<A – Hunter Hollar>: Well, good recollection. When we acquired 7 branches in late 1999 from Mellon. Actually one of the those branches – a very small branch – was in the Tysons Corner, Tysons corner area and we did subsequently close that office because it was the only office they had and that we had in Northern Virginia. So we didn't think there was much future in just having that one office and frankly we weren't interested in immediately of a de novo kind of strategy where we would just open new offices. We thought that was much tougher. So yes we didn't have an interest in continuing from that Mellon acquisition but as I said to answer to Jennifer's question I think that just over time we've gotten more comfortable with that being a market that was similar enough that we could be successful if we got the right partner. And again, I want to emphasize that it was a lot about Potomac just being a great fit with the way we do business, the kind of people they have. It was just a cultural fit and I think we can't overlook that as a significant driver to this as opposed to just purely a drive to say that we must be in northern Virginia. We love the market, and we love our partner there.
<A>: We don't, you know, know everything that they went through on their side. We came to an agreement on price and terms, and we're happy with that.
<Q – Collyn Gilbert>: Okay. Can you give a little bit of color as to the behavior, I know you said that credit, you feel really good about credit or the outlook on credit, but maybe give some color as to the behavior as to some of the builders in your market, especially on the residential construction sites. And how the credit line is looking there and if your seeing any shift in terms of behavior on that part?
<A>: Yeah, there is definitely a shift in behavior. There is not as much optimism as there was a year ago or even several quarters ago with regards to new projects. And so I would say builders and developers are taking a little bit more of a "wait and see" attitude. But in selected areas where there are good opportunities we are still seeing even builders and developers selectively enter new projects and we're entering new projects with them. I think one of the factors that might get overlooked sometimes is the approval processes and some of these jurisdictions we deal in Montgomery, Howard, Frederick [ph], Anne Arundel and now I'm sure the same is true in northern Virginia. Some of those local jurisdictions have been very tight on approvals of residential land. So it's somewhat artificially kept the supply restricted. So we think there is still opportunities even though some pull back from the attitude of several quarters ago as builders and developers work off inventory that they may have had. So slowing, cooling somewhat but not stopping. <Q – Collyn Gilbert>: Okay great. And then just one final question. Can you just elaborate a little bit more on what the marketing campaign entails and if you're doing anything to position yourselves to try to take some market share away from the market share PNC deal?
<A>: Yes. Our marketing campaign is very much directed toward a couple things, getting our name out there more prominently so some of it is just exposure of the name. More broadly in our market, some of it is directed specifically at deposit growth, transactional deposit growth. We've aimed very specifically at that. And we think what we already had in motion really fits very well with what is now called for with Mercantile and it's ability becoming part of PNC. And we do compete with a number of the Merc affiliates in our local markets right here in Montgomery County and Anne Arundel County and other places as well. So we do think that consolidation with large out of state buyer coming in will represent some opportunities for us, but again, we think the marketing plans that we already had in place prior to the announcement of that merger are really appropriate for now post announcement of that merger.
<Q – Collyn Gilbert>: Okay great. Thanks very much.
Operator: Our next question comes from the line of Mark Muth with FTN Midwest Securities Corporation. Please proceed with your question.
<Q – Mark Muth>: Good afternoon guys.
<A>: Hi Mark.
<A>: Good afternoon Mark.
<Q – Mark Muth>: Just following up on it’s in a part I guess Collyn’s question to a degree. Potomac how does this change your growth strategy previously you’ve said 2 to 3 de novos a year and how will that be allocated now I guess between northern Virginia and Maryland going forward?
<A>: Yes, Mark, I don’t know that we specifically have – we haven’t specifically allocated such growth targets. But as we’ve said, we are – said for several quarters now, we are more open to acquisition opportunities than we’ve been in the past although we’ve as we indicated in some of our remarks, we have been involved in a number of deals. But haven’t been the successful bidder or the successful buyer.
But we’re more open to that now. So I think really our plan is to continue to do de novo expansion in addition to selective acquisitions with good partners that help us fill in or continuously add to our market. We think we’ve got good currency and that there are still a number of opportunities in our area here within an immediately configures. So we’ll continue to look for opportunities including opportunities in northern Virginia for de novo and acquisition kinds of growth. We want to do it thoughtfully but we are focused on unique opportunity here as we become a – after the Merck P&C deal the second largest publicly traded banking company headquarters in Maryland and I think we’re uniquely positioned to take advantage of that.
<Q – Mark Muth>: Okay. I guess from a modeling perspective is a bit of a follow up. How should we think about your de novo expansion going forward or on any acquisitions that may or may not materialize? Is it still sort of a very deliberate a couple of branch per year proposition or might we see that accelerate now given the additional territory?
<A>: I would say similar de novo expansion to the past.
<Q>: Okay. Thank you.
Operator: Our next question comes from the line of Mark Hughes [ph] with Lafayette Investments. Please proceed with your question. Our next question comes from the line of Matt Schultheis with Ferris, Baker, Watts. Please proceed with your question.
<Q – Matt Schultheis>: Good afternoon.
<A>: Hey Matt.
<A>: Hey Matt.
<Q – Matt Schultheis>: Sorry if this is redundant, but how long do you expect to continue having the marketing outlines that you did in this quarter as far as your expense? Are you going to keep this up at a million and change for three, four quarters, two quarters?
<A>: Matt I think that what we’ve said in the past there is with marketing and also, but not specific to your question, technology being strategic focuses of the company that, in marketing here in particular, we had really planned this year to increase our overall marketing expenses to be about a million and a half more than it had been in those recent time, especially in 2005, so I think if you then look at what has been spent for the first three quarters of the year, and kind of equate that out, I think that is really what we are doing.
