Average Assets

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 0.98% 1.50% 2.15% 1.55% 1.45% 1.39% 1.27% 0.96% EGBN 0.86 0.97 1.18 1.37 1.31 1.49 1.52 1.66 OLBK 0.38 0.79 0.90 0.74 0.60 0.79 0.83 1.01 UBSI 0.95 0.97 0.98 1.02 1.11 1.12 1.10 1.19 UBSH 0.61 0.79 0.89 0.85 0.72 0.90 0.96 0.94 BYBK NA 0.62 0.05 0.90 0.66 0.40 0.37 NA XBKS " NA (1.20) 0.20 0.47 NA NA 0.89 WFBI 0.37 0.53 0.39 0.60 0.75 0.83 1.00 1.07 CFNL 0.92 1.27 1.70 0.92 1.02 1.29 1.23 NA

Average 0.68 0.85 0.87 0.83 0.83 0.97 1.00 1.13 SASR 0.48% 0.95% 0.97% 1.11% 0.91% 1.01% 1.02% 1.13%

Source: Company filings

On the ROE side though, the capital-light noninterest businesses show their value, as Sandy Spring has outperformed every year since 2013, with a material advantage in the most recent quarterly period over all of its peers except Eagle.

Exhibit 23 Return on Average Equity

2010 2011 2012 2013 2014 2015 2016 Q3 17 ANCX 10.85% 14.80% 19.68% 14.00% 14.47% 14.83% 14.11% 6.69% EGBN 8.74 11.71 14.14 14.60 13.50 12.32 12.27 12.86 OLBK 4.14 9.37 11.17 7.80 5.45 7.54 8.83 9.98 UBSI 9.19 8.50 8.35 8.43 8.13 8.10 7.67 6.89 UBSH 5.50 6.90 8.10 7.89 5.30 6.76 7.79 8.15 BYBK NA 2.84 0.19 6.68 4.93 2.94 2.96 NA XBKS " NA (17.94) 2.22 4.81 NA NA 5.86 WFBI 3.34 5.24 3.92 6.01 8.36 8.48 9.50 NA CFNL 8.44 11.58 16.02 7.96 8.82 11.76 11.40 NA

Average 6.56 8.02 8.84 7.70 7.41 8.27 8.63 8.75 SASR 4.56% 8.07% 7.85% 9.11% 7.43% 8.73% 9.15% 10.74%

Source: Company filings

Valuation Given SASR’s strong returns and growth profile, we think the trading discount relative to the remaining peer group represents a potential buying opportunity, with the company trading at 2.0x TBV and 16.1x forward EPS, below peer averages of 2.2x TBV and 18.4x EPS.

Exhibit 24 Comp Trading Table

Ticker Price Assets ($B) P / TBV 17 P/E 18 P/E 17 ROA 18 ROA 17 ROE 18 ROE Div. % ANCX $28.24 2.9 2.4x 23.9x 14.9x 1.0% 1.2% 7.4% 8.6% 2.1% EGBN 59.45 7.4 2.5 17.7 14.8 1.6 1.7 12.7 12.6 0.0 FNB 13.98 31.1 2.3 15.0 13.3 0.9 1.0 6.7 7.5 3.4 FULT 18.17 20.1 1.9 17.1 15.3 0.9 1.0 8.4 8.8 2.4 OLBK 29.79 2.1 2.2 19.1 14.1 0.9 1.1 8.9 10.1 1.1 SASR 39.47 5.3 2.0 16.2 12.6 1.1 1.3 9.8 9.6 2.6 TOWN 31.45 8.6 2.4 20.0 16.7 1.2 1.3 8.7 9.9 1.8 UBSH 35.92 9.0 2.1 19.7 14.8 0.9 1.1 8.9 10.1 2.3 UBSI 34.80 19.1 2.1 18.1 15.4 1.1 1.2 6.6 7.0 3.9

Average 2.2x 18.6x 14.7x 1.1% 1.2% 8.7% 9.4% 2.2%

Source: Company filings, ThomsonONE

Reposting our precedent transactions exhibit, we also see that Sandy Spring trades at material discount to both of our identified comparable deals: WashingtonFirst and Cardinal Financial, which went for 2.56x and 2.24x TBV, respectively, and corresponding to 24.0x and 17.5x EPS.

Exhibit 25 D.C.-Area Bank Deals 2014-2017

Source: Company Filings, Gabelli & Company Estimates

Potential Acquirers The most-obvious potential catalyst to narrow these valuation discounts would come through an acquisition of SASR itself. We have identified some potential acquirers below, listed in our order of perceived likelihood:

FNB (FNB): With an existing presence in Maryland, FNB’s 2016 acquisition of Yadkin in North Carolina left a Virginia-sized hole in the company’s geography between the Pennsylvania core and assumed southern footprint. While Sandy Spring’s branch network would not quite fill in all the white space, combination with the WFBI footprint would move FNB in the right direction while strengthening the company’s market share in Washington. Additionally, with potential changes in the SIFI thresholds, FNB would no longer have to worry about approaching $50B in assets.

United Bank (UBSI): Cardinal’s acquisition closed, United Bank could look to Sandy Spring to deepen market share in the region that houses half of the company’s dual headquarters. At $19B in assets, USBI could probably integrate Sandy Spring without too much difficulty, although for now the company is still absorbing the Cardinal deal which closed in April 2017.

Union Bank & Trust (UBSH): With the company’s pending acquisition of Xenith, UBSH stands to establish itself in south east Virginia and develop a presence in all of the state’s major markets: except the DC metro area. The Xenith deal should bring UBSH over $10B in assets, but DC could be a logical adjacent expansion market.

South State Bank (SSB): The company’s acquisition of Park Sterling brought South State to Richmond, which is just beyond the reach of Sandy Spring’s acquired WFBI branch network. With SSB’s name increasingly undescriptive of the company’s geography, Washington looks like the next logical stepping stone northward.

Towne Bank (TOWN): Towne has already established strong positions in Richmond and Virginia Beach/Newport News, so management could look to the adjacent DC markets as the firm approaches $10B in assets. The company recently acquired Paragon Commercial Bank in North Carolina.

Fulton Financial (FULT): An existing but small presence in the DC markets (under “The Columbia Bank” brand) could have the $20B company looking for additional scale through an acquisition, and Sandy Spring could prove a vehicle for that growth.

Summary

With strong credit history, best-in-class fee revenues, and plenty of potential for operating leverage, we think management at Sandy Spring Bank have developed a compelling business with potential for outsized returns going forward. We estimate a Private Market Value for SASR of $46 per share in 2018, or 2.2x TBV, in-line with the Cardinal Bank acquisition last year and also in-line with current peer trading multiples.

Table 2 Sandy Spring Bank Private Market Value Analysis 2016-2021P

FYE 12/31 2016 2017E 2018P 2019P 2020P 2021P ($ millions, except per share) Net interest income $170.6 $195.2 $302.6 $328.8 $357.3 $388.2 Noninterest income 21.0 25.8 43.7 45.0 47.5 50.3 Total revenue $198.7 $219.7 $333.6 $360.0 $387.8 $417.9

Compensation and benefits 71.4 73.1 108.4 108.8 115.3 122.4 Occupancy and equipment 19.8 20.4 27.5 27.8 29.6 31.5 Marketing 2.9 3.2 5.0 5.4 5.8 6.2 Data services 5.45.56.67.17.78.3 FDIC insurance 2.7 3.3 4.3 4.6 5.0 5.4 Other 20.918.820.822.524.226.1 Non-operating expenses 0.0 (7.3) (18.0) 0.0 0.0 0.0 Total noninterest expenses $123.1 $124.3 $172.6 $176.2 $187.6 $199.9

Adjusted pretax 70.1 91.6 155.3 177.6 193.5 210.7 Income tax expense 23.1 31.2 54.8 62.7 68.3 74.4 Adjusted net income $46.9 $60.4 $100.5 $114.9 $125.2 $136.3

Diluted shares outstanding24.124.335.535.535.535.5

GAAP Diluted EPS $2.00 $2.35 $2.50 $3.25 $3.55 $3.85 Adjusted EPS $1.94 $2.50 $2.85 $3.25 $3.55 $3.85

TBV / Share $18.71$19.20$20.70$22.95$25.50$28.35 Valuation Multiple 2.2x 2.2x 2.2x 2.2x 2.2x 2.2x PMV / Share $42 $46 $50 $56 $62 Current Market - Discount to PMV 7.0% 15.4% 27.9% 42.1% 58.0%

Source: Public data and Gabelli & Company estimates

Other Companies Mentioned: Access National Corporation (ANCX - NASDAQ) Bank of America Corporation (BAC - NYSE) Alphabet Inc. (GOOG - " ) BB&T Corporation (BBT - " ) Amazon.com, Inc. (AMZN - " ) Capital One Financial Corporation (COF - " ) Bay Bancorp, Inc. (BYBK - " ) Citigroup, Inc. (C - " ) Blue Ridge Bankshares, Inc. (BRBS - " ) F.N.B. Corporation (FNB - " ) Eagle Bancorp, Inc. (EGBN - " ) M&T Bank Corporation (MTB - " ) Fulton Financial Corporation (FULT - " ) HSBC Holdings (HSBC - " ) John Marshall Bancorp, Inc. (JMSB - " ) The PNC Financial Services Group (PNC - " ) Microsoft Corporation (MSFT - " ) SunTrust Banks, Inc. (STI - " ) Old Line Bancshares, Inc. (OLBK - " ) The Toronto-Dominion Bank (TD - " ) Park Sterling Corporation (PSTB - " ) Wells Fargo (WFC - " ) South State Bank (SSB - " ) Summit Financial Group, Inc. (SMMF - " ) TowneBank (TOWN - " ) Union Bankshares Corporation (UBSH - " ) United Bankshares, Inc. (UBSI - " )

Xenith Bankshares, Inc. (XBKS - " )

I, Steve Comery the Research Analyst who prepared this report, hereby certify that the views expressed in this report accurately reflect the analyst’s personal views about the subject companies and their securities. The Research Analyst has not been, is not and will not be receiving direct or indirect compensation for expressing the specific recommendation or view in this report.

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