The third quarter was higher than what the average run rate level, I would say would be, just given some of the parameters that I mentioned just a minute ago, so I think that we also recognize that we have been working towards a ramp up in the whole marketing area here from the beginning of the year. A lot of things came together within the particular quarter, which also included the opening of an additional branch up in the Gregor County [ph] market, that had some promotional dollars and funds [ph] that were related to it. In addition, to some of the things Hunter mentioned earlier, related to just market awareness and also specific product type promotion, so I think the third quarter, and the most direct way to answer your question is higher than what you should expect on a normal run rate basis.
<Q – Matt Schultheis>: Okay, thank you very much.
<A – Philip Mantua>: You are welcome.
Operator: Our next question comes from the line of Mark Hughes [ph] with Lafayette Investments. Please proceed with your question.
6
<Q>: Can you hear me?
<A>: Sure can. Hi, how are you.
<Q>: Okay good. Good afternoon. Just getting back to the Potomac Bank deal. Looking at the numbers they have reported so far this year, they had income of 774,000 through six months, and I am trying to figure out how you make the numbers work from your point of view. Even factoring in some growth, and it just seems like a rich price to pay. Can you walk me through a little bit more of what you are seeing that may not be apparent to me?
<A – Philip Mantua>: Sure Mark. I think there is a couple of things there. First of all, we see that in prior years, in terms of just looking at compound average annual growth rate, that some of its franchise has been averaging somewhere around 35 to 40% in overall earnings growth year-over year- over-year. Obviously, from a year-to-date standpoint, that 774 does not quite get you there, but I think that we believe that that is something that, you know, is real.
We also know that even within that, Potomac has spent dollars in the most recent times to build infrastructure, to allow them to go to the next level in terms of delivery to retail customers, in particular related to many of the types of things that we bring to the table in terms of fee based services and alike that they just had not gotten to yet, and so we recognize that element of what has been built into the earnings to date, and at the same time, we put 25% cost base in the evaluation a deal [ph], which we believe are doable, and yet, have not even factored in derivative enhancements to the degree that – you know, I was just mentioning in terms of different products and services that we think are great opportunities for us over there, again because of the demographics of the market, as Hunter mentioned earlier.
So, we see all of those things coming together to allow the components of the deal to work for us as we move forward.
<Q>: Will you be able to stick to ground running [ph] when the deal closes, in terms of putting in your products? Or, is there, you know, how long a time period does it take to kind of ramp up their staff to push things that you have to offer that they cannot sell right now?
<A>: Yes, obviously, we will have some time here over the next four months here, three to four months until closing in the first quarter to do some significant planning and training in some implementations.
I wouldn't say that we'll hit the ground at a full strength, we won't hit the ground as fast as we'll get to, so it will take us a little while after closing to get everything installed, but I think we'll get some momentum pretty quickly after the closing.
I'll also just add, your earlier question about the earnings multiple, just to keep in mind as you may be aware, the price, the book value, the price of the core deposit premiums, some of those other multiples were very much in line with other deals, so I think as still indicated the earnings stream was still maturing in a sense, was still on a nice upward trajectory and that is some of the explanation for the PE ratio being on the high side.
Other ratios – deposit base, we love the deposit base, a good transactional, customer oriented deposit base, so all those things, I think mixed together certainly justify the price.
<Q>: Did you say earlier in the call that the deal would be accretive in 2007? Did I hear that right or ...
<A>: Accretive in the first full year of operation is the way we said that, with an anticipated closing in the first quarter of 2007.
<Q>: Thank you very much.
<A>: You’re welcome Mark.
Operator: Ladies and gentlemen [Operator Instructions} Yes sir, Mr. Hollar there are no further questions in the queue.
Hunter R. Hollar, President and CEO
7
Okay, that wraps up our questions, we want to thank everybody for participating today. Remind you that a replay of this is available at our website and we welcome your feedback on our quarterly conference call at anytime. That concludes our call for today. Thank you.
Operator: Ladies and gentlemen this does conclude today's teleconference, you may disconnect your lines at this time. Thank you for your participation.
ADDITIONAL INFORMATION ABOUT THE PROPOSED MERGER WITH POTOMAC
Sandy Spring Bancorp, Inc. will be filing a proxy statement/prospectus and other relevant documents concerning the merger with the SEC. SANDY SPRING BANCORP, INC. URGES INVESTORS TO READ THE PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE IN THE PROXY STATEMENT/PROSPECTUS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors will be able to obtain these documents free of charge at the SEC’s web site (www.sec.gov). In addition, documents filed with the SEC by Sandy Spring Bancorp, Inc. will be available free of charge from Shareholder Relations at 301/570-8338.
The directors, executive officers, and certain other members of management and employees of Potomac are participants in the solicitation of proxies in favor of the merger from the shareholders of Potomac. Information about the directors and executive officers of Potomac is set forth in the proxy statement for its 2006 annual meeting of stockholders, which was mailed to shareholders on April 14, 2006, a copy of which is available by calling Stephanie H. Ogle, Senior Vice President/Chief Administrative Officer and Corporate Secretary of Potomac Bank at 703/319-9000.
Additional information regarding the interests of such participants will be included in the proxy statement/prospectus and the other relevant documents filed with the SEC when they become available.
For Sandy Spring Bancorp:
Investor Contact:
Hunter R. Hollar
301/774-8494
hhollar@sandyspringbank.com
8
